Vol 11 (2014) - Issue 3

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Distressed Debt Restructurings: Regulatory Instrument 32/2013 of the Bank of Portugal

I. Background
On 31 December 2013, the Portuguese Central Bank (Banco de Portugal) issued Regulatory Instrument 32/2013 ('Instrument 32/2013') implementing new rules on the identification and flagging of distressed debt restructurings. Instrument 32/2013 applies to credit institutions and to financial institutions with lending activity as well as branches of credit institutions with head offices outside the EU ('Institutions').
The purpose of Instrument 32/2013 is to strengthen compliance with existing prudential rules, aimed at controlling risks inherent in their activities, by extending the circumstances where Institutions are required to identify and flag a 'restructured credit facility of a client in distress', inter alia, by adding new situations where a client is deemed to be in distress and new cases to be considered as amendments to the terms and conditions of an existing credit facility.
Prudential rules of Institutions, a harmonised regulation largely based on EU Directives, aims at controlling risks, ensuring solvency and creditworthiness of Institutions. It further envisages to maintain the stability of the financial system, protecting customers (depositors and investors) against potential losses stemming from poor management, fraudulent conduct or insolvency of suppliers/providers within the context of financial services creating, therefore, a sound banking system.
As far as controlling an Institution’s exposures is concerned, it shall consist in imposing limits on the concentration of exposures to a single client or group of connected clients avoiding pathologic scenarios. In order to monitor compliance with prudential rules, the Central Bank analyses information reported on a systematic basis by the Institutions subject to its supervision.
These new rules on the identification and flagging of distressed debt restructurings set out in Instrument 32/2013 are both backed by and in line with a complex legislative package approved in Portugal throughout 2012, which found in 2013 a green field of implementation. One may say that the relationship between a bank and its costumer has always been a concern of the regulator and of the legislator.
At the corporate level, due to the 2012 revision of the Portuguese Insolvency Code ('CIRE'), the Special Recovery Procedure (Processo Especial de Revitalização, PER) was introduced with the purpose of establishing a negotiation process between creditors and the debtor in order to rescue companies as a going concern.
Further, a revised mechanism called SIREVE (Sistema de Recuperação de Empresas por Via Extrajudicial) was implemented aiming at enhancing efficiency and speeding up out of court settlements, shortening delays and coordinating official agencies and bodies (social security, tax authorities).
At the individual client’s level, also during 2012, changes were introduced to (i) the applicable legal regime of residential mortgages and (ii) duties and obligations of financial institutions, aiming at protecting debtors with residential loans, within a national context of economic difficulties for families to repay their residential mortgage loans together with rising unemployment rates. These amendments were introduced by means of Act 57/2012, Act 58/2012 and Act 59/2012, all dated 9 November.

II. Debt restructurings at a corporate level
II.1. Special Recovery Procedure (Processo Especial de Revitalização)
The PER, a pre-insolvency in-court procedure, introduced by Act 16/2012, of 20 April, attempts to reach a restructuring agreement to the extent that there is a pragmatic scenario for revitalisation. It is conceived as a mechanism to favour financially distressed debtors that face economic difficulties (i.e., unable to meet their obligations, or have difficulty in doing so, namely due to lack of liquidity or difficulties in acquiring additional capital) or imminent insolvency, not applying, therefore, to companies declared insolvent by a Court of Law.