Title[ Annex
Section[ Annex 6
Supervisory Slotting Criteria for Specialised Lending
Table 1 - Supervisory Rating Grades for Project Finance Exposures
Strong Good Satisfactory Weak
Financial strength
Market conditions Few competing suppliers or substantial and durable advantage in location, cost, or technology. Demand is strong and growing
Few competing suppliers or better than average location, cost, or technology but this situation may not last. Demand is strong and stable
Project has no advantage in location, cost, or technology. Demand is adequate and stable
Project has worse than average location, cost, or technology. Demand is weak and declining
Financial ratios (e.g. debt service coverage ratio (DSCR), loan life coverage ratio (LLCR), project life coverage ratio (PLCR), and debt-to- equity ratio)
Strong financial ratios considering the level of project risk; very robust economic assumptions
Strong to acceptable financial ratios considering the level of project risk; robust project economic assumptions
Standard financial ratios considering the level of project risk
Aggressive financial ratios considering the level of project risk
Stress analysis The project can meet its financial obligations under sustained, severely stressed economic or sectoral conditions
The project can meet its financial obligations under normal stressed economic or sectoral conditions. The project is only likely to default under severe economic conditions
The project is vulnerable to stresses that are not uncommon through an economic cycle, and may default in a normal downturn
The project is likely to default unless conditions improve soon
Strong Good Satisfactory Weak
Financial structure
Duration of the credit compared to the duration of the project
Useful life of the project significantly exceeds tenor of the loan
Useful life of the project exceeds tenor of the loan
Useful life of the project exceeds tenor of the loan
Useful life of the project may not exceed tenor of the loan
Amortisation schedule Amortising debt Amortising debt Amortising debt repayments with limited bullet payment
Bullet repayment or amortising debt repayments with high bullet repayment
Political and legal environment
Political risk, including transfer risk, considering project type and mitigants
Very low exposure; strong mitigation instruments, if needed
Low exposure; satisfactory mitigation instruments, if needed
Moderate exposure; fair mitigation instruments
High exposure; no or weak mitigation instruments
Force majeure risk (war, civil unrest, etc),
Low exposure Acceptable exposure Standard protection Significant risks, not fully mitigated
Government support and project’s importance for the country over the long term
Stability of legal and regulatory environment (risk of change in law)
Project of strategic importance for the country (preferably export-oriented). Strong support from Government
Favourable and stable regulatory environment over the long term
Project considered important for the country. Good level of support from Government
Favourable and stable regulatory environment over the medium term
Project may not be strategic but brings unquestionable benefits for the country. Support from Government may not be explicit
Regulatory changes can be predicted with a fair level of certainty
Project not key to the country. No or weak support from Government
Current or future regulatory issues may affect the project
Acquisition of all necessary supports and approvals for such relief from local content laws
Strong Satisfactory Fair Weak
Strong Good Satisfactory Weak
Enforceability of contracts, collateral and security
Contracts, collateral and security are enforceable
Contracts, collateral and security are enforceable
Contracts, collateral and security are considered enforceable even if certain non-key issues may exist
There are unresolved key issues in respect if actual enforcement of contracts, collateral and security
Transaction characteristics
Design and technology risk Fully proven technology and design
Construction risk
Fully proven technology and design
Proven technology and design — start-up issues are mitigated by a strong completion package
Unproven technology and design; technology issues exist and/or complex design
Permitting and siting All permits have been obtained
Type of construction contract Fixed-price date-certain turnkey construction EPC (engineering and procurement contract)
Some permits are still outstanding but their receipt is considered very likely
Fixed-price date-certain turnkey construction EPC
Some permits are still outstanding but the permitting process is well defined and they are considered routine
Fixed-price date-certain turnkey construction contract with one or several contractors
Key permits still need to be obtained and are not considered routine. Significant conditions may be attached
No or partial fixed-price turnkey contract and/or interfacing issues with multiple contractors
Completion guarantees Substantial liquidated damages supported by financial substance and/or strong completion guarantee from sponsors with excellent financial standing
Significant liquidated damages supported by financial substance and/or completion guarantee from sponsors with good financial standing
Adequate liquidated damages supported by financial substance and/or completion guarantee from sponsors with good financial standing
Inadequate liquidated damages or not supported by financial substance or weak completion guarantees
Strong Good Satisfactory Weak
Track record and financial strength of contractor in constructing similar projects.
