ANNEX IV
Assessment criteria for commodities finance exposures
Category 1 | Category 2 | Category 3 | Category 4 | |
Factor: financial strength | ||||
Sub-factor: degree of over-collateralisation of trade | Strong | Good | Satisfactory | Weak |
Factor: political and legal environment | ||||
Sub-factor: 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) |
Sub-factor: mitigation of country risks | Very strong mitigation: Strong offshore mechanisms Strategic commodity 1st class buyer | Strong mitigation: Offshore mechanisms Strategic commodity Strong buyer | Acceptable mitigation: Offshore mechanisms Less strategic commodity Acceptable buyer | Only partial mitigation: No offshore mechanisms Non-strategic commodity Weak buyer |
Factor: asset characteristics | ||||
Sub-factor: 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. |
Factor: strength of sponsor (including public private partnership) | ||||
Sub-factor: financial strength of trader | Very strong, relative to trading philosophy and risks | Strong | Adequate | Weak |
Sub-factor: 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. |
Sub-factor: 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 |
Sub-factor: quality of financial disclosure | Excellent | Good | Satisfactory | Financial disclosure contains some uncertainties or is insufficient |
Factor: security package | ||||
Sub-factor: asset control | 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. |
Sub-factor: 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 |
(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.