EXPORT‐IMPORTBANK–OFFICEOFINSPECTORGENERAL
OFFICEOFINSPECTORGENERALEXPORT‐IMPORTBANKoftheUNITEDSTATES
ReportontheAssetManagementDivision’sRiskRatingProcess
September23,2016
OIG‐EV‐16‐02
EXPORT‐IMPORTBANK–OFFICEOFINSPECTORGENERAL
EVALUATIONREPORTOIG‐EV‐16‐02
The Export‐Import Bank of the United States (“EXIM Bank”) is the official export‐credit agency of the United States. EXIM Bank is an independent, self‐sustaining executive agency and a wholly‐owned U.S. government corporation. EXIM Bank’s mission is to support jobs in the United States by facilitating the export of U.S. goods and services. EXIM Bank provides competitive export financing and ensures a level playing field for U.S. exports in the global marketplace.
The Office of Inspector General, an independent office within EXIM Bank, was statutorily created in 2002 and organized in 2007. The mission of the EXIM Bank Office of Inspector General is to conduct and supervise audits, investigations, inspections, and evaluations related to agency programs and operations; provide leadership and coordination as well as recommend policies that will promote economy, efficiency, and effectiveness in such programs and operations; and prevent and detect fraud, waste, abuse, and mismanagement.
This evaluation was conducted in accordance with the 2012 Quality Standards for Inspection and Evaluation as defined by the Council of Inspectors General on Integrity and Efficiency. This report does not constitute a Government audit and therefore, it was not conducted following the Generally Accepted Government Auditing Standards (“GAGAS”).
EXPORT-IMPORT BANK OF THE UNITED STATES
To: DavidSena,SeniorVicePresident&ChiefFinancialOfficer
KennethTinsley,ChiefRiskOfficer&SVPCredit&RiskManagementFrom: MarkThorum
AssistantInspectorGeneral,Inspections&EvaluationsSubject: ReportontheAssetManagementDivision’sRiskRatingProcessDate: September23,2016
AttachedpleasefindthefinalevaluationReportontheAssetManagementDivision’sRiskRatingProcess.Thereportoutlinesfiverecommendationsforcorrectiveaction.OnSeptember15,2016,EXIMBankprovideditsmanagementresponsetoadraftofthisreport,agreeingwiththerecommendations.TheresponseidentifiedtheBank’sactionstoaddresstherecommendations.OIGconsiderstheBank’sactionssufficienttoresolvethereportedrecommendations,whichwillremainopenuntilOIGdeterminesthattheagreeduponcorrectiveactionsaresuccessfullyimplemented.AredactedversionofthisreportwillbepostedontheOIGwebsiteshortly.
Weappreciatethecourtesiesandcooperationextendedtousduringtheevaluation.Ifyouhaveanyquestionsorcommentsregardingthereport,pleasecontactMarkThorumat(202)565‐3939.
cc: CharlesJ.Hall,EVPandChiefOperatingOfficerMichaelMcCarthy,ActingInspectorGeneralAngelaFreyre,SVP&GeneralCounselInciTonguch‐Murray,DeputyCFOWalterKeating,VPAssetManagementDivisionJenniferFain,DeputyAIGIEParisaSalehi,Counsel,OIGCristopolisDieguez,BusinessComplianceAnalystGodaMcEachern,BusinessComplianceAnalyst
Attachment:ReportontheAssetManagementDivision’sRiskRatingProcess:OIG‐EV‐16‐02,September23,2016
EXPORT‐IMPORTBANK–OFFICEOFINSPECTORGENERAL
WhyWeDidThisEvaluation
AMD’smissionistoproactivelypreservethevalueoftheBank’sassetsthroughscheduledandasneededreviewsofcreditriskratingstoidentifyvulnerabilitiesandtotaketimelyremediationactionwhenrequired.ThescopeofAMD’sportfolioismaterial,representing$38.2billion(40percent)oftheBank’stotalexposureof$94.4billionasofMarch31,2016.
Anaccurateandtimelyassessmentoftheportfolio’sBCLriskratingiscriticalto(i)theproperallocationofcreditlossreservesandsubsidy,(ii)promptresponsetoadversecreditdevelopmentstosafeguardtaxpayerfundsand(iii)theachievementofEXIMBank’smission.
WhatWeRecommend
Tofurtheraligncurrentriskratingpolicieswithindustrybestpractices,OIGrecommendsthatEXIMBanksupplementtheexistingqualitativeandquantitativeapproachtomeasuringcreditriskforobligorsby(i)ensuringtheratingreportsstatethefindingsandresultsoftheprioryear’sMonitoringPlan;(ii)forprojectfinance,testingandperformingsensitivityanalysisonkeyriskassumptionsinthefinancialprojections;(iii)introducingquantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangeswheneverpossible;(iv)adoptingaconsistentmethodologyforevaluatingqualitativecriteria;and(v)ascribinggreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.
EXECUTIVESUMMARY EvaluationReportAMDRiskRatingProcessOIG‐EV‐16‐02,September2016
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For additional information, contact the Office of Inspector General at (202) 565-3908 or visit http://exim.gov/about/oig
WhatWeFound
WeevaluatedtheAssetManagement’sDivision’s(“AMD”)risk‐ratingpoliciesandprocedurestoascertainthelevelofcreditanalysis,methodologyemployed,andtimelinessoftherisk‐ratingreviewprocessforpost‐operativetransactionsandtoassesstheBank’sadherencetoitspolicies,governmentalguidelinesandindustrybestpractices.
OIGreviewedajudgmentalsampleof31obligorsrepresentingarangeofindustries,borrowersandtransactiontypes.Inaddition,OIGconductedinterviewstounderstandtheapplicationofAMD’sBudgetCostLevel(“BCL”)riskratingpoliciesandtoascertainthebestpracticesobservedbypeerinstitutionsincludingforeignexportcreditagencies(“ECAs”),otherU.S.governmentagenciesandmultilateralfinancialinstitutions.
OIGfoundthatAMDisgenerallyadheringtoitsinternalBCLrisk‐ratingpoliciesandprocedures.Initsreview,OIGconcludedthattheriskratingreportsarecompletedinatimelymanner,addressprincipalriskssuchasindustryandcountryrisks,andcontaintherequiredcomponentssuchascovenantcompliance,Character,ReputationandTransactionIntegrity(“CRTI”),andenvironmentalreports.
OIGrecommendsthatEXIMBanktakeadditionalstepstofurtheraligncurrentpolicieswithindustrybestpractices.Forexample,althoughinternalguidanceprovidesquantitativemetricstoassesskeyrisks,itlacksindustry‐specificbenchmarksforindividualriskfactorratings.OIGalsofoundthatthelackofprecisionwithcertainaspectsoftheBank’squalitativeframeworkresultedininconsistencieswithintheratingprocess.Inaddition,OIGfoundthatupdatedmacroeconomicdatasuchasforeignexchangeratesandindustryconditionsarenotconsistentlyincorporatedintoaBorrower’slatestfinancialprojections,resultinginfinancialanalysisthatmaynotfullyreflectcurrentmarketandprojectrisks.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY .................................................................................................................... 4
TABLE OF CONTENTS....................................................................................................................... 5
LIST OF FIGURES AND TABLES ......................................................................................................... 6
ABBREVIATIONS AND GLOSSARY .................................................................................................... 7
INTRODUCTION ............................................................................................................................... 9
SCOPE AND METHODOLOGY .......................................................................................................... 9
BACKGROUND ............................................................................................................................... 11
PRINCIPAL FINDINGS AND RECOMMENDATIONS ........................................................................ 13
CONCLUSION ................................................................................................................................. 24
APPENDIX A: MANAGEMENT RESPONSE AND OIG EVALUATION ................................................ 26
APPENDIX B: LIST OF REVIEWED OBLIGORS ................................................................................. 32
APPENDIX C: DESCRIPTION OF RATING REPORT AND RISK FACTORS .......................................... 33
APPENDIX D: DETERMINATION OF OBLIGOR BCL RISK RATING ................................................... 35
APPENDIX E: CORPORATE RISK RATING CHART ............................................................................ 36
APPENDIX F: OIG MONITORING PLAN OBSERVATIONS ................................................................ 38
ACKNOWLEDGEMENTS ................................................................................................................. 39
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LIST OF FIGURES AND TABLES
Figure 1: Overview of AMD PCPM Risk Rating Process ................................................................ 13
Figure 2: Leverage Ratio vs. Leverage Risk Factor Grade ............................................................. 19
Figure 3: Debt Service Ratio vs. Debt Service Coverage Risk Factor Grade .................................. 20
Table 1: Financial Projections – Project Financings ...................................................................... 15
Table 2: Corporate Specific Risk Factors and Rating Guidance .................................................... 21
Table 3: Summary of Management’s Comments on the Recommendations .............................. 30
Table 4: Obligor Selection List ...................................................................................................... 32
Table 5: Bank, Corporate and Project Risk Rating Models ........................................................... 34
Table 6: Bank Risk Rating Process ................................................................................................. 35
Table 7: OIG Monitoring Plan Observations ................................................................................. 38
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ABBREVIATIONS AND GLOSSARY
Term Description
AMD AssetManagementDivision,EXIMBankBankorEXIMBank Export‐ImportBankoftheUnitedStatesBCLorRiskRating BudgetCostLevel(“BCL”)isariskratingsystemofEXIMBankthat
ratesatransactiononaslidingscaleof1(lowrisk)to11(highrisk).TheBCLratingdetermineslossreservesthatwillbeallocatedbytheBankforthetransaction.
