Is the definition of concession referred in paragraph 164 to be read as including all non-payment related concessions?

Paragraph 164 (a) of the EBA/ITS/2013/03/rev1 24/07/2014 read as follows: 164. For the purpose of template 19, a concession refers to either of the following actions: (a) a modification of the previous terms and conditions of a contract the debtor is considered unable to comply with due to its financial difficulties (“troubled debt”) to allow for sufficient debt service ability, that would not have been granted had the debtor not been in financial difficulties; The phrase “allow for sufficient debt service ability” was interpreted by some firms to mean that the concession itself needed to improve the ability of the obligor to service its debt obligations generally, and that it therefore referred only to concessions which affected the original contractual payments (“payment concessions”). Such firms did not include non-payment concessions, such as covenant waivers, as qualifying concessions. Annex V of EBA/ITS/2015/02 issued in March 2015 restated paragraph 164(a) as follows: “a) modification of the previous terms and conditions of a contract that the debtor is considered unable to comply with due to its financial difficulties (“troubled debt”) resulting in insufficient debt service ability and that would not have been granted had the debtor not been experiencing financial difficulties;” The phrase “allow for sufficient debt service ability” was deleted, and replaced by the phrase “resulting in insufficient debt ability” which appears to relate to the conditions required to establish “financial difficulties” which is earlier defined in paragraph 163. It is unclear whether it was the intent of this change to redefine concession to broaden its definition to include non-payment concessions. EBA/CP/2015/15 section 3.3.3 issued 22 September 2015 refers to the distressed restructuring unlikeliness to pay indicator as follows: “According to Article 178(3)(d) of Regulation (EU) 575/2013 a distressed restructuring is an indication of unlikeliness to pay where this is likely to result in a diminished financial obligation caused by the material forgiveness, or postponement of principal, interest or, where relevant fees. In order to keep consistency with the supervisory reporting framework it has been specified that distressed restructuring should be considered to have occurred when forbearance measures have been extended towards a debtor as specified in the ITS on forbearance and non-performing exposures. Therefore those forborne exposures, where the forbearance measures are likely to result in a diminished financial obligation should be classified as defaulted. This suggests that the definition of forbearance is regarded as consistent with the concessions envisaged within the definition of distressed restructuring – namely “forgiveness, or postponement of principal, interest or, where relevant fees” - all of which it is noted are payment concessions. These points notwithstanding, if non-payment concessions such as covenant waivers are to be treated as forbearance instances, it would be helpful to firms to understand whether all waivers granted to obligors experiencing financial difficulty are to be so treated, or whether only certain types of waiver should trigger the description of forbearance. Typically, covenants are in place to give the bank rights of repricing or acceleration, but they are frequently set at levels where payment capacity has yet to be affected, providing rights of action at earlier stages of credit deterioration. The rights of acceleration that thereby accrue are there to provide the firm with negotiating leverage in instances where consensual remediation of a deteriorating position is not possible. Even quite modest covenant waivers can accrue acceleration rights and it is not clear whether the waiver of such rights is what is deemed to be the concession. Given there may not be a clear relationship between the severity of financial distress and a right of acceleration it does not appear that the waiver of an acceleration right alone should trigger the definition of forbearance. However, it is clear that surrendering a right of acceleration is a more serious matter than surrendering a right of repricing. Clearly, there are certain covenants that reflect directly upon the obligor’s debt service ability (e.g. liquidity and debt service coverage ratios, or for income producing commercial real estate an LTV ratio). Where a customer requests a covenant waiver relating to such a condition, the significance of the underlying breach of covenant speaks to the financial difficulty that the customer is facing. Including only such covenants in the definition would serve to distinguish the concession from other minor concessions which are not regarded as sufficiently serious matters requiring flagging as a forborne exposure.

The definition of concessions qualifying for assessing the forbearance of an asset is directly linked to the capacity of the debtor to meet its payments obligations whether effective or about to happen.

According to paragraph 241 point a) of Annex V to Regulation n°680/2014 (ITS on Supervisory Reporting), a concession refers to a modification of the previous terms and conditions of a contract that the debtor is considered unable to comply with due to its financial difficulties resulting in insufficient debt service.

The latter phrase meaning that financial difficulties of the debtor are a prerequisite to its inability to meet its repayments obligations which the concession aims to reduce. This implies that concession refers specifically to the core terms of the contract related to financial arrangements.

Evidence of a concession is in the form of modified terms more favorable to the debtor which are set up by the lender according to paragraph 242.

Covenants are clauses of the contract requiring the debtor to meet specific obligations in order to protect the lender from a default of the borrower.

If not directly related to the repayments terms of the debtor, waivers might however be considered potential concessions. Due to the wide variety of covenants, a case-by-case analysis is recommended. Indeed, the non-compliance of covenants not directly related to the repayments terms of the debtor may however be evidences supporting the assessment of lender of the financial difficulties of the debtor hence contributing to the classification as forborne exposure.