BIPRU 4 Annex 1 Supervisory Slotting Criteria for Specialised Lending

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

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

Project of strategic importance for the country (preferably export-oriented). Strong support from Government

Project considered important for the country. Good level of support from Government

Project may not be strategic but brings unquestionable benefits for the country. Support from Government may not be explicit

Project not key to the country. No or weak support from Government

Stability of legal and regulatory environment (risk of change in law)

Favourable and stable regulatory environment over the long term

Favourable and stable regulatory environment over the medium term

Regulatory changes can be predicted with a fair level of certainty

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

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

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

Construction risk

Permitting and siting

All permits have been obtained

Some permits are still outstanding but their receipt is considered very likely

Some permits are still outstanding but the permitting process is well defined and they are considered routine

Key permits still need to be obtained and are not considered routine. Significant conditions may be attached

Type of construction contract

Fixed-price date-certain turnkey construction EPC (engineering and procurement contract)

Fixed-price date-certain turnkey construction EPC

Fixed-price date-certain turnkey construction contract with one or several contractors

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

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

(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

Long-term supply contract with supplier of excellent financial standing

Long-term supply contract with supplier of good financial standing

Long-term supply contract with supplier of good financial standing - a degree of price risk may remain

Short-term supply contract or long-term supply contract with financially weak supplier - a degree of price risk definitely remains

Reserve risks (e.g. natural resource development)

Independently audited, proven and developed reserves well in excess of requirements over lifetime of the project

Independently audited, proven and developed reserves in excess of requirements over lifetime of the project

Proven reserves can supply the project adequately through the maturity of the debt

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

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

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

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

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)

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

Cash-flow predictability

(a) For complete and 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

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

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

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

(b) For complete but not stabilised property

Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future

Leasing activity meets or exceeds projections. The project should achieve stabilisation in the near future

Most leasing activity is within projections; however, stabilisation will not occur for some time

Market rents do not meet expectations. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue

(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

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

Asset characteristics

Location

Property is located in highly desirable location that is convenient to services that tenants desire

Property is located in desirable location that is convenient to services that tenants desire

The property location lacks a competitive advantage

The property's location, configuration, design and maintenance have contributed to the property's difficulties

Design and condition

Property is favoured due to its design, configuration, and maintenance, and is highly competitive with new properties

Property is appropriate in terms of its design, configuration and maintenance. The property's design and capabilities are competitive with new properties

Property is adequate in terms of its configuration, design and maintenance

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

Strength of Sponsor/Developer

Financial capacity and willingness to support the property

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

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

The sponsor/developer's contribution may be immaterial or non-cash. The sponsor/developer is average to below average in financial resources

The sponsor/developer lacks capacity or willingness to support the property

Reputation and track record with similar properties

Experienced management and high sponsors' quality. Strong reputation and lengthy and successful record with similar properties

Appropriate management and sponsors' quality. The sponsor or management has a successful record with similar properties

Moderate management and sponsors' quality. Management or sponsor track record does not raise serious concerns

Ineffective management and substandard sponsors' quality. Management and sponsor difficulties have contributed to difficulties in managing properties in the past

Relationships with relevant real estate actors

Strong relationships with leading actors such as leasing agents

Proven relationships with leading actors such as leasing agents

Adequate relationships with leasing agents and other parties providing important real estate services

Poor relationships with leasing agents and/or other parties providing important real estate services

Security Package

Nature of lien

Perfected first lien (Note 1)

Perfected first lien (Note 1)

Perfected first lien (Note 1)

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

Note 1: Lenders in some markets extensively use loan structures that include junior liens. Junior liens may be indicative of this level of risk if the total LTV inclusive of all senior positions does not exceed a typical first loan LTV.

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

Satisfactory short-term revenues. Loan can withstand some financial adversity. Default is only likely under severe economic conditions

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

Revenues subject to strong uncertainties; even in normal economic conditions the asset may default, unless conditions improve

Market liquidity

Market is structured on a worldwide basis; assets are highly liquid

Market is worldwide or regional; assets are relatively liquid

Market is regional with limited prospects in the short term, implying lower liquidity

Local market and/or poor visibility. Low or no liquidity, particularly on niche markets

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

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

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

The lender is able to monitor the location and condition of the asset, at any time and place (regular reports, possibility to lead inspections)

The lender is able to monitor the location and condition of the asset, almost at any time and place

The lender is able to monitor the location and condition of the asset, almost at any time and place

The lender is able to monitor the location and condition of the asset are limited

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

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 mitigation:

Acceptable mitigation:

Only partial mitigation:

Strong offshore Mechanisms

Offshore mechanisms

Offshore mechanisms

No offshore mechanisms

Strategic commodity

Strategic commodity

Less strategic commodity

Non-strategic commodity

1^st class buyer

Strong buyer

Acceptable buyer

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

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

Extensive experience with the type of transaction in question. Strong record of operating success and cost efficiency

Sufficient experience with the type of transaction in question. Above average record of operating success and cost efficiency

Limited experience with the type of transaction in question. Average record of operating success and cost efficiency

Limited or uncertain track record in general. Volatile costs and profits

Trading controls and hedging policies

Strong standards for counterparty selection, hedging, and monitoring

Adequate standards for counterparty selection, hedging, and monitoring

Past deals have experienced no or minor problems

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

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