BY Donald Nyakairu
A commentary on the Bank of Uganda (Central Bank) guidelines
On 14 April 2020, the Bank of Uganda issued guidelines on credit relief and loan restructuring measures for Supervised Financial Institutions (“SFIs”) during the Coronavirus (COVID-19) pandemic. This was a follow up to the Monetary Policy Statement (“MPS”) issued by the Bank on 6 April 2020, which provides for credit relief and loan restructuring measures. These guidelines provide the operationalisation mechanisms for those measures.
The guidelines are for 12 months effective from 1 April 2020 and are applicable only to credit facilities not classified as loss as at 31 March 2020. They are also not applicable to any credit facility granted after 1 April 2020. This relief will be valid until 31 March 2021 unless the period is extended by the Central Bank in future, taking into account how the COVID-19 pandemic will have evolved.
These credit relief and loan restructuring measures will only be applicable where SFIs are considering restructuring of facilities provided to entities affected by the COVID–19 pandemic.
During the 12-month period, a maximum of two restructurings are allowed for any credit facility.
Payment of arrears as a pre-condition for restructuring has been temporarily suspended during this 12-month period. However, SFIs are allowed to capitalise and recover these unpaid arrears less any associated penal interest or fees as part of the credit facility restructuring.
The event of restructuring of a credit facility arising from the direct or indirect impact of the COVID-19 pandemic, will not be treated as an adverse change in the credit risk profile of the borrower.
SFIs will still be required to assess borrowers’ potential unlikeliness to pay subject to any form of restructuring, in accordance with the policies and practices that they usually apply to such assessments. It is purely discretionary on the SFIs, and the bank is just permitting them to make such decisions based on relaxed regulatory rules.
Further, SFIs intending to provide credit relief under these guidelines must have a policy in place to implement the guidelines and are individually responsible for the decision on whether or not to extend the credit reliefs allowed under the guidelines to their customers.
There willbe no automatic adverse impact on a customer's credit ratings or status arising from the event of being granted any restructuring during this 12-month period. The borrower must consent to the restructuring offered by the SFI and there must be proof of that consent.
A repayment moratorium (suspension of payment, postponement or reduction of principal amounts, interest or full payments) is envisaged as a form of restructuring. Accrued interest during the granted moratorium period will be capitalised and amortised over the tenor of the credit facility that remains after the moratorium.
A repayment moratorium cannot be granted for a period exceeding 12 months, and should be granted before 31 March 2021. The period of the moratorium will be excluded by SFIs from the counting of days past due.
The credit classification status and loan loss provisioning amount or percentage for an existing credit facility, will remain unchanged throughout the duration of the granted repayment moratorium.
In addition, the bank has extended, by 180 calendar days, the write-offs of credit facilities classified as loss as of 31 March 2020 only if the original write-off date falls due within the 12-month period from 1 April 2020.
The MPS and the guidelines are a welcome relief to some borrowers who are affected by the COVID-19 pandemic, both by the SFIs and the borrowers.
There is a lot of subjectivity in these guidelines and it is foreseen that very few borrowers will benefit from this relief as borrowers are currently burdened by debt, and future cash flows for some sectors of the economy are very dismal, ie tourism and hotels sector.
There seem to be no linkages in relief between the bank and other relevant institutions of the economy like the Uganda Revenue Authority (“URA”) who have been aggressively collecting taxes to meet their targets.
There are various laws like the Insolvency Act, 2011 that need to be relaxed during this period by an amendment of the law by parliament, which might be used against the affected entities and can affect the ability of the SFIs to provide credit relief and loan restructuring. This will be especially so if the restructuring arrangements are disadvantageous to creditors. For example, under section 3 of the Act, “Inability to pay debts”, a debtor is presumed to be unable to pay its debts if the debtor has failed to comply with a statutory demand. In the Act, on a petition to court to liquidate the company, evidence of failure to comply with a statutory demand is not admissible as evidence of the inability to pay debts unless the application is made within 30-working days after the last date for compliance with the demand. In the current circumstances, this period is too short for them to avoid failure to comply with a statutory demand and this might lead to unnecessary liquidations. The ability of a creditor to petition for a liquidation should also be limited in these difficult times being experienced by most borrowers.
The Companies Act, 2012 and Insolvency Act, 2011 provide for mechanisms that can be used by entities affected by the pandemic to enable them to survive this difficult period. Some of these business rescue mechanisms include provisional administration and administration arrangements with creditors. Another option is to liquidate (graceful exit) the business and free up the assets to establish a new business.
If directors realise that the company does not have a reasonable prospect of survival or being restructured, the only advisable alternative would be to cease trading in a timely manner to protect the position of all creditors including employees and shareholders and appoint a liquidator. This would extricate them from being disqualified as a director for three years for allowing a company to trade while insolvent, as per the Companies Act, 2012. This would provide opportunity to open a new business when the pandemic is over. The reason for insolvency must be based on the effects of the COVID-19 pandemic (and not for other reasons).
For companies that were in crisis before the COVID-19 pandemic, it appears impossible for them to secure funding from their respective SFIs because the guidelines exclude those who were in default before the effective date, although they too may now be affected by the COVID-19 pandemic. Some might already have been in restructuring mode just before the crisis. There should be some mechanism to assist those that fall within the ambit of the guidelines.
There might be other options available to businesses, including leaseback lending, factoring, right sizing (“cut off the fat”), new equity injections, convertible debt or access to “patient” capital.
To be able to benefit from the restructuring under these guidelines, one would have to consider the nature of the business and the effect the COVID–19 pandemic has had on its financial arrangements and agreements. Most businesses will have defaulted on their agreements and all is dependent on the nature and severity of the breach of the financial covenants in its agreements. Ultimately, any form of restructuring will be dependent on what is the ultimate goal of its shareholders/owners or the business.
Since the grant of moratorium is discretionary, the co-lenders may intend to grant different moratorium periods to the same borrower. However, that could lead to several complications with respect to servicing, asset classification etc. It is therefore recommended that all the parties to the co-lending arrangement should grant uniform restructuring terms.
With the regulatory relaxation for SFIs, borrowers who are affected by the COVID-19 pandemic should approach them and negotiate the appropriate relief that they require.
SFIs should embrace these guidelines to ensure they are able to maintain their loan portfolios and remain performing since their capital adequacy requirements under the Financial Institutions (Capital Adequacy Requirements) Regulations, have been relaxed. Both parties need to review the financing agreements, especially clauses to do with events of default and material adverse change. If the COVID-19 pandemic is taken to be a material adverse change, it entitles a lender to call it an event of default and to therefore terminate the agreement and demand that the loans (or any part thereof), together with accrued interest and all other amounts accrued and/or payable under the finance agreements, be immediately due and payable. It all depends on the wording of the agreements and the duration of the pandemic, whether it will be for a short duration or significantly long.
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