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Document 32021R0598
Commission Delegated Regulation (EU) 2021/598 of 14 December 2020 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for assigning risk weights to specialised lending exposures (Text with EEA relevance)
Commission Delegated Regulation (EU) 2021/598 of 14 December 2020 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for assigning risk weights to specialised lending exposures (Text with EEA relevance)
Commission Delegated Regulation (EU) 2021/598 of 14 December 2020 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for assigning risk weights to specialised lending exposures (Text with EEA relevance)
C/2020/8242
OJ L 127, 14.4.2021, p. 1–23
(BG, ES, CS, DA, DE, ET, EL, EN, FR, GA, HR, IT, LV, LT, HU, MT, NL, PL, PT, RO, SK, SL, FI, SV)
In force
- Date of document:
- 14/12/2020; Date of adoption
- Date of effect:
- 04/05/2021; Entry into force Date pub. +20 See Art 7
- Date of effect:
- 14/04/2022; Application See Art 7
- Date of end of validity:
- No end date
- EUROVOC descriptor:
- Subject matter:
- Directory code:
- Author:
- European Commission, Directorate-General for Financial Stability, Financial Services and Capital Markets Union
- Responsible body:
- FISMA
- Form:
- Delegated regulation
- Additional information:
- EEA relevance
- Treaty:
- Treaty on the Functioning of the European Union
- Legal basis:
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- 32013R0575 - A153P9L3
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Relation Act Comment Subdivision concerned From To Completion 32013R0575 14/04/2022 - Instruments cited:
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14.4.2021 |
EN |
Official Journal of the European Union |
L 127/1 |
COMMISSION DELEGATED REGULATION (EU) 2021/598
of 14 December 2020
supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards for assigning risk weights to specialised lending exposures
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union,
Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (1), and in particular the third subparagraph of Article 153(9) thereof,
Whereas:
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(1) |
Under the Internal Ratings Based Approach (‘IRB Approach’), for specialised lending exposures in respect of which an institution is not able to estimate PDs or the institutions’ PD estimates do not meet certain requirements, institutions are to assign risk weights to specialised lending exposures in accordance with Article 153(5) of Regulation (EU) No 575/2013 by attributing them to one of the categories in Table 1 set out in the first subparagraph of Article 153(5) based on their assessment of the specialised lending exposure against each of the factors referred to in its second subparagraph. In order to ensure a harmonised approach to the assignment of the specialised lending exposures to categories, it should be laid down how those factors are to be taken into account by providing for a calculation of values on the basis of which the factors can be linked to the risk categories of that Table. As the specialised lending exposures belong to the corporate exposure class within the IRB Approach and as the method for assigning risk weights to such exposures specified in Article 153(5) of Regulation (EU) No 575/2013 is a form of rating system, the regulatory technical standards for assigning risk weights to specialised lending exposures set by this Regulation should apply in addition to the general rules concerning the assignment of risk weights to corporate exposures and other requirements with regard to rating systems under the IRB Approach. |
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(2) |
In order for the institutions to adequately apply each of those factors, they should be further specified in the form of sub-factors with a view to clarifying the assessment criteria for each situation. In order to adequately assess the sub-factors, it is necessary to further specify some sub-factors in sub-factor components. |
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(3) |
In order to reflect the internationally agreed standards on assigning risk weights to specialised lending exposures, as specified by the Basel Committee on Banking Supervision in the Basel II framework (2), and to take into account the large number of variations in specialised lending exposures, different assessment criteria should be applied to each of those classes of specialised lending exposures when applying the factors. Before assigning a risk weight to a specialised lending exposure, institutions should determine to which of those classes the specialised lending exposure most closely corresponds. |
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(4) |
Where an obligor is in default, institutions should assign the risk weight category 5 in Table 1 of Article 153(5) of Regulation (EU) No 575/2013 and the highest expected loss category, i.e. category 5 in Table 2 of Article 158(6) of that Regulation, to the specialised lending exposure in line with the Basel II framework. |
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(5) |
The attribution by the institutions of a category to each factor should be done on the basis of an overall assessment taking into consideration the categories attributed to the sub-factors of the factor as well as the relative importance which each sub-factor has for the type of specialised lending exposure. The same procedure should be followed when attributing a category to sub-factors where a sub-factor is further specified in sub-factor components. |
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(6) |