Strong Good Satisfactory Weak
Operating risk
Scope and nature of operations and maintenance (O & M) contracts
Strong long-term O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts
Long-term O&M contract, and/or O&M reserve accounts
Limited O&M contract or
O&M reserve account
No O&M contract: risk of high operational cost overruns beyond mitigants
Operator’s expertise, track record, and financial strength
Very strong, or committed technical assistance of the sponsors
Strong Acceptable Limited/weak, or local operator dependent on local authorities
Off-take risk
(a) If there is a take-or-pay or fixed-price off-take contract:
Excellent creditworthiness of off- taker; strong termination clauses; tenor of contract comfortably exceeds the maturity of the debt
Good creditworthiness of off-taker; strong termination clauses; tenor of contract exceeds the maturity of the debt
Acceptable financial standing of off-taker; normal termination clauses; tenor of contract generally matches the maturity of the debt
Weak off-taker; weak termination clauses; tenor of contract does not exceed the maturity of the debt
Strong Good Satisfactory Weak
(b) If there is no take-or-pay or fixed-price off-take contract:
Project produces essential services or a commodity sold widely on a world market; output can readily be absorbed at projected prices even at lower than historic market growth rates
Project produces essential services or a commodity sold widely on a regional market that will absorb it at projected prices at historical growth rates
Commodity is sold on a limited market that may absorb it only at lower than projected prices
Project output is demanded by only one or a few buyers or is not generally sold on an organised market
Supply risk
Price, volume and transportation risk of feed-stocks; supplier’s track record and financial strength
Reserve risks (e.g. natural resource development)
Long-term supply contract with supplier of excellent financial standing
Independently audited, proven and developed reserves well in excess of requirements over lifetime of the project
Long-term supply contract with supplier of good financial standing
Independently audited, proven and developed reserves in excess of requirements over lifetime of the project
Long-term supply contract with supplier of good financial standing — a degree of price risk may remain
Proven reserves can supply the project adequately through the maturity of the debt
Short-term supply contract or long-term supply contract with financially weak supplier
— a degree of price risk definitely remains
Project relies to some extent on potential and undeveloped reserves
Strength of Sponsor
Sponsor’s track record, financial strength, and country/sector experience
Strong sponsor with excellent track record and high financial standing
Good sponsor with satisfactory track record and good financial standing
Adequate sponsor with adequate track record and good financial standing
Weak sponsor with no or questionable track record and/or financial weaknesses
Strong Good Satisfactory Weak
Sponsor support, as evidenced by equity, ownership clause and incentive to inject additional cash if necessary
Strong. Project is highly strategic for the sponsor
(core business — long- term strategy)
Good. Project is strategic for the sponsor
(core business — long- term strategy)
Acceptable. Project is considered important for the sponsor (core business)
Limited. Project is not key to sponsor’s long- term strategy or core business
Security Package
Assignment of contracts and accounts
Fully comprehensive Comprehensive Acceptable Weak
Pledge of assets, taking into account quality, value and liquidity of assets
First perfected security interest in all project assets, contracts, permits and accounts necessary to run the project
Perfected security interest in all project assets, contracts, permits and accounts necessary to run the project
Acceptable security interest in all project assets, contracts, permits and accounts necessary to run the project
Little security or collateral for lenders; weak negative pledge clause
Lender’s control over cash flow (e.g. cash sweeps, independent escrow accounts)
Strong Satisfactory Fair Weak
Strength of the covenant package
(mandatory prepayments, payment deferrals, payment cascade, dividend restrictions…)
Covenant package is strong for this type of project
Project may issue no additional debt
Covenant package is satisfactory for this type of project
Project may issue extremely limited additional debt
Covenant package is fair for this type of project Project may issue limited additional debt
Covenant package is Insufficient for this type of project
Project may issue unlimited additional debt
Strong Good Satisfactory Weak
Reserve funds (debt service, O&M, renewal and replacement, unforeseen events, etc)
Longer than average coverage period, all reserve funds fully funded in cash or letters of credit from highly rated bank