Board TheBoardofDirectors,EXIMBank,responsibleforapprovingallprojectfinancingtransactionsover$10million.
BoardMemo/Memorandum
AmemorandumsubmittedtotheEXIMBankBoardaspartoftheprocessforapprovingatransactionforBanksupport.
Buyer ForeignbuyerofU.S.capitalgoodsorservicesCRTI Character,ReputationalandTransactionIntegrity.CRTIdue
diligenceisaprocessinitiatedbyEXIMBanktovettransactionparticipants,whichconsistsofanalysisofcompaniesandindividualstoidentifypotentialfraud,corruptionandintegrityrisksassociatedwithpartiestoatransaction.
DSCR DebtServiceCoverageRatio.DSCRiscalculatedastheamountofcashavailablefromoperationsdividedbydebtservice(thesumofprincipalandinterest).
ECA ExportCreditAgencyEOL EXIMOnlineistheBank’sAssetManagementSystemofitsobligors,
withkeyrecordssuchastransactionprofiles,ratingreports,covenants,tripreportsandkeydocumentsamongothers.
ERS EnterpriseRiskSystem.ERSisEXIMBank’sdatabasethataggregatesdataontheBank’sobligors,transactionsandexposures.
FY FiscalYearICRAS InteragencyCountryRiskAssessmentSystem.TheICRASprocess
involvestheperiodicassessmentofthecreditriskassociatedwithU.S.creditassistancetoforeigncountriesutilizingaconfidentialinteragencyprocess.
LoanManual EXIMBank’sLoan,GuaranteeandInsuranceManual,whichsetsforththepoliciesandproceduresforduediligence,structuringandmonitoringofBanktransactions.
MonitoringManual EXIMBank’sAssetManagementDivisionOperatingManualObligor TheBorrower,anentitywhoislegallyorcontractuallyobligatedto
repayEXIMBankfinancing.OIG OfficeofInspectorGeneral,EXIMBankOperativeDate Thedatethatthetransactionhassatisfiedallconditionsprecedent
andisavailableforfunding.OptimizationManual AssetMonitoringSystemReportOptimizationProjectOperating
Manualandriskfactorattachments
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Term Description
Origination EXIMBank’sTradeFinanceDivisionandStructuredandProjectFinanceDivision.Thesedivisionsareresponsiblefortheorigination(i.e.,structuring,obtainingcreditapprovalanddocumentingthetransaction)ofallmedium‐andlong‐termtransactionsexcludingtransportationandaircraft.
PMCG PortfolioMonitoringandControlGroup,EXIMBankAMDPCPM ProjectandCorporatePortfolioManagementGroup,EXIMBank
AMDTPMD TransportationPortfolioManagementDivision,EXIMBank
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EVALUATION REPORT ON AMD’S RISK RATING PROCESS
INTRODUCTION
WecompletedareviewoftheAssetManagementDivision’s(“AMD”)ProjectandCorporatePortfolioManagementGroup’s(“PCPM”)BudgetCostLevel(“BCL”)risk‐ratingpoliciesandprocedurestoascertainthelevelofcreditanalysis,methodologyemployed,andtimelinessoftheBCLriskratingreviewprocessforpost‐operativetransactionsandtoassesstheExport‐Import(“EXIM”)Bank’sadherencetoitspoliciesandprocedures,governmentalguidelinesandindustrybestpractices.Weinitiatedthereviewaspartofourannualworkplan.Severalfactorsmotivatedthisevaluation:
ThesizeandscopeofAMD’sportfolioarematerial,representingabout$38.2billionoftheBank’stotalexposureofapproximately$94.4billionasofMarch31,2016;
Anaccurateandtimelyassessmentofanobligor’sBCLriskratingiscriticalto(i)theproperallocationofcreditlossreservesandsubsidy,(ii)theachievementofEXIMBank’smissionand(iii)safeguardingtaxpayerfunds;
AMD’smissionistoproactivelypreservethevalueoftheBank’sassetsthroughscheduledandas‐neededrisk‐basedcreditreviewsofBCLratingstoidentifyvulnerabilitiesandtotaketimelyremediationaction,providingcriticalfeedbacktounderwriting;and
EXIMBankfacesachallengingeconomicenvironmentinseveralkeyindustrysectors.
SCOPE AND METHODOLOGY
Toachieveourobjectives,wereviewedajudgmentalsampleconsistingof31obligorsmanagedwithinAMD.ThesampleincludedamixofBCLriskratings,countriesandindustries,covering66percentofAMD’soverallexposureof$38.2billion.TheselectedobligorswerechosenfromAMD’sPCPMportfolio.AsofMarch31,2016,thePCPMportfoliorepresentsabout93percentofAMD’sexposure.SeeAppendixBforalistofthereviewedobligors.
Thefollowingevaluativecriteriawereusedtoassesstheaccuracyandtimelinessoftheriskratingprocesswithrespecttothesampledobligors:
thetimelinessofthecreditreviews;
thescopeofthefinancialanalysisandprojections,includingsensitivityanalysisanduseofcurrentmacroeconomic,industryoutlookandotherrelevantsourcesofdata;
thevalidityandclarityoftheriskratingmodels;
thelevelofcongruenceoftheBCLriskratingwithexternalriskindicatorssuchaspubliccreditratingswhenavailable;
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thecompletionofCharacter,ReputationalandTransactionIntegrity(“CRTI”)andenvironmentalreviewsasrequired;and
themonitoringplanandsubsequentfollowups.
Inundertakingitsreview,theOfficeofInspectorGeneral(“OIG”)accessedinternaldatabasesincludingtheBank’sEnterpriseRiskSystem(“ERS”)andEXIMOnline(“EOL”)toconfirmthattherequiredinternaldocumentswereavailableandcurrent.SpecifictoEOL,OIGreviewedtheobligor’sfirstriskratingreportaswellasanysubsequentratingupdatereportsfromfiscalyears(“FY”)2013‐2015.OIGreviewedtheBank’sassessmentofobligorriskfactorssuchascountryrisk,financialrisk,operatingriskasprescribedbyAMDguidance.SeeAppendixCformoredetailsonEXIMBank’sriskratingreports.OIGthenanalyzedvariousinternaldocumentspertainingtoeachtransactionincludingtripreports,financialstatementmetrics,financialprojections,andpublicandopensourcedocuments.
