Most financial institutions had a good understanding of troubled debt restructuring (TDR) during the “work-out” years, 2009–2011. Most of the credits were commercial real estate or land development loans, and it was relatively easy to identify them as TDRs. There was little doubt that the borrowers were experiencing financial difficulties, and it was also obvious that the financial institutions were making a concession in most work-out situations. Now that most of the troubled commercial real estate and land development loans have been worked out with an improved economy, financial institutions who are involved in agricultural lending are dealing with TDR determinations on Ag credits that have underperformed due to low commodity prices. Many of the primarily agricultural-based financial institutions may not have had the troubled commercial and land development portfolios and thus do not have the experience and credit administration practices and procedures to properly identify and account for troubled debt restructuring. Another complicating factor today is the fact that the downturn in the Ag economy is certainly not as severe as what was experienced in the commercial real estate market in 2008 to 2010. It is difficult to determine when a loan should be designated as “troubled” and even more difficult to define a “concession.”
In April 2011 FASB issued Accounting Standards Update 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The following content of this update may help financial institutions better determine whether a restructure is, in fact, a TDR:
In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist:
- The restructuring constitutes a concession by the financial institution.
- The debtor is experiencing financial difficulties.
In addition, the update clarifies the guidance on a creditor’s evaluation of whether it has granted a concession:
If a debtor does not otherwise have access to funds at a market rate for debt with similar risk characteristics as the restructured debt, the restructuring would be considered to be at a below-market rate, which may indicate that the creditor has granted a concession. In that circumstance, a creditor should consider all aspects of the restructuring in determining whether it has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a troubled debt restructuring.
A temporary or permanent increase in the contractual interest rate as a result of a restructuring does not preclude the restructuring from being considered a concession because the new contractual interest rate on the restructured debt could still be below the market interest rate for new debt with similar risk characteristics. In such situations, a creditor should consider all aspects of the restructuring in determining whether it has granted a concession. If a creditor determines that it has granted a concession, the creditor must make a separate assessment about whether the debtor is experiencing financial difficulties to determine whether the restructuring constitutes a trouble debt restructuring.
A restructuring that results in a delay in payment that is insignificant is not a concession. However, an entity should consider various factors in assessing whether a restructuring resulting in a delay in payment is insignificant.
The update also clarifies the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties:
creditor may conclude that a debtor is experiencing financial difficulties, even though the debtor is not currently in payment default. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt in the foreseeable future without the modification.
As previously indicated, the Ag economy has experienced a significant decline in commodity prices, specifically in 2014, 2015, and 2016, and some agricultural borrowers were unable to fully repay their crop input loans. Financial institutions have generally dealt with this issue by renewing or extending the borrower’s operating loan for another year or terming it out over an extended number of years, typically by refinancing it into the real estate debt. Does this “delay in payment” constitute a TDR designation? The guidance indicates a restructuring that results in only a delay in payment that is insignificant is not a concession. In making a decision in this regard, the following factors should be considered:
- The amount of the restructured payments subject to the delay is insignificant relative to the unpaid principal or collateral value of the debt and will result in an insignificant shortfall in the contractual amount due.
- The delay in timing of the restructured payment period is insignificant relative to any one of the following:
- The frequency of payments due under the debt.
- The debt’s original contractual maturity.
- The debt’s original expected duration.
Therefore, whether the financial institution extends or terms out an operating line, it needs to consider how significant the unpaid portion of the line is compared to the overall relationship and is the delay in payment significant compared to the debt’s original repayment plan.
The conclusion is that there is some level of subjectivity to the TDR designation, especially as it relates to the significance of a “delay in payment.” A financial institution should seek consistency in its TDR determinations and, most importantly, document the decision-making process and rationale.