Status “Defaulted” (D) can be assigned to loans offered by a specific lending company under three possible criteria:
a.) Current estimated cash flows are not sufficient to cover full exposure: We evaluate whether the expected repayments from the underlying loans bought by investors – or in case of a buyback obligation, cash flows from the lending company’s overall portfolio and operations – are sufficient to cover the contractual payments to investors in full. Should we identify a shortfall in the necessary amounts for full recovery, we would assign Defaulted status irrespective of the size of the shortfall.
b.) The lending company has declared bankruptcy, or a process of insolvency is underway (including enforced liquidation), or the company is under legal protection: Because of third party involvement, such as an administrator or liquidator, there is an increased risk of the lending company not honoring the buyback obligation or not passing on borrowers’ repayments in full, even if the current cash flow forecasts do not show this. The impact of these proceedings can vary based on each country's specific legislation. For example, in one country, revocation of licence might allow the lending company to seek a voluntary wind-down and continue servicing loans and it would not fall under this criteria, while elsewhere, the same revocation would necessitate an obligatory wind-down by appointed administrator, meaning it would fall under this criteria.
c) A restructuring solution has not been achieved, within 180 days of suspension: 180 days should be sufficient to reach a reasonable restructuring agreement with a distressed lending company. We consider a restructuring solution reached with the lending company if payments are being made according to the plan, even if a formal agreement has not yet been signed.