OIGconductedaseriesofinternalinterviewswithEXIMBankdivisionsincludingtheOfficeofChiefFinancialOfficer(“OCFO”)andAMDtogainanunderstandingoftheBank’scurrentpracticesrelatedtotheBCLriskratingprocessandtheirapplication.OIGconductedexternalinterviewstoascertainthebestpracticesobservedbycreditratingagencies,peerinstitutionsincludingforeignexportcreditagencies(“ECAs”),otherU.S.governmentagencies,andmultilateralfinancialinstitutions.Finally,twopointsofinquirydirectedourfocusandhelpedguideourevaluation:
Points of Inquiry
Thefollowingpointsofinquirydirectedourfocusandhelpedguideourevaluation:
POINTOFINQUIRY1:IsAMDadheringtotheriskreviewandmonitoringproceduresoutlinedincurrentpolicyguidelines?
POINTOFINQUIRY2:DoestheAMDcreditriskreviewprocessresultinaccurate,timelyriskratingsandconformtoindustrybestpractices?
TheOIGconductedthisevaluationduringFY2016inaccordancewiththe2012QualityStandardsforInspectionandEvaluationasdefinedbytheCouncilofInspectorsGeneralonIntegrityandEfficiency.1Thosestandardsrequirethatweplanandperformtheevaluationtoobtainsufficient,appropriateevidencetoprovideareasonablebasisforourfindings,conclusionsandrecommendationsbasedonourevaluationobjectiveandpointsofinquiry.Webelievethattheevidenceobtainedprovidesareasonablebasisforourfindingsandconclusions.
1Formoreinformation,seehttps://www.ignet.gov/sites/default/files/files/committees/inspect‐eval/iestds12r.pdf.
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BACKGROUND
TheExport‐ImportBank(“EXIMBank”or“Bank”)isanindependentfederalagencyandwholly‐ownedgovernmentcorporationwhosemissionistoaidexportfinancingtomaintainorcreateU.S.jobs.TheBank’sCharterauthorizesittoengagein“generalbankingbusiness.”2Itscorefinancingprogramsaredirectloans,exportcreditguarantees,workingcapitalguarantees,andexportcreditinsurance.TheCharterrequires“reasonableassuranceofrepayment”forallEXIMBanktransactions,whicharebackedbythefullfaithandcreditoftheU.S.Government.TheBankhasfunctionedonaself‐sustainingbasissinceFY2008,coveringitsoperationalcostsandprovisioningforexpectedlossesthroughloanlossreserves,fundedbythefeesandinterestitchargesitscustomers.
EXIM Bank Portfolio Monitoring
TheEXIMBankportfolioismonitoredbytwoseparategroups:AMDandtheTransportationPortfolioManagementDivision(“TPMD”).AMDisresponsibleforthemonitoringofallmedium‐andlong‐termtransactionsoriginatedbytheBank’sTradeFinanceDivisionandStructuredandProjectFinanceDivision(“Origination”).TPMDisresponsibleforthemonitoringoftransactionsoriginatedbytheTransportationDivisionincludingaircraft.
WithinAMD,therearetwogroupsresponsibleformanagingoperativecredits:PCPMandthePortfolioMonitoringandControlGroup(“PMCG”).PCPMcoversallnon‐sovereignobligorswithanaggregateexposureofover$20million,whilePMCGcoversallsovereignobligorsofanyexposurelevelandnon‐sovereignobligorswithanaggregateexposureof$20millionorless.Bothgroupshavetheresponsibilitytomonitorcompliance,reviewandprocessamendments,completeperiodicassessmentofobligorrisk,andwiththesupportofotherspecializedgroups,managetroubledassetstoensuretheBankreceivesthehighestreasonablypossiblerecoveryrate.BothPCPMandPMCGareresponsibleforcreditmonitoringoncethetransactionistransferredfromOrigination.Presently,PCPMmonitors94obligorswithanaggregateexposureof$38.2billionrepresenting93percentofAMD’sexposure.AsOIG’sevaluationfocusedonPCPMobligors,thesectionbelowwillfocusonthePCPMobligorriskratingprocess.
PCPM Obligor Risk Rating Process
OnceanobligoristransferredfromOriginationtoPCPM,theobligorisassignedtooneofthreecategories:
Corporateobligor–EXIMBanklendstotheborrowerbasedonthestrengthoftheborrower’sbalancesheet
Bankobligor–Similartocorporateobligor,exceptEXIMBanklendstoabank
2SeeTheCharteroftheExport‐ImportBankoftheUnitedStatesathttp://www.exim.gov/sites/default/files/2015_Charter_‐_Final_As_Codified_‐_02‐29‐2016.pdf.
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Projectobligor–EXIMBanklendstoaprojectfinanceborrowerbasedprimarilyonthestrengthofprojectcashflows
Thethreetypesofobligorsthenundergoaprocessofcredittransferandannualreviewasoutlinedbelow.SeeFigure1belowforanoutlineofthePCPMriskratingprocess.
1. TimingofcredittransfertoPCPM:
a. BankandCorporateobligors:Thecredittransferdateisthedateinwhichthetransactionismadeoperative,i.e.,“OperativeDate.”
b. Projectobligors:InadditiontotheOperativeDate,project‐relatedtransactionsmusthavea“cleandisbursement,”i.e.,noamendmentsorwaiversofconditionsprecedenttodisbursementbeforethetransactionistransferredfromOriginationtoPCPM.
2. Documentationrequirementsduringcredittransfer:
a. BankandCorporateobligors:OriginationtransfersallexistingdocumentationrelevanttothetransactiontoAMDduringthecredittransfer.
b. Projectobligors:Inadditiontohandingoverexistingdocumentation,Originationisrequiredtocompleteariskratingmatrixdescribingthekeyrisksofthetransaction.
3. Scopeandtimingoffullratingreports:OncethecreditistransferredfromOrigination,allPCPMobligorsareratedonanannualbasisormorefrequentlyasnecessary,withreportsubmissionandapprovalforannualreviewsdueonJuly15thandAugust31stofeachyear,respectively.Ifthecredittransferdateislessthansixmonthsbeforethenextreportsubmissiondate,aconfirmationreportoftheriskratingissuedbyOriginationiscompletedwithinsixmonthsinlieuofafullreport,whichwouldbeduethefollowingyear.
AfullratingreportisbasedonPCPM’sassessmentofdefinedriskfactors.AsdefinedbyEXIMBankpolicy,theseriskfactorscontainamixtureofqualitativeelementsandquantitativeratiosandaregenerallyratedonaBCLscaleof1to11.
4. AnoverallBCLriskratingisassignedtotheobligorbasedonaweightedaverageoftheriskfactors.Bank,corporate,andprojectobligorseachhaveauniquereportformatduetodifferentsetsofdefinedriskfactorsfortheriskrating.Inadditiontoriskratingdetails,thereportsalsocoverareassuchasamonitoringplan,CRTIresultsandenvironmentalcompliance.Theratingreportsarealsosupplementedwithinformationtosupporttheriskanalysis,suchasmacroeconomic,industry,andobligorcreditreports.SeeAppendixCformoredetailsontheriskratingreportsandAppendixDformoredetailsontheriskratingdeterminationprocess.
5. Subsequentratings:Afterafullratingreportisissued,subsequentratingupdatereportsaregenerallyissuedonanannualbasis.Iftherearesignsofcreditdeterioration,afullrestructuringreportorratingupdatereportisissuedonan“asneeded”basis.
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Figure 1: Overview of AMD PCPM Risk Rating Process (Confidential and Proprietary Information)
Source: Information based on Loan Manual
PRINCIPAL FINDINGS AND RECOMMENDATIONS Inwritingthisreport,OIGrecognizesthatourfindingsandrecommendationsprimarilyrelatetothejudgmentalsampleof31obligorsreviewedtoassesstheaccuracyandtimelinessofAMD’sBCLriskratingprocess,andmaynotnecessarilybegeneralizabletothebroaderuniverseofEXIMBanktransactions.Thereportisguidedbythetwopointsofinquirylistedabove.Foreachpointofinquiry,OIGprovidesapplicablestandardsbasedonEXIMBank’spoliciesandprocedures,marketbestpractices,peerentities,aswellasratingcriteria.ThereportcontinueswithOIG’sfindingsandattendantrecommendationstomanagement.
