FSB Initiates Peer Review, Seeks Feedback on Corporate Debt Workouts

The objective of the review is to support the COVID-19 response efforts by examining FSB member jurisdictions’ practices, experiences, and lessons from out of court debt workouts and the associated implications for financial stability. The review will explore how losses to the financial system and economy could be mitigated by efficient procedures for the restructuring of financial debt of corporates, in particular in an economic environment that may entail restructuring needs for a large number of companies. To this end, the review will focus on the legal and regulatory conditions (or enabling framework) that facilitate out of court debt workouts as well as elements of the legal and regulatory regime that interact with the financial system. This includes regulatory factors that affect incentives for restructuring (for example, prudential treatment of a restructured loan, rights of existing shareholders), in particular with regard to restructuring mechanisms to efficiently work out a high number of failing loans. The experience of asset management companies will be also considered in this context, but the focus will be on how they have helped to facilitate out of court debt workouts rather than on their role in addressing problem banks.

Furthermore, the review will explore the role of financial sector authorities in facilitating enabling processes and structures (for example, codes of conduct for debt workouts) for dealing with cases of corporate financial difficulty in which financial institutions have a significant exposure, especially in markets where the need for corporate restructuring has reached systemic levels. The review will cover non-financial corporates of all sizes to get a wider perspective of frameworks in place. The review will focus on out of court debt workouts for businesses organized as corporations. It will include financial institutions only insofar as they are creditors to corporates in financial distress and will not cover legal frameworks on the insolvency or resolution of financial institutions. Given the concerns about small and medium-size enterprises (SMEs) stemming from cost, effectiveness, and administrative burden considerations, a particular focus will be on specific rules and practices for debt workouts for SMEs.

Deteriorating credit quality of non-financial borrowers poses risks to the financial system; indeed, growing vulnerabilities in the non-financial corporate sector may increasingly affect banks and other financial institutions. It is therefore important to have in place efficient procedures for the restructuring or liquidation of corporates in distress. Thus, FSB is inviting feedback from financial institutions, corporates, insolvency practitioners, and other stakeholders on out of court corporate debt workouts. This could include comments on:

• Types of out of court debt workout frameworks (for example, informal workouts, enhanced workouts, and hybrid workouts) most often used in a jurisdiction and the rationale for their use
• Features of out of court debt workout frameworks that may be particularly helpful to minimize the economic and financial system damage caused by corporate defaults due to COVID-19
• The appropriate role of financial sector authorities in facilitating debt restructuring, including to incentivize the participation of various stakeholders in an out of court debt workout
• Experiences and challenges in the use of out of court debt workouts, including to manage the volume of non-performing loans in the financial system

Related Links

• Press Release
• Terms of Reference for Peer Review (PDF)

Keywords: International, Banking, Securities, Credit Risk, COVID-19, NPLs, Out of Court Debt Workout, Debt Restructuring, Corporate Debt Workout, FSB