Current & potential developments

Businesses are experiencing financial pressures from lost revenues, higher operating costs and/or cash flow challenges due to the on-going and widening COVID-19 lockdowns across different cities and states. If not already the case for some, Banks and lenders may soon be facing an unprecedented wave of requests from borrowers to draw down on their emergency credit lines, obtain additional or bridge financing, restructure existing debt agreements, or obtain waivers in debt covenants and/or moratoriums on debt payments.

Impact

With a potential mounting wave of clients’ request for debt modifications, debt extinguishments or a troubled debt restructuring, business-as-usual credit processes may not be sufficient to handle the large variety of circumstances of these requests.

If covenants are breached or defaults are escalating, the associated debt may need to be reclassified from long-term to current on the balance sheet, as well as from performing to considerations for non-performing assets, trouble debt restructures and doubtful loans classifications in a more accelerated pace than historical.

Concern about issuer and counterparty risk may acerbate the market’s decline and dry up liquidity in financial markets.

Key questions you should consider

  • Are your credit policies and procedures adequate to accommodate special credit considerations? If so, what are the ramifications of exceptional credit decisions on existing risk limits and underwriting standards?
  • Have your credit portfolios (both loans and debt securities) been adequately stress-tested based on more onerous adverse assumptions to reflect the current environment?
  • Does your institution have loan work-out expertise and staff to manage the potentially higher frequency of credit risk shocks?
  • How should any potential changes to the credit profiles of counterparties and borrowers resulting from COVID-19 be accounted for?

How Accume can help

A rigorous sensitivity analysis of the credit portfolios for severe credit risk shocks will help identify any areas of weak credits within the portfolios, and allow your institution to take pre-emptive actions where necessary (e.g., shoring up more credit support such as collateral or guarantees, considerations of asset sales etc.)

A review of existing credit policies and procedures to build in more flexibility into the credit processes where necessary, while increasing more discipline in credit approvals in other cases.

Engage with an independent 3rd-party expert on credit risk management for a comprehensive critical assessment of tactical options available, strategic implications and feasibility of the latest credit risk management trends and practices in the industry for your institution.