OIGalsorecognizesthatEXIMBankmanagementhasconvenedaninterdivisionaltaskforce,coordinatedbytheCreditPolicyCommitteeandcomprisedofrepresentativesoftheapplicableoperatingdivisions,todeterminehowpriorrecommendationsoninternalriskscoringmodelscitedbyS&PCapitalIQRiskSolutions(“S&P”)3includingrecommendationsthatmayimpacttheAMDriskratingreports,willbeimplementedandsecondtodevelopatimeframeforcompletion.ThisevaluationfocusesonthecurrentAMDriskratingpoliciesandprocedures.
3InFY2015,EXIMBank’sAuditCommitteeengagedS&PtoconductanindependentreviewoftheBank’sBCLriskratingsfortransactions.S&PcompletedtheirassessmentsofAMDriskratingmodelsonMay27,2015.
Originating Division Credit Transfer to AMD for monitoring
PMCGPCPM
Bank Obligors
Corporate Obligors
Project Obligors
1. Sovereign Obligors2. Non‐Sovereign Obligors with ≤20m exposure
Non‐Sovereign Obligors with > 20m exposure
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PointofInquiry1:IsAMDadheringtotheriskreviewandmonitoringproceduresoutlinedincurrentpolicyguidelines?Applicable Standards
OIGreviewedvariousApplicableStandardsandfocusedonthefollowing:
1. EXIMBank’sAMDproceduresandriskratingguidance:
a. GuidelinesforcredittransferfromOriginationtoAMDPCPMformonitoringasoutlinedinChapters6,7,and14,Post‐OperativeMonitoringguidelinesasoutlinedinChapter22,andFinancialModelingguidelinesasoutlinedinChapter14oftheBank’sLoan,GuaranteeandInsuranceManual,updatedApril2015(“LoanManual”);
b. AssetMonitoringSystemReportOptimizationProjectOperatingManualandriskfactorattachments,revisedSept2013(“OptimizationManual”);and
c. AssetManagementDivisionOperatingManual,March2009(“AMDOperatingManual”).
EXIM Bank’s AMD procedures and risk rating guidelines
AMDPCPMproceduresandriskratingguidelinescoverthelifeofaPCPMassetaftertransferfromOrigination.ThePCPMriskratingprocessisonanobligorbasis.Eachobligorisratedonindividualriskfactors,withtheobligor’soverallBCLratingaresultoftheweightedaverageofindividualriskfactors.Inadditiontoriskrating,PCPMisalsoresponsibleforrelationshipmanagement,sitevisits,amendments,waivers,monitoringplans,covenantcompliance,andEXIMBankpolicycompliancesuchasCRTIthroughtheratingreports.PleaseseeAppendixCformoredetailsonthePCPMriskratingreports.
Finding 1: OIG tested compliance with various AMD requirements and determined that AMD is generally adhering to those requirements.
OIGcheckedpolicycomplianceinthefollowingareasandtheresultswereasfollows:
Timelinessofcreditreviews:Allcreditreviewswereincompliancewithreportingrequirements.
Identificationanddiscussionofrequiredriskfactors:Allratingreportsincludedaqualitativediscussionoftherequiredriskfactors.
Covenantcompliance:OIGdidnotfindanyunaddressedissuesofcovenantirregularities.
InclusionofCRTIandenvironmentalreviews:AllratingreportsincludedaCRTIreviewandwhenrequiredanenvironmentalreview.
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Inclusionofmonitoringplans:Allinitialratingreportsincludedamonitoringplan.WhileAMDgenerallyfollowedthroughwiththemonitoringplaninsubsequentratingupdates,therewereafewcases4whereAMDdidnotfollowthroughwiththemonitoringplan.SeeAppendixFformoredetailsonthefewcasesofnon‐adherencetotheplan.
Useoffinancialprojectionsandratios:Allratingreportsincludedthesuggestedquantitativeratiosforriskrating.However,Bankpoliciesforprojectfinancingsrequireadetailedanalysisofthefinancialprojectionsincludingareviewofassumptionsandsensitivities.5OIG’sjudgmentalsampleof31obligorsincluded14projectfinancings.Wespecificallyreviewedtheprojectionsfor11ofthoseprojectfinancingsandfoundthatfivecouldhavebenefitedfromamoredetailedreviewofthecashflowassumptionsandmodelingofsensitivitiesaffectingprojecteconomicsandriskiness.Further,theseratingreportsweresilentontheresultsofthesensitivityanalysisofthefinancialprojections.SeeTable1belowfortheresultsofthisfinding.
Table 1: Financial Projections – Project Financings Insufficient Analysis of Projections
Obligor Exposure ($MM)
Comment
Currencydevaluationwasexcludedinthefinancialprojectionsduringthefive‐yearconstructionperiodandunderestimatedduringtheoperatingperiod.Theunderestimateofthecurrencydevaluationresultedinanun‐forecastedconstructioncostoverrunof 6,7andunderstatedcostofhedgingduringoperation.Thesefactorscombinedwithaseriouslackofraterelief,theincreasingcostofhedging,andothersfactors,ledeventuallytoareductionintheBCLriskratingfrom in2014to in2015.8
Althoughtheprojectfacesanincreasingcostofhedgingashighlightedintheratingreports,thesecostswerenotsufficientlyreflectedinthe2014and2015financialprojections.Thecosts
4
5LoanManual,Chapter14,page27
6
7OIGnotesthattheconstructioncostoverrunwascoveredbytheprojectsponsorandnotEXIMBankfinancing.
8SinceSeptember2015,AMDriskmonitoringon hasincludedcontinuousreviewofcurrenthedgingby againsttheproject’shedgingrequirements.ThisincludedengaginginNovember2015ahedgingadvisoryfirm, ,toconductananalysisofthehedgingstrategyfor .
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)(b) (4)
(b) (4) (b) (4)
(b) (4)
(b) (4) (b) (4)
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Table 1: Financial Projections – Project Financings Insufficient Analysis of Projections
Obligor Exposure ($MM)
Comment
werebasedon2012,notthecurrentcostswhichexceededtheannualrevenueoftheproject.9Theratingofthisprojectin2014and2015was butwasrevisedin2016to toreflectupdatedprojectionsofcashflow.
Theprojectfacesanincreasingcostofhedgingbutsuchcostwasnotsufficientlyreflectedinthefinancialprojectionsin2015basedonsensitivityanalysisandforecastedexchangerates.Theratingofthisprojectin2014and2015was butwasrevisedin2016to toreflectupdatedprojectionsofcashflow.
isanuncompletedprojectguaranteedby Additionally, guaranteestheloansto throughsupportpayments. revenuesare
in .AlthoughtheanalysisbytheBank’sfinancialadvisorbroadlyandcriticallyevaluated ,thecashflowprojectionsomittedforeignexchangeexposureandthepotentialeffecton abilitytosupportitsU.S.dollarguaranteesandcontingentliabilities.
TheBoardMemoatoriginationincludedsensitivitiesonforeignexchange,lowoilprices,operatingcosts,andprojectavailability.However,althoughtheratingreportsfor2014and2015noteda
depreciationofthecountry’scurrencyandamajordropinoilprices,thereportsdidnotincludeacomprehensivesensitivityanalysisofthefactorstestedduringoriginationanddidnotre‐runthemodeltoupdatetheprojectedDebtServiceCoverageRatios.Further,asreportedinthe2015report,theprojectexperiencedan
constructioncostoverrunof ,10 duetounhedgedforeignexchangeexposure,affectingtheprojectcompetivenessandvalue.OIGnotesthatthecostoverrunwillbefundedbythesponsorsunderthecompletionguaranteeandwillnotinvolveadditionalloansfromEXIMBank.Theratingofthisprojectwas in2014and2015,butwasreviseddownwardin2016to basedonthesteepdeclineincrudeoilprices.
