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STANDARD POLICIES FOR NPL WORKOUTS

GUIDING PRINCIPLES
FINSAC’s Non-Performing Loan (NPL) unit was created to maximise the recovery of value (or minimise the government’s costs) from a portfolio of distressed loans through a fair and professional workout process. 

Given FINSAC’s role in rehabilitating the financial sector, the NPL unit would prefer to see all loans rehabilitated, but fully recognises that asset sales will often be necessary to offset the government’s expenditure to purchase the loans. 

The following are a set of key principles that the NPL unit created to guide its operations:

1. FINSAC is not a bank and is, therefore, unable to extend further credit except in cases where loans bought already have a commitment from the originating institution. Where loans bought already have a disbursement commitment from the originating institution, FINSAC will not continue said disbursement unless adequate security is in place and the debtor has acknowledged the additional facility by way of commitment letter et al.

 2. FINSAC must ensure consistent treatment of all debtors in the portfolio.

3. FINSAC’s charter is for a maximum of 7 years; all loans should be resolved (worked out or rehabilitated and turned over to banks) within the next 5 years.

4. FINSAC must recoup costs associated with collection of debts as a priority.

These guiding principles have been used to develop standard policies for the workout unit to ensure fair and uniform treatment of all debtors. FINSAC has created an NPL Credit Committee that reviews major cases and ensures uniform treatment across all debtors. Loan workouts requiring approval outside the scope of the Credit Committee are referred to the Board of Directors for approval.

STANDARD POLICIES
To ensure uniformity and equal treatment of all debtors in the workout process, FINSAC’s NPL Credit Committee has created a set of standard policies that apply to the following areas:

1. Debt Consolidation

2. Decision Authority

3. Selection of workout strategy (including referrals to Oversight Committee)

4. Write-offs and relief (loan forgiveness, payment moratoriums)

5. Finance (interest rates, extended payments, early payments, payment allocation, miscellaneous fees/charges)

6. Legal and

7. External Service Providers.

Debt Consolidation
All common debtors across FINSAC’s portfolio will be consolidated for workout purposes so that loan facilities that share the same primary debtor(s) will be treated as a single case. All debt settlement proposals must address the entire debt outstanding.

Decision Authority
Many of the decisions that must be taken will require some judgement on the part of the workout unit. Thus, decision rights have been distributed across the FINSAC Board, the Credit Committee, the Workout Unit Head and the Workout Team Managers. Where a decision involves the compromise of a debt the following terms apply:

• Write-off : this relates to a compromise relative to the purchase price.

• Forgiveness: this relates to a compromise relative to the balance outstanding but in excess of the purchase price.

FINSAC Board
FINSAC’s Board of Directors, appointed by the Minister of Finance, has the ultimate decision making authority for NPL workout activities. The Board approves the following:

1. all loan forgiveness in excess of 20% of the balance outstanding on loans with outstanding balances over J$15 million. 

2. all loan write-offs (subject to a minimum threshold of 20% of purchase price or $5M, whichever is more).

3. all loan workout strategy recommendations by the Credit Committee for loans purchased at a cost of $15M and more. 

In addition, the Board reviews decisions taken by the Credit Committee, and ensures that decisions are consistent with standard policy. 

NPL Credit Committee
the NPL Credit Committee reviews major cases and ensures uniform treatment across all debtors. All accounts with balances in excess of J$5m must be referred to the Committee.

The Credit Committee meets weekly to review and approve valuations and workout strategies proposed by workout team managers. 

The Credit Committee consists of the following functions within FINSAC: Managing Director, Workout Unit Head, General Manager of Asset Management & Divestment, General Manager of Monitoring & Supervision, Financial Controller, Treasury, and Legal Counsel.

The Credit Committee approves the following:

1. valuations for loans with balances in excess of $5m. 

2. workout strategies on loans with balances between J$5 million and J$15 million. 

In addition, the Credit Committee:

1. reviews proposals for referrals to the Oversight Committee; and 

2. makes recommendations to the FINSAC Board regarding workout strategies on loans with outstanding balances over J$15million, not involving compromise in excess of 20% of outstanding balance.

NPL Workout Unit Head
The head of the workout unit has the following decision rights:

1. approval of valuations and workout strategies on loans with outstanding balances of up to J$5 million (principal plus interest in arrears); and

2. approval of write downs of suspended interest.

NPL Team Managers
NPL Team Managers can, without further approval:

1. write down suspended interest where the balance of the entire amount due is being collected; and

2. approve refinancing (i.e., extension of loan payments, change interest rate), as long as the Net Present Value (NPV) of loan remains the same for loans under $5m.Selection of workout strategies

In developing workout strategies to propose to the Credit Committee or the workout unit head:

• all proposals must be valued on an NPV for comparison.

• proposals with the highest NPV are considered first.