Average coverage period, all reserve funds fully funded
Average coverage period, all reserve funds fully funded
Shorter than average coverage period, reserve funds funded from operating cash flows
Table 2 - Supervisory Rating Grades for Income-Producing Real Estate Exposures and
High-Volatility Commercial Real Estate Exposures
Strong Good Satisfactory Weak
Financial strength
Market conditions The supply and demand for the project’s type and location are currently in equilibrium. The number of competitive properties coming to market is equal or lower than forecasted demand
The supply and demand for the project’s type and location are currently in equilibrium. The number of competitive properties coming to market is
roughly equal to forecasted demand
Market conditions are roughly in equilibrium. Competitive properties are coming on the market and others are in the planning stages. The project’s design and capabilities may not be state of the art compared to new projects
Market conditions are weak. It is uncertain when conditions will improve and return to equilibrium. The project is losing tenants at
lease expiration. New lease terms are less favourable compared to those expiring
Financial ratios and advance rate
The property’s debt service coverage ratio (DSCR) is considered strong (DSCR is not relevant for the construction phase) and its loan to value ratio (LTV) is considered low given its property type. Where a secondary market exists, the transaction is underwritten to market standards
The DSCR (not relevant for development real estate) and LTV are satisfactory. Where a secondary market exists, the transaction is underwritten to market standards
The property’s DSCR has deteriorated and its value has fallen, increasing its LTV
The property’s DSCR has deteriorated significantly and its LTV is well above underwriting standards for new loans
Strong Good Satisfactory Weak
Stress analysis The property’s resources, contingencies and liability structure allow it to meet its financial obligations during a period of severe financial stress (e.g. interest rates, economic growth)
Cash-flow predictability
The property can meet its financial obligations under a sustained period of financial stress (e.g. interest rates, economic growth). The property is likely to default only under severe economic conditions
During an economic downturn, the property would suffer a decline in revenue that would limit its ability to fund capital expenditures
and significantly increase the risk of default
The property’s financial condition is strained and is likely to default unless conditions improve in the near term
(a) For complete and stabilised property.
(b) For complete but not stabilised property
The property’s leases are long-term with creditworthy tenants and their maturity dates are scattered. The property has a track record of tenant retention upon lease expiration. Its vacancy rate is low. Expenses (maintenance, insurance, security, and property taxes) are predictable
Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future
Most of the property’s leases are long-term, with tenants that range in creditworthiness. The property experiences a normal level of tenant turnover upon lease expiration. Its vacancy rate is low. Expenses are predictable
Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future
Most of the property’s leases are medium rather than
long-term with tenants that range in creditworthiness. The property experiences a moderate level of tenant turnover upon lease expiration. Its vacancy rate is moderate. Expenses are relatively predictable but vary in relation to revenue
Most leasing activity is within projections; however, stabilisation will not occur for some time
The property’s leases are of various terms with tenants that range in creditworthiness. The property experiences a very high level of tenant turnover upon lease expiration. Its vacancy rate is high. Significant expenses are incurred preparing space for new tenants
Market rents do not meet expectations. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue
Strong Good Satisfactory Weak
(c) For construction phase The property is entirely pre- leased through the tenor of the loan or pre-sold to an investment grade tenant or buyer, or the bank has a binding commitment for take-out financing from an investment grade lender
Asset characteristics
The property is entirely
pre-leased or pre-sold to a creditworthy tenant or buyer, or the bank has a binding commitment for permanent financing from a creditworthy lender
Leasing activity is within projections but the building may not be pre-leased and there may not exist a take- out financing. The bank may be the permanent lender
The property is deteriorating due to cost overruns, market deterioration, tenant cancellations or other factors. There may be a dispute with the party providing the permanent financing
Location Property is located in highly desirable location that is convenient to services that tenants desire
