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4.6 RESTRUCTURING AND RENEGOTIATION OF REAL ESTATE LOANS

Restructuring and renegotiation are the terms commonly used in order to classify all situations involving deferment periods, extensions, amendments to contractual clauses, as well as the settlement of outstanding debts due to banks by borrowers which are temporarily unable to comply with their obligations.

Generally speaking, the term restructuring is used to classify transactions concluded between the lender and the borrower and is intended to redefine the overall agreement of the latter's debt exposure. Within this context, these transactions are also classified using the term consolidation. Renegotiation instead generally involves one individual financial relationship or, otherwise, a homogeneous series of relationships in which some elements of the loan agreement (term, interest rate, repayment plan) are amended, not necessarily in order to deal with a situation in which the borrower has defaulted. Usually they are characterized by granting certain facilities to a borrower who is encountering temporary difficulties in honouring the terms of the loan or they represent the conclusion of market transactions aimed at securing the client's loyalty. These may involve changes to interest rates, payment terms, maturity dates, and repayment plans (the waivers), or alternatively the granting of a new loan to replace the previous one, which will then be redeemed with the proceeds of the new loan.

Generally speaking, these transactions may relate both to unsecured short-term debts as well as to medium- and long-term debts backed up by a mortgage security.

Restructuring techniques may involve any of the following:

1. the grant of a new loan;

2. the deferral of payment deadlines and the concession of respite periods;[1]

3. the definition of a loan restructuring agreement.

In many cases restructuring may involve a moratorium on the payment of overdue instalments (generally on the principal in order to permit the borrower to overcome the temporary difficulties without defaulting on the loan). For example, in a case where a tenant paying a significant amount in rent terminates its lease earlier or does not renew the lease upon expiry, it may be necessary to reduce the amount of the instalments falling due pending the arrival of a new tenant by negotiating a suspension on payments of the principal.

  • [1] Please refer to paragraph 4.6.2 for an explanation of the respite period.
 
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