In order to achieve the greatest possible accuracy and consistency in the assignment of specialised lending exposures to categories, the institutions should attribute a weight to each factor having regard to its relative importance for the type of specialised lending exposures and determine the weighted average of the values of the categories which have been attributed to the factors. In order to ensure that the institutions assign these weights in a sufficiently prudent way, a lower and an upper limit should be set for the weight that can be assigned to each factor. |
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(7) |
Under Regulation (EU) No 575/2013 institutions are required to document the assignment of risk weights under the IRB Approach in general. In order to facilitate the verification by the competent authorities of the correct application of the rules on the assignment of risk weights to specialised lending exposures as referred to in the second subparagraph of Article 153(5) of Regulation (EU) No 575/2013, certain specific documentation requirements should be laid down for the assignment of risk weights to those exposures. |
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(8) |
This Regulation is largely based on the internationally agreed standards on assigning risk weights to specialised lending exposures. Given the variety of specialised lending exposures and given the specificities of such exposures, it may not capture all risk drivers which institutions identify in their daily business, either for particular types of exposures within the meaning of point 2 of Article 142(1) of Regulation (EU) No 575/2013 or for individual specialised lending exposures. Given that the institutions are required by Article 171(2) of Regulation (EU) No 575/2013 to take into account all relevant information for assignment of obligors and facilities to grades or pools, the institutions should be required to take into account each of any additional risk drivers and consider it jointly with the sub-factor of the specialised lending exposure framework which most closely corresponds to the risk driver. Where this is done for an individual specialised lending exposure, it should be considered an override for the purposes of Article 172(3) of Regulation (EU) No 575/2013. The institution should document why it was appropriate to take into account additional risk drivers and provide a justification for it. |
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(9) |
The provisions on the application of overrides in the IRB Approach also apply to specialised lending exposures. Therefore, the institutions are allowed, exceptionally, not to apply a certain sub-factor or sub-factor component, for an individual specialised lending exposure, where they find it not to be relevant. Institutions should also be allowed, exceptionally, not to apply a certain sub-factor or sub-factor component for all specialised lending exposures belonging to a type of exposures as defined in point (2) of Article 142(1) of Regulation (EU) No 575/2013 when that sub-factor or sub-factor component is not a relevant risk driver for that type of specialised lending exposures. The institutions should be required to document the decision not to apply a sub-factor or a sub-factor component and to provide a justification for it. |
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(10) |
The institutions should be allowed a sufficient period of time to adapt their rating systems for assigning risk weights to specialised lending exposures in order to comply with the rules laid down in this Regulation. |
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(11) |
This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority. |
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(12) |
The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (3), |
HAS ADOPTED THIS REGULATION:
Article 1
Applicable assessment criteria for different classes of specialised lending exposures
1. Where the purpose of a specialised lending exposure is to finance the development or acquisition of large, complex and expensive installations, including in particular power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure, and the income to be generated by the assets is the money generated by the contracts for the output of the installation obtained from one or several parties which are not under management control of the sponsor(‘project finance exposures’), institutions shall apply the assessment criteria set out in Annex I to this class of exposures when assigning risk weights in accordance with the second subparagraph of Article 153(5) of Regulation (EU) No 575/2013.
2. Where the purpose of a specialised lending exposure is to finance the development or acquisition of real estate, including in particular office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space, hotels and land, and the income to be generated by the real estate is lease or rental payments or the proceeds from the sale of such real estate obtained from one or several third parties (‘real estate exposures’), institutions shall apply the assessment criteria set out in Annex II to this class of exposures when assigning risk weights in accordance with the second subparagraph of Article 153(5) of Regulation (EU) No 575/2013.
3. Where the purpose of a specialised lending exposure is to finance the acquisition of physical assets, including in particular ships, aircraft, satellites, railcars, and fleets, and the income to be generated by those assets is lease or rental payments obtained from one or several third parties (‘object financing exposures’), institutions shall apply the assessment criteria set out in Annex III to this class of exposures when assigning risk weights in accordance with the second subparagraph of Article 153(5) of Regulation (EU) No 575/2013.