Source: OIG observations of obligor projections and Bank rating reports
9In2016,EXIMBankamendedthestrikepriceofthehedgingagreementtomakethecostofhedgingaffordableforthenextfive‐yearperiod.
10Supranote7.
(b) (4)
(b) (4)
(b) (4) (b) (4)(b) (4) (b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4) (b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4) (b) (4) (b) (4)
(b) (4)(b) (4)
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RECOMMENDATIONS
ToenhanceEXIMBank’sriskreviewandmonitoringprocedures,OIGrecommendsthefollowing:
1. Ratingreportsstatethefindingsandresultsoftheprioryear’sMonitoringPlan.
2. Forprojectfinancings,conductanupdatedreviewofthefinancialmodelandassumptions,performsensitivitytestsasappropriate,anddocumenttheresultsintheratingreportstoincludetheeffectonrepaymentriskanddebtservicecoverage.
Management Response:
PleaseseeAppendixA,ManagementResponseandOIGEvaluation.PointofInquiry2:DoestheAMDcreditriskreviewprocessresultinaccurate,timelyriskratingsandconformtoindustrybestpractices?Applicable Standards
OIGreviewedvariousApplicableStandardsandfocusedonthefollowing:
1. EXIMBank’sAMDPCPMproceduresandriskratingguidance:
a. GuidelinesforcredittransferfromOriginationtoAMDPCPMformonitoringasoutlinedinChapters6,7,and14,Post‐OperativeMonitoringguidelinesasoutlinedinChapter22,andFinancialModelingguidelinesasoutlinedinChapter14oftheBank’sLoanManual;
b. OptimizationManual;and
c. AMDOperatingManual;
2. IndustrypracticesasobservedbypeerinstitutionsincludingFederalAgencies,foreignECAs,andmultilateraldevelopmentbanks.
EXIM Bank’s AMD procedures and risk rating guidelines
SeePointofInquiry1aboveforadescriptionoftheseproceduresandguidelines.
Industry Practices
Theseinstitutionsincorporateariskscorecardapproachthatusesacombinationofqualitativecriteriaandquantitativemetricssuchassectorspecificcriteria.
Finding 2: AMD’s review process produces risk ratings that are timely and generally aligned with comparable ratings from credit rating agencies. However, there are some departures from industry practices that should be addressed.
Ofthe31obligorsinthejudgmentalsample,OIGfoundthattheBank’soverallratingofobligors,sponsors,andcountriestobegenerallyconsistentandcomparabletotheratingsfromcreditratingagencies.However,OIG’scomparisonattheobligorlevelis
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limited,because14projectobligorsandsevenbank/corporateobligorsintheOIG’ssamplearenotpublicallyratedattheobligorlevel.
IncomparingtheBank’sBCLriskratingprocesswiththeratingagenciesmethodologiesandindustrypractices,OIGobservedseveraldeparturesfromindustrypracticesthatintheaggregatereducetheaccuracyandreplicabilityoftheriskratingoutcome.ThepotentialforratingmisalignmentisheightenedforobligorsthatareunratedbycreditagenciessincetheBank’sutilizationofexternalcreditratingsasausefulreferencepointislimited.Thedifferencesinpracticesaredetailedinthefindingsbelow.
Finding 2A: EXIM internal guidance prescribes which metrics to use to determine individual risk factor ratings and provides a qualitative framework to assess risks. However, further refinements are needed for both quantitative and qualitative analyses to reflect industry practice.
Lack of Benchmarks for Quantitative Metrics
InternalBankguidancegenerallydoesnotprovidespecificnumericrangesforfinancialriskfactorratingsorsector‐basedbenchmarks,leadingtoinconsistenciesinhowkeycreditratiosarealignedwithriskratings.EXIMBankguidanceprescribestheuseofkeyfinancialratios,suchasdebt/networthratioordebtservicecoverageratio,asquantitativemeasuresforleveragerisk.However,thereisnoguidancethatcorrelatesorlinksanumericrangefortheratioswitheachrisk‐ratinglevel,whichisadeparturefromthepracticesbenchmarkedatotheragencies.Inaddition,EXIMBankguidancedoesnotprovideindustry‐specificbenchmarks,asidefromafewexceptionssuchastheTier1capitalratioforBankobligors.Withoutspecificguidancefornumericranges,thereisalackofconsistentalignmentamongaBorrower’sactualfinancialratiosandrespectiveBCLriskfactorgrades.
Forinstance,AMD'sOptimizationManualprescribestheuseofadebt/networthratioasthequantitativemeasureforleveragerisk.WhereastheOptimizationManualprovidesabroaddescriptionforeachlevelofleverageriskfactorgrade,11itdoesnotprovidespecificrangesorbenchmarksforeachriskfactorgrade.Absentbenchmarks,portfoliomanagersusethebroaddefinitionstoassessthelevelofrisk,therebyincreasingtheriskofsubjectiveinterpretationandinconsistencyacrossobligorratings.
Inoursample,wefoundobligorswithwidelyvaryingratiosreceivingsimilarriskfactorgradesforleverage,andobligorswithsimilarratiosreceivingdifferentriskfactorgradesforleverage.Forexample,in2015,theBankassigneda5riskfactorgradeforleverageriskto withadebt/networthratioof4.2.Incontrast,theBankassigneda6riskfactorgradeforleverageriskto
withadebt/networthratioof18.2,onlyoneratingnotchlowerdespiteadifferenceinleverageofover400percent.Although debt/net
11Forexample,Bankguidancenotesthataleverageriskfactorgradeof“1or2”equatestoverylowleverage,“3or4”equatestolowleverage,andsoforthwithoutguidancefornumericranges.
(b) (4)
(b) (4)(b) (4)
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worthratioof18.2wasascribeda6riskfactorgrade,theratioexceededtherangeofratiosofothercorporateobligorswhoseleverageriskfactorgradewasratedbetween7and9.
Theextentofthepotentialmisalignmentismoreevidentattheleveloftheentirejudgmentalsample.Forexample,inFigures2and3below,thereisawidedispersionofratioswhenmappedtotherespectiveobligor’sriskfactorscores.Althoughthegeneralguidanceshouldproducehigherriskratingsincaseswherethereishigherleverageoralowerdebtservicecoverageratio,theexpectedtrendisnotevident,withseveraloutliers.Whentheratiowasaclearoutliertothesample,OIGfoundthattheindividualratingreportsdidnotprovidesufficientqualitativeexplanationstojustifytheoutlier’sriskfactorgrade.
Figure 2: Leverage Ratio vs. Leverage Risk Factor Grade12 (Confidential and Proprietary Information)
Source: Information based on all corporate risk rating reports in OIG’s sample
12Therearesomeobligorswithnetleverageratiosduetonegativeequity.
1234567891011
‐15 ‐10 ‐5 0 5 10 15 20
LeverageRiskFactorGrade
LeverageRatio(Debt/TangibleNetWorth)
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Figure 3: Debt Service Ratio vs. Debt Service Coverage Risk Factor Grade13 (Confidential and Proprietary Information)
Source: Information based on all corporate risk rating reports in OIG’s sample
Lack of precise guidance within the Qualitative Framework
Lackofpreciseguidancewithinthequalitativeframeworkcontributestopotentialdiscrepanciesintheapplicationoftheriskfactorgrades.Althoughthequalitativeframeworkspecifiessub‐factorsthatshouldbeevaluatedforeachriskfactor,EXIMBankdoesnothavespecificguidanceonhowsub‐factorratingsaretranslatedintotheoverallriskfactorrating.Inoursampleofobligors,wefoundinconsistencieswheredifferingsub‐factorratingsdidnotleadtodifferentriskfactorratings.Thequalitativeframeworkusedforbothcorporateandprojectfinanceriskassessmentslackspreciseevaluativecriteriaforindividualriskfactorgrades.
