EBA Guidelines on COVID-19 moratoria on loan payments

Manuel MagalhãesPartner, Sérvulo & Associados

A. Context

To minimize the medium- and long-term economic impacts resulting from the COVID-19 pandemic, Member States have implemented a broad range of measures, including some forms of moratorium on payments of credit obligations, to support the operational and liquidity challenges faced by borrowers. Notwithstanding being vested of different forms, moratoria generally have the same economic substance: suspension or postponement of payments within a specified period of time, after which the debtors return to regular payments.

In this context, the European Banking Authority (“EBA”) clarified a number of aspects in relation to the use of public and private (legislative and non-legislative) payment moratoria in its statement dated of 25 March 2020.

In last 2 April, EBA has published the “Guidelines on legislative and non-legislative moratoria on loan repayments applied in the light of the COVID-19 crisis” (EBA/GL/2020/02), aiming to clarify the legal effect the moratoria have on the current prudential framework, especially the application of the “default” definition and the classification as “forbearance” (“Guidelines”).

With these Guidelines, EBA provides further detail on legislative and non-legislative moratoria applied before 30 June 2020, without prejudice of such term being later extended if deemed necessary by the European Authority.

The Guidelines shall be applicable in Portugal as of the date of its translation to Portuguese, which has not yet occurred.

B. Classification of Exposures

1. Classification of exposures under the definition of forbearance and default

According to article 47b(1) of Capital Requirements Regulation – Regulation (EU) no. 575/2013 (“CRR”), forbearance measure is a concession by a credit institution towards a specific obligor that is experiencing or is likely to experience difficulties in meeting its financial commitments. Such concession is tailored made to the specific circumstances of the obligor, being granted after the individual assessment of the debtor’s repayment capacity by the institution, and may consist (i) in a total or partial refinancing of a debt obligation or (ii) in a modification of the terms and conditions of a debt obligation (thus, including a temporarily postpone capital and/or interest payments of a loan).

Differently, the moratoria schemes that have been implemented as a response to the COVID-19 pandemic are, as a general rule, preventive and not borrower specific.

The existing regulatory and legal framework on risk measurement and capital requirements shall continue to be applied (at the European level, it is particular relevant the CRR and the Commission Delegated Regulation (EU) 2018/171 on the materiality threshold for credit obligations past due, but should also be taken into account EBA Guidelines on the application of the definition of default under Article 178 of CRR (EBA/GL/2016/07)).
Hence, credit institutions shall continue to categorize the exposures as performing or non-performing in accordance with the applicable requirements. As so, classifications as forbearance measures previous to the application of moratoria should not be changed. EBA also clarifies that new classifications shall take into account the difference between a general moratorium and any form of individual measures and renegotiation of the loans based on the obligor’s specific situation:

  • The application of a general moratorium is not a forbearance measure, nor should be considered distressed restructuring and, consequently, shall not be deemed as a diminishment of the financial obligation, thus as an indication of unlikeliness to pay (for the purposes of considering the obligor in default under CRR);
  • The application of some form of individual measures and renegotiation of the loans based on the obligor’s specific situation shall be classified as forbearance if it meets the definition criteria set out in CRR (case by case approach).

2. General payment moratoria

According to EBA, general payment moratoria have to fulfil the following criteria in order not to be considered forbearance:

  • The moratorium was launched in response to the COVID-19 pandemic. 
The moratorium aims to address the systemic short-term liquidity shortages and it is announced and applied until 30 June 2020 – subject to term’s extension by EBA –, including moratoria launched before the application of the Guidelines.
 
  • The moratorium has to be broadly applied.
The broad scope of application may be achieved by national law (applicable to all credit institutions within a given jurisdiction, as it has occurred in Portugal with the Decree-Law no. 10-J/2020 of 26 March (“DL 10-J/2020”)) or through industry- or sector-wide private initiative agreed and applied broadly by relevant credit institutions.
 
  • The moratorium has to be applicable to a broad range of debtors.
The moratorium has to be available to a large, predefined group of obligors (delimited, for example, by their exposure class, product, industry or region), regardless of the assessment of their creditworthiness.
 
The moratorium is not mandatory for debtors, and may be subject to their request and prove of the extension of how they are affected by the COVID-19 pandemic (before 30 June 2020).
 
  • The same moratorium offers the same conditions for the debtors subject to the moratoria.
  • The moratorium only changes the payments schedule. 
The moratoria suspend, postpone or reduce the payments (principal, interest or both) within a limited period of time, which may lead to increased payments after the period of the moratorium or an extended duration of the loan. The remaining terms and conditions, however, should not be changed unless to ensure that the impact on the net present value is neutralized. Particularly, for these purposes, it is not considered a relevant change of the loan’s terms and conditions: (i) in case of a loan with a variable interest rate, the usual adaptation of the interest rate according to the benchmark; and (ii) the application of public guarantees to the moratorium.
 
  • The moratorium does not apply to new loans granted after the launch of the moratorium.
According to EBA, the use of existing credit facilities or renewal of revolving loans is not considered a new loan.
 
C. Assessment of unlikeliness to pay
 
Credit institutions should continue to regularly review the indications of unlikeliness to pay, according to their usual policies and practices, throughout the duration of the moratorium and after it ends (based on the revised schedule and not affected by credit risk mitigation forms as third-party guarantees). Besides, to the extent possible, and where manual checks are performed, credit institutions should prioritise the assessment of debtors for whom the effects of the COVID-19 pandemic are most likely to transform into longer-term financial difficulties or insolvency.
 
D. Documentation and Notifications
 
Institutions shall collect information about the scope and effects of the use of moratoria and disclose relevant information to the competent authorities (e.g. list of debtors/exposures subject to the moratorium –those within the scope and those to which the moratorium was effectively applied; and potential economic losses resulting from the application of the moratorium and that may have an impact on their financial statements).
 
E. Moratorium Granted in Portugal by DL 10-J/2020
 
In 27 March 2020, it has entered into force in Portugal the DL 10-J/2020, above mentioned, which has granted companies and individuals a moratorium, allowing the extension of the term of loans with capital repayment at the end of the contract and the suspension of capital and interest payments in loans with instalment payments.
 
This moratorium, which intends to be a response to the COVID-19 pandemic crisis, is applicable to a large and predetermined group of debtors and to loans granted before 27 March 2020, offers the same conditions to the beneficiaries subject to the moratorium and only allows the change of the payments schedule. However, this moratorium is granted until 30 September 2020, raising questions regarding the applicability of the EBA Guidelines when the moratorium is requested after 30 June 2020 or, even when requested before, the debtors benefit of the moratorium after such date.
 
Maria Gabriela Teixeira Duarte | gtd@servulo.com