4. Where the purpose of a specialised lending exposure is to finance reserves, inventories or receivables of exchange-traded commodities, including in particular crude oil, metals, or crops, and the income to be generated by those reserves, inventories or receivables is to be the proceeds from the sale of the commodity (‘commodities financing exposures’), institutions shall apply the assessment criteria set out in Annex IV to this class of exposures when assigning risk weights in accordance with the second subparagraph of Article 153(5) of Regulation (EU) No 575/2013.
Article 2
Assessment at factor level and risk weight assignment
1. Institutions shall, on the basis of an overall assessment, attribute a category to each factor set out in the annex which is applicable to the class of specialised lending exposures in accordance with Article 1. For each specialised lending exposure, the institution shall carry out this attribution taking into consideration the categories attributed to each applicable sub-factor in accordance with Articles 3 and 4, as well as the relative importance of each sub-factor for the type of specialised lending exposures as defined in point (2) of Article 142(1) of Regulation (EU) No 575/2013.
2. The institution shall assign a weight in percentage that is not lower than 5 % and not higher than 60 % to each factor having regard to its relative importance for the type of specialised lending exposures.
3. The institution shall determine the weighted average of the categories, which have been attributed to the factors in accordance with paragraph 1, applying the weights assigned in accordance with paragraph 2. Where the weighted average is a decimal number, institutions shall round that number to the nearest cardinal number.
4. The institution shall assign the specialised lending exposure to the category set out in Table 1 of Article 153(5) of Regulation (EU) No 575/2013 for which the number corresponds to the weighted average calculated in accordance with paragraph 3.
Article 3
Assessment at sub-factor level
1. Where a sub-factor of a given factor listed in Annex I, II, III or IV is not further specified in sub-factor components, the institution shall attribute a category to the sub-factor on the basis of the assessment criteria set out for that sub-factor.
2. Where a sub-factor of a given factor listed in Annex I, II, III or IV is further specified in sub-factor components, the institution shall:
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(a) |
attribute a category to each sub-factor component on the basis of the assessment criteria set out for that sub-factor component; |
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(b) |
attribute a category to the sub-factor on the basis of an overall assessment carried out taking into consideration the categories attributed in accordance with point (a) as well as the relative importance of each sub-factor component for the type of specialised lending exposure. |
3. Where the institution takes into account additional relevant information (an ‘additional risk driver’) in accordance with Article 171(2) of Regulation (EU) No 575/2013 for a type of specialised lending exposures, it shall consider it jointly with the sub-factor, which most closely corresponds to that additional risk driver.
4. Where, exceptionally, a sub-factor or sub-factor component is not relevant for all specialised lending exposures belonging to a certain type of specialised lending exposures, the institution may decide not to apply that sub-factor or sub-factor component for any of the specialised lending exposures belonging to that type.
Article 4
Overlapping criteria at sub-factor and sub-factor component levels
Where a sub-factor or a sub-factor component has identical assessment criteria in two or more categories (‘overlapping criteria’), and the specialised lending exposure conforms to those overlapping criteria, institutions shall attribute a category to the sub-factor or sub-factor component as follows:
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(a) |
where overlapping criteria occur in two categories, institutions shall attribute the higher of the two categories; |
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(b) |
where overlapping criteria occur in three categories, institutions shall attribute the category between the lowest and the highest of the three categories. |
Article 5
Default of an obligor
By way of derogation from Articles 1 to 4, where the obligor is in default in the meaning of Article 178 of Regulation (EU) No 575/2013, the institution shall assign a risk weight of category 5 as set out in Table 1 of Article 153(5) of that Regulation to the specialised lending exposure.
