A clearer definition of the phrase 'Financial Difficulties' is required.
Defining the phrase ‘Financial Difficulties’ is crucial, as it stands to determine whether a review / change in terms & conditions is being made purely on commercial grounds, or as a ‘forbearance measure’ as defined by the EBA rules. It will also have a bearing as to whether reviewed terms of facilities may continue to be classified as ‘Performing’ or ‘Non-Performing’ – also in terms of EBA rules. This term does not appear to be clearly defined by EBA, notwithstanding that it is a common trigger requiring credit institutions to classify credit facilities as Forborne or Non-Performing.
The concept of financial difficulties is defined in paragraph 163 of the Draft ITS on Supervisory Reporting on forbearance and non-performing exposures under Article 99(4) of Regulation (EU) No 575/2013 as a situation where the debtor is facing or about to face difficulties in meeting its financial commitments.
The assessment of the financial difficulties of the debtor should be based on the situation of the debtor only, disregarding collateral or any guarantees provided by third parties, as the focus of the definition is the financial difficulties of a particular debtor and its (in)ability to meet its financial obligations.
When a debtor is in financial difficulties, and only in this case, a modification or a refinancing of an exposure qualifies as a concession and hence the exposure is considered as forborne. Paragraph 165 provides some evidence of what a concession includes, but other situations are possible (for instance when a debtor is in financial difficulties, an exposure modified at market rate will be considered as forborne).
Each institution is responsible for using its own judgement when identifying situations of financial difficulties, subject to the provisions of paragraph 172, laying down situations that always qualify as forbearance, i.e. situations where the debtor should always be considered in financial difficulties and where any modification or refinancing is therefore a concession.