Thefollowingexamplesillustratetheinconsistentapplicationofqualitativefactorsassessmentonindividualobligors:
In ’June30,2014ratingupdatereport,industryriskwasrateda4.Theindustryriskfactorissupportedbythesub‐factorsstructuralchange,priceanddemandvolatilityandcompetitiverisk,whichwereallratedaslowinthereport.
wassubsequentlyre‐ratedduringthereportingperiodNovember30,2014.Theindustryrisksub‐factorsstructuralchange,priceanddemandvolatilityandcompetitiveriskweredowngradedtomedium,high,andmedium,respectively.However, industryriskscoreremaineda4.
In2010, ’leverageriskwasratedaslowwithaleverageriskfactorratingof5.From2013‐2015, ’leverageriskwasratedasmediumwithaleverageriskfactorratingof4.
13Therearesomeobligorswithnegativedebtservicecoverageratiosduetonegativenetcashafteroperations.
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‐4 ‐2 0 2 4 6 8 10
DSCRiskFactorGrade
DebtServiceRatio(UCACashFlowCoverage)
(b) (4)
(b) (4)
(b) (4)(b) (4)
(b) (4)
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Managementriskisbasedontwosub‐factors:experiencerisk,andstabilityandintegrityrisk.Inoneriskratingreport,managementriskwasrateda5withexperienceriskratedaslow,andstabilityandintegrityriskratedasmedium.Inanotherriskratingreport,managementriskwasrateda4,yetbothexperienceriskandstabilityandintegrityriskwereratedasmedium.
Incomparison,theratingmethodologyofqualitativefactorsatpeeragenciesensuresconsistencyinratingsthroughclearlydefinedratinggradesandprocess,includingtheappropriatesequenceofstepsusedtoanalyzetheunderlyingrisks.
Lack of Precise Guidance within Paired Risk Ratings
Theratingofcorporateriskfactorsrangesfrom1to11with1beingthelowestriskand11beingthehighestriskwherelossesappearinevitable.However,theBank’sguidanceforassigningtheseratingsisgroupedinpairs,i.e.,riskratings1&2,3&4,5&6,7&8,and9&10.Thisapproachofgroupingratingswiththesameguidancemakestheassignmentofaspecificratingunclear.
Forexample,theratingguidanceisthesameforleverage,debtservice,andmanagementrisksforriskratings7&8,wherea“7”is“SpecialAttention‐PotentialRisksforEmergingProblems”andan“8”is“Substandard–EmergingProblems.”ThereisadifferencebetweenaSpecialAttentionLoanandaSubstandardLoan.However,theBank’scriteriaarethesame,makingthespecificratingclassificationunclearandinconsistent.SeeTable2belowformoredetails.Likewise,thelackofclarityandoverlappingcriteriaexistsforthescoringofothercorporateriskfactorsandprojectfinanceriskfactors.
Table 2: Corporate Specific Risk Factors and Rating Guidance
Risk Factor BCL Risk Rating Classes 7&8
LeverageRiskMeasureofthelevelofindebtednessandfinancialflexibility
Hightomoderateleverage.Limitedfinancialflexibility;evenandunstabletrend;ratiosessentiallythesameorslightlyworsethanaverageandmoderatelyhightohighriskofadversechangeinfinancialflexibility.
DebtServiceCoverageRiskMeasureoftheobligor’sabilitytomeetallitsdebtserviceobligations
Limitedcapacitytopayinterestanddebtmaturitieswithoutrefinancing;somewhatquestionableabilityforrefinance;evenandunstabletrendandmoderatelyhightohighriskofcasherosion.
ManagementRiskMeasureofoverallmanagementstrength,depthandintegrity
Management’sexperienceandintegrityisdeemedtobeadequate.Corporatestructureisdifficulttounderstand.Managementisbyowner’sfamilyandnoclearsuccessionplanexists.
Source: Excerpts from AMD Operating Manual, March 2009
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Finding 2B: As the overall BCL rating is generally based on a fixed weighted numerical average of individual risk factor grades, especially high risk factors may not be adequately reflected in the overall BCL rating.
EXIMBankcalculatestheoverallBCLriskratingasafixedweightednumericalaverageofindividualriskfactorgrades.Becauseofthismethodology,anespeciallyhighriskfactorthatcreatesasignificantoverallriskcanbeoffsetbylowerriskfactorsduetothefixedweightingsystem.Asaresult,theBCLratingdoesnotnecessarilyreflectthesignificantoverallriskposedbyahighriskfactor.Further,thisapproachmayunderstatetheimpactofthestrongestnegativeriskfactorsintheoverallriskassessmentandisinconsistentwithratingagencymethodology.14
Forexample,in2014and2015,projectobligor wasratedatthehighestriskfactorgradeformanagementrisk(equivalenttoaBCL11).However,sincetheBankemploysafixedweightedaverage,thissignificantriskfactorwasoffsetbyotherriskfactorsandresultedinanoverallobligorBCLriskratingof6.BasedonOIG’sresearch,peergroups,suchascommercialbanks,multilaterals,andotherfederalagencieswithasimilarlendingfunction,generallyoverweighanespeciallyhighriskfactorsothattheoverallriskratingbetterreflectsthesignificantoverallrisk.
OIGnotesthattheBankhastakensimilarapproachesinthepasttoalterweightsfortheratingmodelbasedonspecificscenarios.In2015,thesovereigncountryriskweightinEXIMBank’smodelbecameanoptionalweightiftheobligor’sindustryriskwasdeemedtobeseparatefromthecountryrisk.
Finding 2C: Sovereign support for individual borrowers is not applied consistently in the BCL risk rating process.
Sovereignsupportforborrowersgenerallydecreasestheriskofatransaction,andthereforeisconsideredintheoverallBCLriskrating.However,wefoundthatratingadjustmentstoreflectsovereignsupportwereinconsistentlyapplied,duetoalackofclearpolicy.OIGfoundthatratingadjustmentsforsovereignsupportwereappliedtoindividualriskfactorgradesonsometransactionsandtotheoverallriskratingonothers.Thisinconsistencymayleadtodivergentoutcomesandtheinabilitytoreplicatetheanalysis.
14Forexample,Moody’swillvarytheweightsgiventofinancialmetricsdependingontheoverallriskinessofaprojectasstatedinMoody’sRatingMethodologyReport,“GenericProjectFinanceMethodology,December20,2010,page7.AnotherexampleisthatS&Pwillvarytheriskweightingofcompetitivenessdependingonthecountryandtypeofindustry,asdescribedinS&P’sratingreport,“GeneralCorporateMethodology,”November19,2013,pages24‐26.Theseexamplesofdynamic,conditionalriskweightingareemployedonotherriskfactorsaswell.OIGalsoobservedthatforstandaloneratings,creditagenciesgenerallyapplyaconditionalweightincreaseonlywhenaspecificriskfactorisnegative.However,creditagenciesmayadjustthefinalratingbasedonfactorssuchasstrongcorporatesponsorsorsovereignsupport.
(b) (4)
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Forexample,in2015, ,isratedbyacreditagencywithastandaloneratingequivalentofBCL8(asub‐standardloan)andagovernment‐supportedratingequivalentofBCL5(asatisfactoryloan).WhileEXIMBank’soverallBCLratingfor isalso5,theBank’sindividualriskfactorratingsareallintherangeof5to6.Thissuggeststhattheimpactofgovernmentsupportwasappliedto ontheleveloftheindividualriskfactors.Anotherexampleis
.In2015,despitethreestraightyearsofrelativelyhigh‐riskdebtservicecoverageratios,EXIMBankrated debtservicecoverageriskattherelativelylow‐risklevelof3,indicatingthattheBankmayhaveconsideredthesovereignsupportinassessingtheindividualriskfactorfordebtservicecoverage.Incontrastto and ,EXIMBankassessedentitiessuchas asastandaloneentitywhenassessingindividualriskfactors,andthenadjustedtheoverallriskratingattheendoftheprocesstoaccountforsovereignsupport.Thiseffectivelybifurcatedthestandaloneratingandthegovernment‐supportedrating.