Article 6
Documentation
1. Institutions shall document the following information for each type of specialised lending exposures for which they assign risk weights in accordance with this Regulation:
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(a) |
the assignment of weights to each factor in accordance with Article 2(2) and the justification for that assignment; |
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(b) |
a description of additional risk drivers and a justification for taking them into account in accordance with Article 3(3), where applicable; |
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(c) |
the justification for deciding not to apply a certain sub-factor or sub-factor component in accordance with Article 3(4), where applicable. |
2. Institutions shall document the following information for each specialised lending exposure for which they assign risk weights in accordance with this Regulation:
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(a) |
the class of the specialised lending exposure as set out in Article 1; |
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(b) |
the category of Table 1 of the first subparagraph of Article 153(5) of Regulation (EU) No 575/2013 to which the specialised lending exposure has been assigned; |
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(c) |
the remaining maturity as referred to in Table 1 of the first subparagraph of Article 153(5) of Regulation (EU) No 575/2013; |
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(d) |
the assessment of the specialised lending exposure at each step of the process laid down in Articles 2 to 5 that led to the assignment of the risk weight to the exposure. |
Article 7
Entry into force and application
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
It shall apply from 14 April 2022.
This Regulation shall be binding in its entirety and directly applicable in all Member States.
Done at Brussels, 14 December 2020.
For the Commission
The President
Ursula VON DER LEYEN
(1) OJ L 176, 27.6.2013, p. 1.
(2) International Convergence of Capital Measurement and Capital Standards, A Revised Framework, Comprehensive Version, June 2006.
(3) Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12).
ANNEX I
Assessment criteria for project finance exposures
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Category 1 |
Category 2 |
Category 3 |
Category 4 |
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Factor: financial strength |
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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. |
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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. |
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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 an economic downturn. |
The project is likely to default unless conditions improve soon. |
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Amortising debt without bullet repayment |
Amortising debt with no or insignificant bullet repayment |
Amortising debt repayments with limited bullet payment |
Bullet repayment or amortising debt repayments with high bullet repayment |
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There is no or very limited exposure to market or cycle risk since the expected cashflows cover all future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments. There is no or very low refinancing risk. |
The exposure to market or cycle risk is limited since the expected cashflows cover the majority of future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments. There is low refinancing risk. |
There is moderate exposure to market or cycle risk since the expected cashflows cover only a part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments. Average refinancing risk. |
There is significant exposure to market or cycle risk since the expected cashflows cover only a small part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments. High refinancing risk. |
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There is no foreign exchange risk because there is no difference in the currency of the loan and the income of the project or because the foreign exchange risk is fully hedged. |
There is no foreign exchange risk because there is no difference in the currency of the loan and the income of the project or because the foreign exchange risk is fully hedged. |
There is a difference in the currency of the loan and the income of the project, but the foreign exchange risk is considered low because the exchange rate is stable or because the foreign exchange risk is hedged to a large extent. |
There is a difference in the currency of the loan and the income of the project, and the foreign exchange risk is considered high because the exchange rate is volatile and the foreign exchange risk is not hedged to a large extent. |
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Factor: political and legal environment |
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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 |
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No or very low exposure to force majeure risk’ |
Limited exposure to force majeure risk |
Significant exposure to force majeure risk which is not sufficiently mitigated |
Significant exposure to force majeure risk which is not mitigated |
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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. |
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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 |
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Strong |
Satisfactory |
Fair |
Weak |
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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. |
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Factor: transaction characteristics |
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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. |
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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. |
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Fixed-price date-certain turnkey construction EPC (5) (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 |
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It is almost certain that the project will be finished within the agreed time horizon and at the agreed cost. |
It is very likely that the project will be finished within the agreed time horizon and at the agreed cost. |
It is uncertain whether the project will be finished within the agreed time horizon and at the agreed cost. |
There are indications that the project will not be finished within the agreed time horizon and at the agreed cost. |
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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 |
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Strong |
Good |
Satisfactory |
Weak |