 Proposals with less than the highest NPV can be considered if:

1. the NPV is close to the highest (that is within X%) and the proposal maintains a viable on-going concern, or

2. if the likelihood of success of the highest NPV option is low.

Workout Officers will prepare letters to debtors and their representatives within three (3) days of meetings. These letters should outline the issues discussed in said meetings.

• if the debtor’s business is in one of the industries considered in the national interest (e.g., manufacturing, agriculture, tourism) the workout unit will consider referral to the Oversight Committee set up by the government:

–client will be informed for all loans referred to the Oversight Committee; 

–client will be required to submit a standard business plan that incorporates FINSAC requirements (e.g. new management); 

–client may be given a moratorium on interest and principal (within standard policy) while Oversight Committee reviews case/business plan; and 

–FINSAC will act unilaterally at end of moratorium, and will inform client of its chosen course of action.

Write-offs and relief
FINSAC has very strict policies that limit the NPL unit’s ability to grant loan forgiveness or moratoriums on repayments. Most of these decisions require Credit Committee approval and some require FINSAC Board approval.

Loan Forgiveness
• No loan forgiveness will be approved prior to debtor making a significant lump sum payment or consistent payments for a 12 month period, as approved by the Credit Committee or the Board. (See limits established under Decision authority on pages 2 and 3).

• amount of loan forgiveness must be approved by the Credit Committee, and the debtor must provide written evidence that debtor cannot pay the amount to be forgiven.

Payment Moratoriums
Based on the repayment agreement between FINSAC, the debtor and any third parties (e.g. NIBJ, ACB, NDB) a moratorium- 

• on payments (payment holiday) may be granted for up to 3 months;

• on principal payments (i.e. interest only payments) may be granted for up to 6 months; and 

• all terms of the new agreement with FINSAC must be in good standing.

Finance
The NPL unit has a number of policies to ensure uniform treatment of finance arrangements with all debtors.

Interest Rates:
• All extended payment proposals must incur interest: 

–at least 25% on J$ denominated loans 

–15% on US$ denominated loans; and except where it is recognised that it will not be possible to collect the interest being accrued and the proposal is consistent with the policies for selection of workout strategies.

• Interest is computed on a simple interest basis, based on principal the balance outstanding. 

• rate is variable and is loosely tied to the T-Bill rate. (Rates will be reviewed every 3 months and revised accordingly).

Miscellaneous Fees/Charges
FINSAC will add to the debtor costs all costs associated with discharging the debt and securities, including documentation charges, stamp duties and transfer taxes.

Payment Allocation
Payments received are first allocated to fees and charges; the excess is allocated to the principal and interest accrued in the proportion of 2/3 to 1/3. When the interest accrued has been settled, the 1/3 will be applied to interest accrued after transfer to the NPL unit. 

Early Payments
If payments are received in excess of agreed amounts, the surplus will be applied to principal outstanding.

Extended Payments
Extended payments will be granted for a maximum period of 6 years, if the proposed new payment schedule has an equivalent NPV to the original loan.

Securities
No release of securities will be scantioned unless exchanged for the cash value of the security, or the CC approved security of higher value.

FINSAC will not release securities for further interests to be noted thereon unless FINSAC will receive a reasonable payment arising from the additional liability of the debtor. 

Legal
All new agreements require a standard legal contract that must be signed by the customer and include the following clauses:– stated penalties for violation of contract terms;– increased securitization of debt;– agreement to provide financial statements (including cash flow projections) and statement of affairs on an ongoing basis until the debt is resolved (i.e., monthly). Statements must be provided within 30 days of the end of accounting period.

All FINSAC proposals/agreements will be mailed to debtor and require response within 7 days of receipt. If no response is received, FINSAC will follow up on the 8th day indicating to the debtor its intended course of action.

External Service Providers
• FINSAC will define a list of approved service providers (lawyers, real estate evaluators and receivers).

• FINSAC will negotiate fee discounts in exchange for volume.

• All external lawyers should be retained on a contingency basis.• External evaluators should be retained on a flat fee basis (based on the type of real estate being valued).

• Receivers must agree to perform a comprehensive diagnosis of the situation, including strategic options and recommendations, and provide audited financial statements to FINSAC on a monthly basis.

Asset Repossession & Realisation
• Assets are repossessed in instances where the debt is not being adequately serviced and no feasible proposal for settlement is forthcoming.

• All asset disposals are co-ordinated /handled by the Asset Disposal Unit of FINSAC.

• Attendant costs for seizure, storage, sale et al are recovered from the sale proceeds of the said asset.

• The seized assets are sold at prices which are guided by professional valuations not older than six months in the case of motor vehicles, and one year in the case of real estate.

• All real estate must first be offered for sale by auction before they are offered for sale by Private Treaty. All properties available for sale by private treaty must be listed with brokers; all such sales are subjected to the approval/ ratification of the Board.

• The seizure of an asset does not relieve the debtor of his/her obligations under the loan. Interest accrual on the debt continues until the asset is disposed.

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