RECOMMENDATIONS
ToenhancetheaccuracyofEXIMBank’sBCLriskratingmodels,OIGrecommendsthattheBankundertakethefollowinginitiatives:
3. Introducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangeswheneverpossibleandre‐evaluatethesebenchmarksonscheduledintervals.
4. Adoptaconsistentmethodologyforevaluatingqualitativecriteria.Forexample,Bankguidanceshouldincludeaconsistentmethodologyforratingadjustmentsduetolevelsofsovereignsupportandclearriskratingcriteriaforindividualriskfactors.
5. Inaccordancewithratingagencybestpractices,ascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.
Management Response:
PleaseseeAppendixA,ManagementResponseandOIGEvaluation.
(b) (4)
(b) (4)
(b) (4)
(b) (4) (b) (4) (b) (4)
(b) (4)
(b) (4)
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CONCLUSION
OIGfoundthatAMDisgenerallyadheringtoitsinternalBCLrisk‐ratingpoliciesandprocedures.Initsreview,OIGdeterminedthattheriskratingreportsarecompletedinatimelymanner,addressprincipalriskssuchasindustryandcountryrisks,andcontaintherequiredcomponentssuchascovenantcompliance,CRTIandenvironmentalreports.
OIGrecommendsthatEXIMBanktakeadditionalstepstofurtheraligncurrentpolicieswithindustrybestpractices.Forexample,althoughinternalguidanceprovidesquantitativemetricstoassesskeyrisks,itlacksindustry‐specificbenchmarksforindividualriskfactorratings.OIGalsofoundthatthelackofprecisionwithcertainaspectsoftheBank’squalitativeframeworkresultedininconsistencieswithintheratingprocess.Inaddition,OIGfoundthatupdatedmacroeconomicdatasuchasforeignexchangeratesandindustryconditionsarenotconsistentlyincorporatedintoaBorrower’slatestfinancialprojections,resultinginfinancialanalysisthatmaynotfullyreflectcurrentmarketandprojectrisks.
Ourevaluationproducedseveralkeyfindingsrelatedtothepointsofinquiry:
Point of Inquiry 1: IsAMDadheringtotheriskreviewandmonitoringproceduresoutlinedincurrentpolicyguidelines?
Finding 1: OIGtestedcompliancewithvariousAMDrequirementsanddeterminedthatAMDisgenerallyadheringtothoserequirements.
Recommendations: ToenhanceEXIMBank’sriskreviewandmonitoringprocedures,OIGrecommendsthefollowing:
1. Ratingreportsstatethefindingsandresultsoftheprioryear’sMonitoringPlan.
2. Forprojectfinancings,conductanupdatedreviewofthefinancialmodelandassumptions,performsensitivitytestsasappropriate,anddocumenttheresultsintheratingreportstoincludetheeffectonrepaymentriskanddebtservicecoverage.
Management Response:
PleaseseeAppendixA,ManagementResponseandOIGEvaluation.
Point of Inquiry 2: DoestheAMDcreditriskreviewprocessresultinaccurate,timelyriskratingsandconformtoindustrybestpractices?
Finding 2: AMD’sreviewprocessproducesriskratingsthataretimelyandgenerallyalignedwithcomparableratingsfromcreditratingagencies.However,therearesomedeparturesfromindustrypracticesthatshouldbeaddressed.
Finding2A:EXIMinternalguidanceprescribeswhichmetricstousetodetermineindividualriskfactorratingsandprovidesaqualitativeframeworktoassessrisks.However,furtherrefinementsareneededforbothquantitativeandqualitativeanalysestoreflectindustrypractice.
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Finding2B:AstheoverallBCLratingisgenerallybasedonafixedweightednumericalaverageofindividualriskfactorgrades,especiallyhighriskfactorsmaynotbeadequatelyreflectedintheoverallBCLrating.
Finding2C:SovereignsupportforindividualborrowersisnotappliedconsistentlyintheBCLriskratingprocess.
Recommendations:ToenhancetheaccuracyofEXIMBank’sBCLriskratingmodels,OIGrecommendsthattheBankundertakethefollowinginitiatives:
3. Introducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangeswheneverpossibleandre‐evaluatethesebenchmarksonscheduledintervals.
4. Adoptaconsistentmethodologyforevaluatingqualitativecriteria.Forexample,Bankguidanceshouldincludeaconsistentmethodologyforratingadjustmentsduetolevelsofsovereignsupportandclearriskratingcriteriaforindividualriskfactors.
5. Inaccordancewithratingagencybestpractices,ascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.
Management Response:
PleaseseeAppendixA,ManagementResponseandOIGEvaluation.
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APPENDIX A: MANAGEMENT RESPONSE AND OIG EVALUATION
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OIG Evaluation
OnSeptember15,2016,EXIMBankprovideditsmanagementresponsetoadraftofthisreport,agreeingwiththefiverecommendations.TheresponseidentifiedtheBank’sactionstoaddresstherecommendations.OIGconsiderstheBank’sactionssufficienttoresolvethereportedrecommendations,whichwillremainopenuntilOIGdeterminesthattheagreeduponcorrectiveactionsarecompletedandresponsivetothereportedrecommendations.
TheBank’smanagementresponsetothereportedrecommendationsandOIG’sassessmentoftheresponseareasfollows:
RECOMMENDATION 1
Recommendation 1: Ratingreportsstatethefindingsandresultsoftheprioryear’sMonitoringPlan.
Management Response: EXIMBankconcurswiththisrecommendation.AMDriskratingreportswillincludethefindingsandresultsoftheprioryear’sMonitoringPlanforthatcredit.
Evaluation of Management’s Response: Management’sactionsareresponsive;therefore,therecommendationisresolvedandwillbecloseduponcompletionandverificationthattheactionshavebeenimplemented.
RECOMMENDATION 2
Recommendation 2: Forprojectfinancings,conductanupdatedreviewofthefinancialmodelandassumptions,performsensitivitytestsasappropriate,anddocumenttheresultsintheratingreportstoincludetheeffectonrepaymentriskanddebtservicecoverage.
Management Response: EXIMBankconcurswiththisrecommendation.Asappropriate,AMDstaffwillcontinuetoreviewthefinancialmodelandassumptions,furtherdevelopcapacitytoperformandtestsensitivityanalyses,anddocumenttheresultsandeffectsonrepaymentriskanddebtservicecoverageinriskratingreports.StaffwillincorporatefinancialmodelreviewandtestingguidelinesintheAMDOperatingManual.
Evaluation of Management’s Response: Management’sactionsareresponsive;therefore,therecommendationisresolvedandwillbecloseduponcompletionandverificationthattheactionshavebeenimplemented.
RECOMMENDATION 3
Recommendation 3: Introducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangeswheneverpossibleandre‐evaluatethesebenchmarksonscheduledintervals.
Management Response: EXIMBankconcurswiththisrecommendation.AMDwillevaluateandintroducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangesandupdateitsguidelinesintheAMDOperatingManual.
Evaluation of Management’s Response: Management’sactionsareresponsive;therefore,therecommendationisresolvedandwillbecloseduponcompletionandverificationthattheactionshavebeenimplemented.
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RECOMMENDATION 4
Recommendation 4: Adoptaconsistentmethodologyforevaluatingqualitativecriteria.Forexample,Bankguidanceshouldincludeaconsistentmethodologyforratingadjustmentsduetolevelsofsovereignsupportandclearriskratingcriteriaforindividualriskfactors.
Management Response: EXIMBankconcurswiththisrecommendation.AMDwillimplementaconsistentmethodologyforriskratingqualitativecriteria,assignment,andadjustmentinlinewithcurrentAMDOperatingManualguidelinesandwilldevelopfurtherguidanceonriskratingadjustmentandotherriskratingevaluationmethodologyissues.
Evaluation of Management’s Response: Management’sactionsareresponsive;therefore,therecommendationisresolvedandwillbecloseduponcompletionandverificationthattheactionshavebeenimplemented.
RECOMMENDATION 5
Recommendation 5: Inaccordancewithratingagencybestpractices,ascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.