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Strong long-term O&M contract (8), preferably with contractual performance incentives (9), and/or O&M reserve accounts (10), although an O&M contract is not strictly necessary to perform the required maintenance because the O&M activities are straightforward and transparent. |
The O&M activities are relatively straightforward and transparent, and there is a long-term O&M contract, and/or O&M reserve account. |
The O&M activities are complex and an O&M contract is necessary. There is a limited long-term O&M contract and/or reserve account. |
The O&M activities are complex and an O&M contract is strictly necessary. There is no O&M contract. There is therefore the risk of high operational cost overruns beyond mitigants. |
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Very strong, or committed technical assistance of the sponsors |
Strong |
Acceptable |
Limited/weak, or local operator dependent on local authorities |
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Excellent robustness of the revenues |
Good robustness of the revenues |
Acceptable robustness of the revenues |
The revenues of the project are not certain and there are indications that some of the revenues may not be obtained. |
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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. |
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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. |
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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. |
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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. |
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Factor: strength of sponsor (including any public private partnership) |
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Strong sponsor with high financial standing |
Good sponsor with good financial standing |
Sponsor with adequate financial standing |
Weak sponsor with clear financial weaknesses |
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Sponsor with excellent track record and country/sector experience |
Sponsor with satisfactory track record and country/sector experience |
Sponsor with adequate track record and country/sector experience |
Sponsor with no or questionable track record or country/sector experience |
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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. |
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Factor: security package |
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Fully comprehensive |
Comprehensive |
Acceptable |
Weak |
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First perfected security interest (17) 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 (18) |
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Strong |
Satisfactory |
Fair |
Weak |
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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. |
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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 |
(1) The Debt Service Coverage ratio (‘DSCR’) refers to the ratio of the cashflow available for debt service which can be generated from the asset to the required repayment of the principal and the interest payments during the life of the loan, where the cashflow available for debt service is calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(2) The Interest Coverage Ratio (‘ICR’) refers to the ratio of the cashflow available for debt service which can be generated from the asset to the required repayment of the interest payments during the life of the loan, where the cashflow available for debt service is calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(3) The Loan Life Coverage Ratio (‘LLCR’) refers to the ratio of the net present value of the cashflow available for debt service to the outstanding debt balance, and refers to the number of times the cashflow available for debt service which can be generated from the asset can repay the outstanding debt balance over the scheduled life of the loan, where the cashflow available for debt service calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(4) The tenor of a loan refers to the amount of time left for the repayment of a loan.
(5) An Engineering and Procurement Contract (‘EPC’) or ‘turnkey contract’ refers to an agreement between the engineering and procurement contractor (‘EPC contractor) and the developer, whereby the EPC contractor agrees to develop the detailed engineering design of the project, procure all the equipment and materials necessary, construct and deliver a functioning facility or asset to the developer, usually within an agreed time and budget.
(6) A completion guarantee refers to a guarantee provided by the contractor to the project’s lenders to undertake to deliver the project within the specified timeframe, and to pay for the cost overruns, if any.
(7) A liquidated damage refers to a monetary compensation for a loss, detriment or injury to a person’s rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract.
(8) An Operation and Maintenance (‘O&M’) contract refers to a contract between the developer and the operator. The developer delegates the operation, maintenance and often performance management of the project to an operator with expertise in the industry under the terms of the O&M contract (i.e. scope, term, operator responsibility, fees, and liquidated damages).
(9) Performance incentives or performance based contracting refer to strategic performance metrics which directly relate contracting payment to these performance metrics. Performance metrics may measure availability, reliability, maintainability, supportability.
(10) An O&M reserve account refers to a fund into which money is deposited to be used for the purpose of meeting the costs of operation and maintenance of the project.
(11) Off-take risk refers to the risk that the demand for the output or service does not exist at the price at which it is provided or the off-taker is unable or refuses to honour his commitment to purchase the output or service.
(12) An off-take contract refers to a contract between a producer of a resource/product/service and a buyer (‘off-taker’) of a resource to purchase/sell portions of the producer’s future production. An off-take contract is normally negotiated prior to the construction of a facility in order to secure a market for the future output of the facility. The purpose is to provide the producer with stable and sufficient revenue to pay its debt obligation, cover the operating costs and provide certain required return.
(13) A termination clause refers to a provision in a contract which allows for its termination under specified circumstances.
(14) A take-or-pay contract refers to a contract in which it is agreed that a client buys the output or service from the supplier or the client pays the supplier a penalty. Both the price and the penalty are fixed in the contract.
