The Hungarian Central Bank is expected to issue a recommendation by December 2016 to all financial institutions under its regulatory regime which will set out best practice guidelines on out-of-court restructuring and consensual settlement of non-performing loans (NPLs) in the corporate sector.
The recommendation was first drafted by the Magyar Nemzeti Bank (MNB) in cooperation with the European Bank for Reconstruction and Development (EBRD) and discussed in consultation with the Hungarian Banking Association and representatives of the banking sector. The law firm Lakatos Köves and Partners assisted with the preparation of the draft recommendation, based on a report by the financial consultants EY. Consultations with banks culminated in a workshop hosted by both institutions in Budapest this week.
While technically non-binding, the draft recommendation is expected to have significant power of persuasion among banks and to be an important tool for NPL resolution. It is aimed at encouraging banks to adopt a more cooperative and coordinated approach where more than one financial creditor is involved. The recommendation will encourage banks to consult and share information to the greatest extent possible and to agree to a standstill of any enforcement action to allow time for the restructuring of viable businesses. Banks will be recommended in the interests of efficiency to designate, as appropriate, coordinating banks to lead the restructuring or settlement negotiations. The recommendation also highlights the importance of appointing professional advisers for larger NPL exposures.
Márton Nagy, MNB Deputy Governor, said: “In our view, out-of-court restructuring is an integral part of financial stability. A restructuring guideline for out-of-court restructuring cases can provide a unified approach for a restructuring involving several lenders. The principles underlying the guidelines have the ultimate goal of providing a framework and predictability for both the debtor and creditor in a restructuring process.”
Graeme Hutchison, EBRD Regional Head of Hungary and Slovakia, added: “Today we are on the verge of a significant step forward. With the support of the Hungarian National Bank and with the advice and input from various advisers and experts, we now have what we think is a robust template for multi-creditor out-of-court restructurings. We hope this framework will be received positively by the industry and will prove to be a useful tool in stimulating further collaboration with the banks.”
Leading bankers and the Hungarian Banking Association welcomed the MNB’s support to develop a set of best practice guidelines for banks for out-of-court restructuring and consensual settlement although stressed that the MNB recommendation should be a “rulebook” for the banks and should not be relied upon by debtors abusively. The Banking Association has offered to develop further template documentation to set an industry standard and help make the restructuring process more efficient and predictable.
The 95 participants at the workshop were also in agreement that the current legislative framework in Hungary was insufficient to support out-of-court restructuring. The Bankruptcy Code was seen as needing revision to support the MNB recommendation. Particular issues highlighted included the lack of a pre-insolvency or expedited bankruptcy procedure to be used as a “Plan B” where consensual out-of-court restructuring negotiations fail and the absence of statutory protections for new money in restructuring. In general, banks noted the limited ability of creditors to influence the existing bankruptcy process.
The MNB and the EBRD agreed to continue the policy dialogue with leading government ministries to work on improving the current legislative framework for NPL resolution. The two institutions have been working closely together on NPL issues since 2014 and host workshops on a regular basis. NPL resolution is one of the common operational priorities identified in a Memorandum of Understanding between Hungary and the EBRD signed in February 2015.
The cooperation takes place under the auspices of the European Bank Coordination (“Vienna”) Initiative, which has been calling for decisive, timely and targeted action to address NPLs. After presenting a number of resolution strategies, the Initiative has started supporting individual country action plans, led by country authorities and supported by IFIs and the European authorities participating in the forum.