Background – INT 20-07, Troubled Debt Restructuring of Certain Debt Investments Due to COVID-19
This INT addresses additional suggestions posed by interested industry parties (IP) in their request to expand the initial scope of INT 20-03 – Troubled Debt Restructuring Due to COVID-19, to include all debt securities within the purview of SSAP No. 26R and SSAP No. 43R. Further, interested parties inquired whether exceptions should also be acknowledged to provide additional direction on determining what qualifies as “insignificant modifications” in accordance with SSAP No. 36, Troubled Debt Restructuring, paragraph 10.
So, what’s the rub?
This one is short-lived and gets a little deep. SAPWG reached a general consensus with respect to the existing SSAP 36 requirements, with particular emphasis on assessing whether a modification is an insignificant concession. The SAPWG practical expedients consensus provides for the following limited-time adjustments under SSAP No. 36:
- Paragraph 10.a. of SSAP No. 36 recognizes that restructured payments are considered insignificant if the interruption is insignificant to the unpaid principal or collateral value of the debt and will result in an insignificant deficit in the contractual amount due. Within the time frame of this INT, debt security restructurings resulting from COVID-19 are considered insignificant if the restructuring results with a change that reflects a 10% or less deficit amount in the contractual amount due;
- Paragraph 10.b. of SSAP No. 36 recognizes that restructured payments are considered insignificant if the interruption in the timing of the restructured payment period is insignificant to the occurrence of payments due under the debt, the debt’s original contractual maturity or the debt’s original expected duration. Within the time frame of the INT, debt security restructurings resulting from COVID-19 are considered insignificant if the restructuring does not result in a postponement of the maturity of the debt by more than three years.
- Within the time frame of the INT, debt security restructurings resulting from COVID-19 that exclusively impact covenant requirements are not considered troubled debt restructurings.
- SAPWG’s closing consensus provides exceptions to SSAP No. 103R – Transfer and Servicing of Financial Assets and Extinguishments of Liabilities whereby:
- Modifications that reflect a 10% or less change in contractual cash flows considered insignificant under the INT will not require further evaluation to assess whether the modification is more than minor based on the specific facts and circumstances (including all other pertinent items) surrounding the modification. As such, these investments are not to be reported as an extinguishment and a new debt instrument;
- Modifications resulting from COVID-19 that exceed the practical expedient of a 10% shortfall in contractual cash flows permitted in the INT that were assessed and deemed insignificant under paragraph 10 of SSAP No. 36 will not be measured as an exchange of debt instruments with substantially different terms under SSAP No. 103, paragraph 22. [Note: SSAP No. 103 provides that an exchange of debt instruments (in a nontroubled debt situation) is accomplished with debt instruments that are substantially different if the present value of cash flows under the terms of the new instruments is at least 10% different from the present value of the remaining cash flows under the terms of the original instrument]. Further, SAPWG calls for reporting entities to engage their auditors and regulators with the application of SSAP No. 36, paragraph 10, to confirm that a change in contractual cash flows in excess of 10% would still qualify as insignificant.
- Due to the fluid nature of the entire COVID-19 situation, for those loan alterations that would be considered significant and create an actual troubled debt restructuring under SSAP No. 36, SAPWG has recommended the option of requesting potential permitted practice exceptions from the entity’s regulatory domicile.
- SAPWG makes it quite clear this INT is a “specific-purpose practical expedient” to determine whether debt alterations due to COVID-19 are deemed insignificant under SSAP No. 36 and/or a substantive adjustment under SSAP No. 103R. As such, INT 20-07 will only be effective for the period March 1, 2020, through December 31, 2020, or the date that is 60 days after the date on which the national emergency terminates. Modifications made under the INT will endure for the duration of its term. SAPWG will revisit INT 20-07 to determine the further need for adjustments to the covered period.
Other SAPWG Conference Call Decisions:
Two additional INT promulgations were discussed during the May 20 conference call. You can click below to read more about the INTs.