(15) Reserve risk refers to the risk that the accessible reserves are smaller than estimated.
(16) An ownership clause refers to a provision that states that a project cannot be owned by a different entity than the actual owner (sponsor).
(17) First perfected security interest refers to a security interest in an asset (mortgaged as a collateral) protected from claims by other parties. A lien is perfected by registering it with appropriate statutory authority so that it is made legally enforceable and any subsequent claim on that asset is given a junior status.
(18) A negative pledge clause refers to a provision that indicates that the institution will not pledge any of its assets if doing so gives the lenders less security.
(19) A cash sweep refers to the mandatory use of excess free cash flows to pay down outstanding debt rather than distribute it to shareholders.
(20) An independent escrow account refers to an account held in the sponsor’s name by a bank under the support of an escrow account agreement between the lender and borrower providing for irrevocable instructions from the borrower to the effect that all operational revenue or proceeds from sale of assets of the project will be paid into this account, and where the bank is authorised to make payments from available funds only as agreed in the project financing documents.
(21) A mandatory prepayment refers to a provision that requires the borrower to prepay a portion of the debt with certain proceeds if and when received before the maturity date.
(22) A payment deferral refers to a provision that indicates that the borrower is allowed to start making payments at some specified time in the future.
(23) A payment cascade refers to a provision whereby the project’s cash flows are summarised using a cash flow waterfall, which shows the priority of each cash inflow and outflow.
(24) A dividend restriction refers to a provision that defines the circumstances in which the lender is able to prevent equity distributions.
ANNEX II
Assessment criteria for real estate exposures
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Category 1 |
Category 2 |
Category 3 |
Category 4 |
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Factor: financial strength |
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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 design and capabilities of existing comparable properties are not state of the art as compared to new projects. |
Market conditions are weak. It is uncertain when conditions will improve and return to equilibrium. Comparable properties in the market are losing tenants at lease expiration. New lease terms of comparable properties are less favourable compared to those existing. |
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The property’s financial ratios, measured by the property’s debt service coverage ratio (DSCR (1)) or interest coverage ratio (ICR (2)), are considered strong and are expected to remain strong taking into account the past evolution in financial ratios. DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase. |
The property’s financial ratios, measured by the property’s DSCR or ICR, are considered good and are expected to remain good taking into account the past evolution in financial ratios. The DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase. |
The property’s financial ratios measured by the property’s DSCR or ICR are satisfactory and are expected to remain satisfactory taking into account the past evolution in financial ratios. The DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase. |
The property’s financial ratios, measured by the property’s DSCR or ICR are weak and are expected to remain weak taking into account the past evolution in financial ratios. The DSCR or ICR is not relevant and should not be calculated for properties that are in the construction phase. |
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The property’s 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 property’s LTV is considered satisfactory given its property type. Where a secondary market exists, the transaction is underwritten to market standards. |
The property’s LTV is considered relatively high given its property type. |
The property’s LTV ratio is well above underwriting standards for new loans. |
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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 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. |
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The property’s leases are long-term with creditworthy tenants and their maturity dates are scattered, or a public private partnership guarantees a considerable part of the tenancy contracts. 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. |
The majority of the property has several tenant lease contracts that are long-term, and with tenants that have on average a high creditworthiness, and with scattered maturity dates. A public private partnership may guarantee part of the tenancy contracts. Where the property has only one lease contract or one tenant has a very significant share in the income generated by the property, this tenant is of excellent creditworthiness and the contract includes covenants that ensure lease payments until the end of the project life or beyond. 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. A public private partnership may guarantee only a minor part of the tenancy contracts. Where the property has only one lease contract or one tenant has a very significant share in the income generated by the property, this one tenant, the contract includes covenants that ensure lease payments until the end of the project life or beyond but the tenant has moderate 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 proportion of short term leases is significant with tenants that range in creditworthiness, or the property has only one lease contract, or one tenant has a very significant share in the income generated by the property, where that tenant has a low creditworthiness and/or the contract does not include the necessary covenants that ensure lease payments until the end of the project life or beyond. 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. |
