2461On November 17, 2014, the Committee to Examine Debt Restructuring Proceedings in Israel, chaired by Ministry of Finance Director General Yael Andorn, published the report (in Hebrew) summing up its work. The Committee’s recommendations are meant to increase certainty among financial market participants relating to the process of managing credit in general, and the stages relating to the handling of default in particular. Among other things, the Committee recommended that the Supervisor of Banks and the Commissioner of Capital Markets, Insurance and Savings instruct the corporations under their supervision to set internal limitations on credit to leveraged borrowers, strengthen the standards for managing leveraged loans, and set out a framework for obtaining information on debt restructuring they carry out.
Following the publication of the Committee’s recommendations, the Supervisor and the Commissioner agreed on the proper way to implement the recommendations and formulated the required amendments to their directives. Accordingly, the Supervisor of Banks today published the following directives:
1. Update of Proper Conduct of Banking Business Directive 311—Credit Risk Management
The update to the Directive includes, inter alia, reference to the following issues:
a. Banking corporations will be required to set limitations on the volume of leveraged loans in their credit portfolios, and limitations on the provision of credit to borrowers with higher levels of leverage than common in the industry;
b. Guidelines have been set out in relation to the banking corporation’s participation in syndications, both as the organizer and as the credit provider. In particular, the organizing banking corporation is required to cautiously manage risks due to the concern of absorbing losses as a result of a delay in the process of selling the exposures, and a participating banking corporation is required to assess the risks independently, as if it itself were the loan originator.
c. When providing a material amount of credit (more than NIS 50 million) to a corporation, banking corporations will be required to obtain, and to take into account, information on credit taken out by the controlling shareholder of the borrowing corporation to purchase the controlling shares of the corporation (or use them as a pledge), and on his past behavior.
d. Banking corporations will be required to anchor the appropriate quantitative calculations in their procedures, which will form the basis for the bank’s considerations prior to implementing the debt restructuring, as well as a requirement to examine a number of alternatives to maximize the loan repayment.
2. Update of Proper Conduct of Banking Business Directive 323—Limitations on Capital Transactions Financing
The Directive, which has thus far been limited to credit for the purchase of means of control, has been expanded, and shall apply to all “credit for capital transaction purposes”. A capital transaction is a transaction with the objective of purchasing capital rights in another corporation, buyback, or capital distribution (for instance, through dividends).
The definition of capital, from which the limitation rate set out in the Directive is derived, has been narrowed from the total capital base to Tier 1 capital as defined in Proper Conduct of Banking Business Directive 202. The limitations regulated as part of the Directive prior to the amendment have thereby been made more rigid.
3. Proper Conduct of Banking Business Directive 327—Management of Leveraged Lending—New Directive
In view of the high risk profile of leveraged transactions, and in accordance with the Committee’s recommendations, the Banking Supervision Department’s minimum expectations of the banking corporations regarding the proper and cautious risk management of these loans have been sharpened.
The new Directive instructs banking corporations to define a leveraged loan, and sets out standards relating to credit policy, a periodic discussion by the Board of Directors, underwriting and valuation procedures, reporting and quantitative analysis, the classification of leveraged loans, credit analysis, credit review, and more.
4. Reporting to Banking Supervision Directive 811—Report on the Restructuring of Troubled Debt—New Directive
Due to the need to monitor the volume of debt restructuring arrangements reached in the Israeli banking system, banking corporations will be required to submit a detailed quarterly report to the Banking Supervision Department regarding the implementation of the restructuring of troubled debt.