Design and condition Property is favoured due to its design, configuration, and maintenance, and is highly competitive with new properties
Property is located in desirable location that is convenient to services that tenants desire
Property is appropriate in terms of its design, configuration and maintenance. The property’s design and capabilities are competitive with new properties
The property location lacks a competitive advantage
Property is adequate in terms of its configuration, design and maintenance
The property’s location, configuration, design and maintenance have contributed to the property’s difficulties
Weaknesses exist in the property’s configuration, design or maintenance
Property is under construction
Construction budget is conservative and technical hazards are limited. Contractors are highly qualified
Construction budget is conservative and technical hazards are limited. Contractors are highly qualified
Construction budget is adequate and contractors are ordinarily qualified
Project is over budget or unrealistic given its technical hazards. Contractors may be under qualified
Strong Good Satisfactory Weak
Strength of
Sponsor/Developer
Financial capacity and willingness to support the property.
Reputation and track record with similar properties.
Relationships with relevant real estate actors
The sponsor/developer made a substantial cash contribution to the construction or purchase of the property. The sponsor/developer has substantial resources and limited direct and contingent liabilities. The sponsor/developer’s properties are diversified geographically and by property type
Experienced management and high sponsors’ quality. Strong reputation and lengthy and successful record with similar properties
Strong relationships with leading actors such as leasing agents
The sponsor/developer made a material cash contribution to the construction or purchase of the property. The sponsor/developer’s financial condition allows it to support the property in the event of a cash flow shortfall. The sponsor/developer’s properties are located in several geographic regions
Appropriate management and sponsors’ quality. The sponsor or management has a successful record with similar properties
Proven relationships with leading actors such as leasing agents
The sponsor/developer’s contribution may be immaterial or non-cash. The sponsor/developer is average to below average in financial resources
Moderate management and sponsors’ quality. Management or sponsor track record does not raise serious concerns
Adequate relationships with leasing agents and other parties providing important real estate services
The sponsor/developer lacks capacity or willingness to support the property
Ineffective management and substandard sponsors’ quality. Management and sponsor difficulties have
contributed to difficulties in managing properties in the past
Poor relationships with leasing agents and/or other parties providing important real estate services
Strong Good Satisfactory Weak
Security Package
Nature of lien Perfected first lien1 Perfected first lien1 Perfected first lien1 Ability of lender to foreclose is constrained
Assignment of rents (for projects leased to long-term tenants)
The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to remit rents directly to the lender, such as a current rent roll and copies of the project’s leases
The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project’s leases
The lender has obtained an assignment. They maintain current tenant information that would facilitate providing notice to the tenants to remit rents directly to the lender, such as current rent roll and copies of the project’s leases
The lender has not obtained an assignment of the leases or has not maintained the information necessary to readily provide notice to the building’s tenants
Quality of the insurance coverage
Appropriate Appropriate Appropriate Substandard
Table 3 - Supervisory Rating Grades for Object Finance Exposures
Strong Good Satisfactory Weak
Financial strength
Market conditions Demand is strong and growing, strong entry barriers, low sensitivity to changes in technology and economic outlook
Demand is strong and stable. Some entry
barriers, some sensitivity to changes in technology and economic outlook
Demand is adequate and stable, limited entry barriers, significant sensitivity to changes in technology and economic outlook
Demand is weak and declining, vulnerable to changes in technology and economic outlook, highly uncertain environment
Financial ratios (debt service coverage ratio and loan-to-value ratio)
Strong financial ratios considering the type of asset. Very robust economic assumptions
Strong / acceptable financial ratios considering the type of asset. Robust project economic assumptions
Standard financial ratios for the asset type
Aggressive financial ratios considering the type of asset
Stress analysis Stable long-term revenues, capable of withstanding severely stressed conditions through an economic cycle