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The cashflows obtained from the leasing activity, for instance obtained from a public private partnership, meet or exceed the expected cashflows used in the valuation of the property. The project should achieve stabilisation in the near future. |
The cashflows obtained from the leasing activity, for instance obtained from a public private partnership, meet or exceed the expected cashflows used in the valuation of the property. The project should achieve stabilisation in the near future. |
Most of the cashflows obtained from the leasing activity meet the expected cashflows used in the valuation of the property, however, stabilisation will not occur for some time. |
The cashflows obtained from the leasing activity do not meet the expected cashflows used in the valuation of the property. Despite achieving target occupancy rate, cash flow coverage is tight due to disappointing revenue. |
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The property is entirely preleased through the tenor of the loan (5) or pre-sold to a tenant or buyer of high creditworthiness, or the bank has a binding commitment for take-out financing from a tenant or buyer of high creditworthiness, for instance through a public private partnership. |
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, for instance through a public private partnership. |
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. |
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Factor: political and legal environment |
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Jurisdiction is very favourable to repossession and enforcement of contracts. |
Jurisdiction is generally favourable to repossession and enforcement of contracts. |
Jurisdiction is generally favourable to repossession and enforcement of contracts, but 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. |
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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 |
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Factor: asset/transaction characteristics |
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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 is located in an undesirable location. |
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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. |
The property’s configuration, design and maintenance have contributed to the property’s difficulties. Weaknesses exist in the property’s configuration, design or maintenance. |
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Construction budget is conservative and technical hazards are limited. Contractors are highly qualified and have high credit standing. |
Construction budget is conservative and technical hazards are limited. Contractors are highly qualified and have good credit standing. |
Construction budget is adequate and contractors are ordinarily qualified and have average credit standing. |
Project is over budget or unrealistic given its technical hazards. Contractors may be under qualified and have low credit standing. |
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Amortising debt without bullet repayment |
Amortising debt with no or insignificant bullet repayment |
Amortising debt repayments with limited bullet payment |
Bullet repayment or amortising debt repayments with high bullet repayment |
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There is no or very limited exposure to market or cycle risk since the expected cashflows cover all future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments. There is no or very low refinancing risk. |
The exposure to market or cycle risk is limited since the expected cashflows cover the majority of future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments. There is low refinancing risk. |
There is moderate exposure to market or cycle risk since the expected cashflows cover only a part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments. Average refinancing risk. |
There is significant exposure to market or cycle risk since the expected cashflows cover only a small part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments. High refinancing risk. |
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Factor: strength of sponsor/developer (including any public private partnership) |
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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. |
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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. |
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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 |
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Factor: security package |
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Perfected first lien (6) |
Perfected first lien |
Perfected first lien |
Ability of lender to foreclose is constrained. |
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The lender has obtained an assignment for the majority of the rents. 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 for a significant part of the rents. 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 for a relatively small part of the rent. The lender has not maintained 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. |
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Very good quality |
Good quality |
Appropriate quality |
Substandard quality |
(1) The Debt Service Coverage ratio (‘DSCR’) refers to the ratio of the cashflow available for debt service which can be generated from the asset to the required repayment of the principal and the interest payments during the life of the loan, where the cashflow available for debt service is calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(2) The Interest Coverage Ratio (‘ICR’) refers to the ratio of the cashflow available for debt service which can be generated from the asset to the required repayment of the interest payments during the life of the loan, where the cashflow available for debt service is calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(3) The Loan-to-Value ratio (‘LTV’) refers to the ratio of the loan amount to the value of the pledged assets.
(4) The tenor of a loan refers to the amount of time left for the repayment of a loan.
(5) The tenor of a loan refers to the amount of time left for the repayment of a loan.
(6) Lenders in some markets exclusively 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.
