Troubled Debt Restructuring - Restructured Loans

What is a debt restructuring (TDR)? This term will be discussed in this article. In a troubled debt restructuring, the debtor has financial problems and is relieved of part or all of the obligations. The concession arises from the debtor-creditor agreement, or law, or it applies to foreclosure and repossession.

There are several types of troubled debt restructurings. They are:

• Transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt;
• Issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest; or
• Modification of the terms of a debt.

Modification of the terms of a debt may include one or a combination of these changes:

• Reduction of the stated interest rate for the remaining original life of the debt;
• Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk;
• Reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement; or
• Reduction of the accrued interest.

During past few decades loan modifications made as part of a customer retention program have not been considered to be TDRs. But whenever an interest rate is lowered on what is perceived as a healthy loan, banks should be encouraged to perform new underwriting in order to ensure that the modified loan is at market rate and that the borrower would have qualified for this "nontroubled" market-rate loan. Without the new underwriting, that modification might be considered a TDR.

Before making the final decision, the bank should consider whether the borrower has defaulted on any debt; has declared bankruptcy; is unable to service the debt; or has credit available.

That is why a credit analysis should be performed for a restructured loan in conjunction with its restructuring to determine the borrower’s ability to repay the loan and any estimated credit loss. If the modified loan is considered to be a TDR, then the guidance in FASB Statement 114, “Accounting by Creditors for Impairment of a Loan,” should be followed.

If available information confirms that a specific restructured loan, or a portion thereof, is uncollectible, the uncollectible amount should be charged off against the allowance for loan and lease losses at the time of the restructuring. The credit quality of restructured loans should be reviewed regularly. And the bank should periodically evaluate the restructured loan for impairment to determine whether any additional amounts should be charged off against the allowance for loan and lease losses.

Banking Dictionary

Troubled Debt Restructuring - Condition where a lender grants a concession to a borrower in financial difficulty. The Statement of Financial Accounting Standards No. 15 (FASB 15) divides debt restructuring of nonperforming loans, where the loan payments are past due 90 days or more, into two categories: (1) loans where the borrower transfers assets to the lender; and (2) those where credit terms are modified. The latter includes foreclosures, reductions in the interest rate, extension of the maturity date, and forgiveness of principal and/or interest payments.
More info - http://www.answers.com/topic/troubled-debt-restructuring-in-accounting.

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