Central Bank allows
corporate debt restructuring

To develop financial markets and reorganize

relationship between debtors and creditors

Banks and financial institutions will be allowed to restructure their loans, according to a basic circular issued by the Central Bank (BDL) this week. The circular targets loans provided mainly to companies.

“This circular is not worrying about any default crisis in the market,” said Marwan Mikhael, Head of Research at Blominvest Bank. “Authorities have been working for a long time on a law similar to the concept of the US Chapter 11 law, which helps protect debtors, but due to political paralysis and difficulty to legalize it, issuing a circular is a short way to the target,” he said.

Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor's business affairs and assets. It is filed by individuals or by corporations, that require time to restructure their debts.

“The circular’s purpose is to develop financial markets and reorganize the relationship between debtors and creditors,” said Mikhael. The Gross Doubtful Loans to total loans represent 6.58 percent, while the Net Doubtful Loans to total loans stand at 2.15 percent. “This is a very acceptable figure and lower than that of many other countries,” said Mikhael.

The circular covers specific categories of loans. The first includes the loans for follow-up and settlement. The second comprises the substandard loans, where the financial capacity of the client is not enough to meet his obligations and depends on suitable financial and economic conditions, but his file provides acceptable guarantees. The third embraces the doubtful loans, where full repayment is questionable and uncertain, even after the liquidation of guarantees (if available).

The circular excludes from the above mentioned categories of loans those subject to article 152 of the Code of Money and Credit and the loans that benefit from the State’s subsidy to debit interest rates and non-productive loans (substandard, doubtful, and bad loans), which are covered by virtue of the subsidized loan provided by BDL to the parent merger bank.

The loan restructuring process will be conducted upon a mutual consent between borrower and creditor (bank and financial institution). If the borrower is involved with many banks and financial institutions, the circular determines several conditions to allow the loan restructuring process. The borrower will have the approval of two thirds of creditor banks and financial institutions, which would own at least 60 percent of the total debt of the borrower.

“The circular doesn’t have the effect of the law. That’s why it emphasizes the mutual consent of banks and financial institutions over the restructuring process,” said Mikhael.