ANNEX III
Assessment criteria for object finance exposures
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Category 1 |
Category 2 |
Category 3 |
Category 4 |
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Factor: financial strength |
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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. |
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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 |
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Strong LTV ratio considering the type of asset |
Strong/good LTV ratio considering the type of asset |
Standard LTV ratio for the asset type |
Aggressive LTV ratio considering the type of asset |
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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 an economic downturn |
Revenues subject to strong uncertainties; even in normal economic conditions the asset may default, unless conditions improve |
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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. |
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Factor: political and legal environment |
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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. |
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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 |
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Factor: transaction characteristics |
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Amortising debt without bullet repayment |
Amortising debt with no or insignificant bullet repayment |
Amortising debt repayments with limited bullet payment |
Bullet repayment or amortising debt repayments with high bullet repayment |
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There is no or very limited exposure to market or cycle risk since the expected cashflows cover all future loan repayments during the tenor of the loan (5) and there are no significant delays between the cashflows and the loan repayments. There is no or very low refinancing risk. |
The exposure to market or cycle risk is limited since the expected cashflows cover the majority of future loan repayments during the tenor of the loan and there are no significant delays between the cashflows and the loan repayments. There is low refinancing risk. |
There is moderate exposure to market or cycle risk since the expected cashflows cover only a part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments. Average refinancing risk. |
There is significant exposure to market or cycle risk since the expected cashflows cover only a small part of future loan repayments during the tenor of the loan or there are some significant delays between the cashflows and the loan repayments. High refinancing risk. |
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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. |
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Strong long-term O&M contract (6), preferably with contractual performance incentives, and/or O&M reserve accounts (if needed) |
Long-term O&M contract, and/or O&M reserve accounts (7) (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 |
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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 |
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Factor: asset characteristics |
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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. |
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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. |
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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. |
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Factor: strength of sponsor (including public private partnership) |
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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 |
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Factor: security package |
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Legal documentation provides the lender effective control (e.g. a first perfected security interest (8), 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. |
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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’s ability to monitor the location and condition of the asset are limited. |
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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 |
Weak insurance coverage (not including collateral damages) or with weak quality insurance |
(1) The Debt Service Coverage ratio (‘DSCR’) refers to the ratio of the cashflow available for debt service which can be generated from the asset to the required repayment of the principal and the interest payments during the life of the loan, where the cashflow available for debt service shall be calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(2) The Interest Coverage Ratio (‘ICR’) refers to the ratio of the cashflow available for debt service which can be generated from the asset to the required repayment of the interest payments during the life of the loan, where the cashflow available for debt service shall be calculated by subtracting operating expenditure, capital expenditure, debt and equity funding, taxes and working capital adjustments from the revenues generated by the project.
(3) The Loan-to-Value ratio (‘LTV’) refers to the ratio of the loan amount to the value of the pledged assets.
(4) The tenor of a loan refers to the amount of time left for the repayment of a loan.
(5) The tenor of a loan refers to the amount of time left for the repayment of a loan.
(6) An Operation and Maintenance (‘O&M’) contract refers to a contract between the developer and the operator. The developer delegates the operation, maintenance and often performance management of the project to an operator with expertise in the industry under the terms of the O&M contract (i.e. scope, term, operator responsibility, fees, and liquidated damages).
(7) An O&M reserve account refers to a fund into which money is deposited to be used for the purpose of meeting the costs of operation and maintenance of the project.
(8) First perfected security interest refers to a security interest in an asset (mortgaged as a collateral) protected from claims by other parties. A lien is perfected by registering it with appropriate statutory authority so that it is made legally enforceable and any subsequent claim on that asset is given a junior status.
ANNEX IV
Assessment criteria for commodities finance exposures
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Category 1 |
Category 2 |
Category 3 |
Category 4 |
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Factor: financial strength |
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Strong |
Good |
Satisfactory |
Weak |
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Factor: political and legal environment |
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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) |
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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 |
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Factor: asset characteristics |
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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. |
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Factor: strength of sponsor (including public private partnership) |
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Very strong, relative to trading philosophy and risks |
Strong |
Adequate |
Weak |
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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. |
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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 |
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Excellent |
Good |
Satisfactory |
Financial disclosure contains some uncertainties or is insufficient |
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Factor: security package |
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First perfected security interest (1)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. |
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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 |
(1) First perfected security interest refers to a security interest in an asset (mortgaged as a collateral) protected from claims by other parties. A lien is perfected by registering it with appropriate statutory authority so that it is made legally enforceable and any subsequent claim on that asset is given a junior status.