Market liquidity Market is structured on a worldwide basis; assets are highly liquid
Satisfactory short-term revenues. Loan can withstand some financial adversity. Default is only likely under severe economic conditions
Market is worldwide or regional; assets are relatively liquid
Uncertain short-term revenues. Cash flows are vulnerable to stresses that are not uncommon through an economic cycle. The loan may default in a normal downturn
Market is regional with limited prospects in the short term, implying lower liquidity
Revenues subject to strong uncertainties; even in normal economic
conditions the asset may default, unless conditions improve
Local market and/or poor visibility. Low or no liquidity, particularly on niche markets
Strong Good Satisfactory Weak
Political and legal environment
Political risk, including transfer risk
Very low; strong mitigation instruments, if needed
Low; satisfactory mitigation instruments, if needed
Moderate; fair mitigation instruments
High; no or weak mitigation instruments
Legal and regulatory risks Jurisdiction is favourable to repossession and enforcement of contracts
Jurisdiction is favourable to repossession and enforcement of contracts
Jurisdiction is generally favourable to repossession and enforcement of contracts, even if repossession might be long and/or difficult
Poor or unstable legal and regulatory environment. Jurisdiction may make repossession and enforcement of contracts lengthy or impossible
Transaction characteristics
Financing term compared to the economic life of the asset
Full payout profile/minimum balloon. No grace period
Balloon more significant, but still at satisfactory levels
Important balloon with potentially grace periods
Repayment in fine or high balloon
Operating risk
Permits / licensing All permits have been obtained; asset meets current and foreseeable safety regulations
All permits obtained or in the process of being obtained; asset meets current and foreseeable safety regulations
Most permits obtained or in process of being obtained, outstanding ones considered routine, asset meets current safety regulations
Problems in obtaining all required permits, part of the planned configuration and/or planned operations might need to be revised
Scope and nature of O & M contracts
Strong long-term O&M contract, preferably with contractual performance incentives, and/or O&M reserve accounts (if needed)
Long-term O&M contract, and/or O&M reserve accounts (if needed)
Limited O&M contract or O&M reserve account (if needed)
No O&M contract: risk of high operational cost overruns beyond mitigants
Strong Good Satisfactory Weak
Operator’s financial strength, track record in managing the asset type and capability to re-market asset when it comes off- lease
Excellent track record and strong re-marketing capability
Satisfactory track record and re-marketing capability
Weak or short track record and uncertain re-marketing capability
No or unknown track record and inability to re-market the asset
Asset characteristics
Configuration, size, design and maintenance (i.e. age, size for a plane) compared to other assets on the same market
Strong advantage in design and maintenance. Configuration is standard such that the object meets a liquid market
Above average design and maintenance. Standard configuration, maybe with very limited exceptions — such that the object meets a liquid market
Average design and maintenance. Configuration is somewhat specific, and thus might cause a narrower market for the object
Below average design and maintenance. Asset is near the end of its economic life. Configuration is very specific; the market for the object is very narrow
Resale value Current resale value is well above debt value
Resale value is moderately above debt value
Resale value is slightly above debt value
Resale value is below debt value
Sensitivity of the asset value and liquidity to economic cycles
Asset value and liquidity are relatively insensitive to economic cycles
Asset value and liquidity are sensitive to economic cycles
Asset value and liquidity are quite sensitive to economic cycles
Asset value and liquidity are highly sensitive to economic cycles
Strength of sponsor
Operator’s financial strength, track record in managing the asset type and capability to re-market asset when it comes off- lease
Excellent track record and strong re-marketing capability
Satisfactory track record and re-marketing capability
Weak or short track record and uncertain re-marketing capability
No or unknown track record and inability to re- market the asset
Strong Good Satisfactory Weak
Sponsors’ track record and financial strength
Sponsors with excellent track record and high financial standing
Sponsors with good track record and good financial standing
Sponsors with adequate track record and good financial standing
Sponsors with no or questionable track record and/or financial weaknesses
Security Package
