• Question ID: 2020/0006
• Date of publication: 31/01/2020
• Subject matter: Leasing products, Non-performing/defaulted or impaired instruments
• AnaCredit Manual: Part II
• Data attribute: Type of instrument, Status of forbearance and renegotiation

Question

Please consider a financial lease where the debtor does not pay and is considered in default. After the default classification, the bank seizes and sells the asset and the proceeds obtained in this way are used to pay the outstanding debt. However, as the proceeds fall short of the debt, part of it remains unpaid. Please clarify whether the instrument should still be considered to be a “financial lease” as of this point in time even if it is not protected by the leased asset, or whether it should be reclassified as another type of instrument. Does the answer depend on whether there are changes to the contract after the default?

Answer

The answer depends on whether the lease contract is changed in the event of default.

In the context of AnaCredit, financial leases are defined in paragraphs 5.134 to 5.135 of Annex A to Regulation (EU) No 549/2013. Specifically, a financial lease is a contract under which the lessor as legal owner of an asset conveys the risks and benefits of ownership of the asset to the lessee. Financial leases are distinguished from other kinds of leases because the lease transfers substantially all the risks and rewards incidental to ownership.

Under a financial lease, the lessor is deemed to make, to the lessee, a loan with which the lessee acquires the asset. Accordingly, the loan is classified under AnaCredit as a financial lease and is subject to reporting.

Please note that lease classification is made at the inception of the lease. Changes in circumstances (for example, default by the lessee) do not give rise to a new classification of a lease for AnaCredit purposes. However, if at any time the provisions of the lease are changed in a way that would have resulted in a different classification of the lease if the changes had been in effect at the inception of the lease, the revised agreement is regarded as a new agreement resulting in a new instrument reportable to AnaCredit.

Consequently, if after the default of the debtor and the liquidation of the leased asset as described in the question, the provisions of the lease contract are changed to the effect that the loan outstanding after the liquidation of the leased asset is regarded as a new instrument arising under a new loan agreement, the reporting to AnaCredit is as follows:

• the financial lease instrument ceases to be reported;
• in its place a new loan relating to the remaining debt of the lessee is reported, which emerges based on the new agreement;
• the type of instrument of the new loan is determined on the basis of its characteristics;
• the purpose of the new loan is “debt financing”;
• other data attributes are reporting according to the features of the instrument and the debtor; in particular, the change is duly flagged in the data attributes “status of forbearance and renegotiation” and “date of the forbearance and renegotiation status”.

Conversely, if the creditor (lessor) and the debtor (lessee) do not change the provisions of the lease and no new instrument is created, the financial lease continues to be reported in the same way as prior to the seizure of the leased asset, and the lease is still considered to be a “financial lease”, despite the fact that is not protected by the leased asset. Notably, also in this case other data attributes are reported on the features of the instrument, the debtor and the protection, in particular the data attributes “performing status of the instrument” and “status of forbearance and renegotiation” pursuant to Implementing Regulation (EU) No 680/2014.