The
objective is to enhance the credit rating of the bonds issued so as to enable
corporates to access the funds from the bond market on better terms.
Banks
can provide PCE to a project as a non-funded subordinated facility in the form
of an irrevocable contingent line of credit which will be drawn in case of
shortfall in cash flows for servicing the bonds and thereby improve the credit
rating of the bond issue.
Salient
features of the PCE facility
The
aggregate PCE provided by all banks for a given bond issue shall be limited to
20 per cent of the bond issue size.
The
PCE facility shall be provided at the time of the bond issue and will be
irrevocable.
Banks
may offer PCE only in respect of bonds whose pre-enhanced rating is BBB
minus or better.
Banks
cannot provide PCE by way of guarantee.
Banks
providing PCE to bonds will not be eligible to invest in those bonds. They can,
however, provide other need based credit facilities.
So long
as the exposure of a bank to a project loan is classified as standard,
providing a commercially priced PCE to enhance the rating of a bond issue,
whose proceeds replace the bank's project loan, would not amount to
restructuring.
Banks
should have a Board approved policy on PCE.
The
documentation for the facility must clearly define the circumstances under
which the facility would be drawn upon.
The
contingent PCE will be available only for servicing the bond, irrespective of
the seniority of claims of other creditors in relation to the bond holders. A
clear agreement will be signed between the bond issuer, the bank and all other
lenders to the project. The operational details are to be decided by the banks.
The
unpaid accrued interest on a partly drawn PCE will be excluded from the
remaining amount available for drawing.
The
contingent facility may be made available as a revolving facility.
In
the event of the project failure, the PCE must rank below the claims of the
enhanced bond holders.
Balance
sheet treatment, capital requirements, exposure and asset classification norms
for exposures arising on account of providing PCE
PCE
facilities should be treated as an advance in the balance sheet. Undrawn
facilities would be reported under ‘Contingent Liability – Others’.
The
capital to be maintained by the banks will be computed, as if the entire bond
issue was held by banks, as the difference between (a) the capital required on
the entire bond amount, corresponding to its pre-credit enhanced rating and (b)
the capital required on the bond amount corresponding to its post-credit
enhanced rating, as per Basel III.
Where
the PCE is provided by more than one bank, each bank will maintain capital as
illustrated above in proportion to the quantum of PCE provided by it.
The
rating of the bond must be monitored regularly and capital requirement adjusted
in the following manner:
(a)
The capital calculation must take into account, the difference in rating
notches between the pre-enhanced and enhanced rating as arrived at the time of
bond issue.
(b)
As long as the bond outstanding exceeds the aggregate PCE, the capital held
should not be less than the amount required to be held at the time of issuance
of the PCE enhanced bond. However, once the bond outstanding has amortised
below the aggregate PCE amount, the capital can be computed taking into account
the outstanding bond amount.
(c)
In situations where the notional pre-enhanced rating of the bond, slips below
investment grade (BBB minus), capital must be maintained as per risk weight of
1250% on the amount of PCE provided.
In
all circumstances, the capital computed for PCE and required to be maintained
by the PCE provider, will be capped by the total amount of credit enhancement
provided.
When
Credit Enhancement (CE) gets drawn it indicates towards financial distress of
the project. Therefore, a drawn tranche of the PCE will be required to be
repaid within 30 days from the date of its drawal (due date). The facility will
be treated as NPA if it remains outstanding for 90 days or more from the due
date and provided for as per the usual asset classification and provisioning
norms. In that event, the bank’s other facilities to the borrower will also be
classified as NPA.
The
PCE providing bank will observe the following exposure limits:
(a)
PCE exposure to a single counterparty or group shall not exceed 5% of the
bank’s Single / Group limit to the counterparty to whom the PCE is provided,
(b)
The aggregate PCE exposure of a bank shall not exceed 20% of its Tier 1
capital.
Other
Aspects
The
effect of the PCE on the bond rating must be disclosed in the bond offer
document.
There
would be no prohibition in providing the PCE facility even if the issuer is not
the regular constituent of the bank.
Banks
should ensure that the assets created out of the bond issue, and the cash flows
from the project are ring fenced through an escrow account mechanism
administered under a bond trustee arrangement. The manner in which security
interest would be shared by the lenders, bond holders and banks and the manner
in which the project cash flows would be shared for servicing loans and the
bonds and PCE, should be decided and agreed upon before the issue of bonds and
should be properly documented.
While
providing PCE, banks should exercise necessary due diligence and risk
appraisal, including making their own internal credit analysis/rating. Banks
should strengthen their internal rating systems which should also include
building up of a system of regular tracking of the financial position of the issuer.
Banks
must honour the full PCE commitment made ab-initio in respect of a bond issue
irrespective of the asset classification of the concerned borrower’s credit
facilities.
All
extant regulatory prescriptions for credit and investment exposures by banks,
unless specified otherwise in this circular, will continue to apply.
Based on RBI
Circular dt 24/9/15. Please visit www.rbi.org.in for any further clarification
if required….. Poppy
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