Asset control Legal documentation provides the lender effective control (e.g. a first perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it
Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it
Legal documentation provides the lender effective control (e.g. a perfected security interest, or a leasing structure including such security) on the asset, or on the company owning it
The contract provides little security to the lender and leaves room to some risk of losing control on the asset
Rights and means at the lender's disposal to monitor the location and condition of the asset
Insurance against damages
The lender is able to monitor the location and condition of the asset, at any time and place (regular reports, possibility to lead inspections)
Strong insurance coverage including collateral damages with top quality insurance companies
The lender is able to monitor the location and condition of the asset, almost at any time and place
Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies
The lender is able to monitor the location and condition of the asset, almost at any time and place
Fair insurance coverage (not including collateral
damages) with acceptable quality insurance companies
The lender is able to monitor the location and condition of the asset are limited
Weak insurance coverage
(not including collateral damages) or with weak quality insurance companies
Table 4 - Supervisory Rating Grades for Commodities Finance Exposures
Strong Good Satisfactory Weak
Financial strength
Degree of over- collateralisation of trade
Strong Good Satisfactory Weak
Political and legal environment
Country risk No country risk Limited exposure to country risk (in particular, offshore location of reserves in an emerging country)
Exposure to country risk (in particular, offshore location of reserves in an emerging country)
Strong exposure to country risk (in particular, inland reserves in an emerging country)
Mitigation of country risks Very strong mitigation: Strong offshore mechanisms
Strategic commodity
1st class buyer
Strong mitigation: Offshore mechanisms
Strategic commodity
Strong buyer
Acceptable mitigation: Offshore mechanisms
Less strategic commodity
Acceptable buyer
Only partial mitigation: No offshore mechanisms
Non-strategic commodity
Weak buyer
Asset characteristics
Liquidity and susceptibility to damage
Commodity is quoted and can be hedged through futures or OTC instruments. Commodity is not susceptible to damage
Commodity is quoted and can be hedged through OTC instruments. Commodity is not susceptible to damage
Commodity is not quoted but is liquid. There is uncertainty about the possibility of hedging. Commodity is not susceptible to damage
Commodity is not quoted. Liquidity is limited given the size and depth of the market. No appropriate hedging instruments. Commodity is susceptible to damage
Strong Good Satisfactory Weak
Strength of sponsor
Financial strength of trader Very strong, relative to trading philosophy and risks
Strong Adequate Weak
Track record, including ability to manage the logistic process
Trading controls and hedging policies
Extensive experience with the type of transaction in question. Strong record of operating success and cost efficiency
Strong standards for counterparty selection, hedging, and monitoring
Sufficient experience with the type of transaction in question. Above average record of operating
success and cost efficiency
Adequate standards for counterparty selection, hedging, and monitoring
Limited experience with the type of transaction in question. Average record of operating success and cost efficiency
Past deals have experienced no or minor problems
Limited or uncertain track record in general. Volatile costs and profits
Trader has experienced significant losses on past deals
Quality of financial disclosure
Excellent Good Satisfactory Financial disclosure contains some uncertainties or is insufficient
Security package
Asset control First perfected security interest provides the lender legal control of the assets at any time if needed
First perfected security interest provides the lender legal control of the assets at any time if needed
At some point in the
process, there is a rupture in the control of the assets by the lender. The rupture is mitigated by knowledge of the trade process or a third party undertaking as the case may be
Contract leaves room for some risk of losing control over the assets. Recovery could be jeopardised
Strong Good Satisfactory Weak
Insurance against damages
Strong insurance coverage including collateral damages with top quality insurance companies
Satisfactory insurance coverage (not including collateral damages) with good quality insurance companies
Fair insurance coverage (not including collateral
damages) with acceptable quality insurance companies
Weak insurance coverage
(not including collateral damages) or with weak quality insurance companies
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