Management Response: EXIMBankconcurswiththisrecommendation.AMDwillevaluateriskfactorgradeweightingandwilldeveloprevisedguidelinestoascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.
Evaluation of Management’s Response: Management’sactionsareresponsive;therefore,therecommendationisresolvedandwillbecloseduponcompletionandverificationthattheactionshavebeenimplemented.
Table 3: Summary of Management’s Comments on the Recommendations
Rec. No.
Corrective Action: Taken or Planned
Expected Completion
Date15
Resolved:
Yes or No16
Open or
Closed17
1. TheBankwillrequireAMD’sriskratingreportsforcreditstoincludethefindingsandresultsoftheprioryear’sMonitoringPlan.
Notargetcompletiondate
provided
Yes Open
2. TheBank,asappropriate,willcontinuetoreviewthefinancial
Notargetcompletiondate
Yes Open
15EXIMBankOIGhasrequestedtargetcompletiondatesforeachoftheoutstandingrecommendations.
16“Resolved”meansthat(1)Managementconcurswiththerecommendation,andtheplanned,ongoing,andcompletedcorrectiveactionisconsistentwiththerecommendation;or(2)Managementdoesnotconcurwiththerecommendation,butalternateactionmeetstheintentoftherecommendation.
17UpondeterminationbytheEXIMBankOIGthattheagreed‐uponcorrectiveactionhasbeencompletedandisresponsivetotherecommendation,therecommendationcanbeclosed.
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Table 3: Summary of Management’s Comments on the Recommendations
Rec. No.
Corrective Action: Taken or Planned
Expected Completion
Date15
Resolved:
Yes or No16
Open or
Closed17
modelandassumptions,developcapacityforanalysesperformanceandtesting,anddocumenttheresultsandeffectsintheriskratingreports.TheAMDOperatingManualwillbeupdatedtoincorporatethefinancialmodelreviewandtestingguidelines.
provided
3. TheBankwillimplementquantitativebenchmarksforkeyriskmetrics,withupdatestotheAMDOperatingManual.
Notargetcompletiondate
provided
Yes Open
4. TheBank’sAMDwilladoptaconsistentmethodologyforriskratingqualitativecriteria,assignment,andadjustment;anddevelopadditionalguidanceonriskratingadjustmentandotherriskratingmethodologyissues.
Notargetcompletiondate
provided
Yes Open
5. TheBankwillreviewtheweightingofriskfactorgradesandupdateitsguidelinestoascribegreaterweighttokeyriskfactors.
Notargetcompletiondate
provided
Yes Open
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APPENDIX B: LIST OF REVIEWED OBLIGORS
Table 4: Obligor Selection List (Confidential and Proprietary Information)
# Obligor Exposure as of March 31, 2016
Industry Report Type
1 Renewables Corporate2 LNG Project3 Renewable‐ Solar Project4 Renewable‐ Solar Project5 Gas‐ Integrated Corporate6 Oil&Gas
ExplorationCorporate
7 Bank Bank8 Oil Corporate9
Mining‐ Bauxite&ALManuf.
Project
10 PowerGeneration Corporate11 Satellite Corporate12 IntegratedCircuit
Manuf.Corporate
13
Renewable‐ Wind Project
14 Mining‐ Iron Corporate15 Satellite Corporate
16
FinanceCompany Corporate
17 Refinery Corporate18 Renewable‐ Wind Project19 Oil Corporate20 LNG Project21 ‐ Oil Corporate22 Mining‐ Gold Project
23 Airport Project24 Refinery Corporate25 Gas,Other Corporate26 Power,Renewables Project27 Agriculture Corporate28 Mining‐ Iron Project29 Power Project30 Chemical Project31 Refinery ProjectTotal Exposure in Sample $25,390,919,439
Source: EXIM Bank, Exposure as of 3/31/2016
(b) (4) (b) (4)(b) (4) (b) (4)(b) (4) (b) (4)(b) (4) (b) (4)(b) (4)(b) (4)
(b) (4)(b) (4)(b) (4)
(b) (4)(b) (4)(b) (4)
(b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4)(b) (4)(b) (4)(b) (4)(b) (4)(b) (4)
(b) (4)(b) (4)(b) (4)(b) (4)(b) (4)(b) (4)(b) (4)
(b) (4)(b) (4)
(b) (4)(b) (4)
(b) (4)(b) (4)(b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4)(b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4)(b) (4)(b) (4)
(b) (4)(b) (4)
(b) (4)(b) (4)
(b) (4)(b) (4)
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APPENDIX C: DESCRIPTION OF RATING REPORT AND RISK FACTORS EachEXIMBank,CorporateandProjectratingreportconsistsofthefollowingstandardizedsections:
• BorrowerDescriptionandLoanInformation:Basiccompanyandloaninformationsuchascountry,sector,loanprogram,andamountauthorized
• RiskRatingRecommendation:Mostrecentrating,outlook,andbriefcommentaryonriskratingjustification
• BackgroundandUpdate/NewExposureandTransactionDevelopments:Briefdescriptionoftransactionhistoryandmostrecentissues
• GeneralRiskFactorAnalysis:Thissectiondiffersbyreporttype.o ForBankandCorporatereports,thegeneralriskfactorsarecountryriskand
industry/competitivepositionrisk.CountryriskratingisbasedontheresultsoftheInteragencyCountryRiskAssessmentSystem(“ICRAS”)process.
o ForProjectreports,thegeneralriskfactorsarecountryriskandmarket/businessrisk.
• PrimarySourceofRepayment(“PSOR”)SpecificRiskFactorAnalysis:Thissectiondiffersbyreporttype.Someriskfactorsincludemeasurementofrequiredfinancialratios,suchastotalliabilities/tangiblenetworthforleverageandUniformCreditAnalysis(“UCA”)cashflowcoveragefordebtservicecoverage.o ForBankreports,thePSORspecificriskfactorsareearningstrength,liquidity,
capitaladequacy,assetqualityandmanagementrisk.o ForCorporatereports,thePSORspecificriskfactorsareoperating,liquidity,
leverage,debtservicecoverageandmanagementrisk.o ForProjectreports,thePSORspecificriskfactorsarecashflow/liquidity,
construction/technical,counterparty,legal&contractualandmanagementrisk.• StructuralCreditEnhancementsandRiskAdjustment:Discussiononspecificcredit
enhancements,suchasguaranteesandsovereignadjustments,ifapplicable• EXIMBankPolicyConsideration:DiscussiononCRTIcompliance• MonitoringPlan:discussionofmonitoringfrequency,keyissues,andstepsforrisk
management• RiskRating:Riskratingchartthatcapturesallriskfactorgradesforgeneralrisk
factorsandPSORspecificriskfactorsandthefinalEXIMBCLscorefortheobligor.Beginningin2015,theriskratingchartalsoincludesaswitchthatturnsoffcountryriskweightwhentheobligor’screditriskisdeterminedtobenotdependentoncountryrisk.
• EXIMBankTeamandApproval:Chainofapprovalanddates
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Source: AMD Optimization Manual, May 2010
Table 5: Bank, Corporate and Project Risk Rating Models Risk Factors and Weights
(Confidential and Proprietary Information)(b) (4)
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APPENDIX D: DETERMINATION OF OBLIGOR BCL RISK RATING
Table 6: Bank Risk Rating Process (Confidential and Proprietary Information)
Source: AMD Operating Manual and Optimization Manual
(b) (4)
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APPENDIX E: CORPORATE RISK RATING CHART
Source: AMD Operating Manual, March 2009
(b) (4)
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Source: AMD’s Operating Manual, March 2009 (b) (7)(E)
(b) (4)
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APPENDIX F: OIG MONITORING PLAN OBSERVATIONS Table 7: OIG Monitoring Plan Observations
Obligor Non follow‐up of Prior Year’s Monitoring Plan
The2014MonitoringPlanhighlightedthefollowingkeyissuesthatwerenotdocumentedinthe2015ratingreport:18 ConfirmationbytheBanks’consultantthat aresufficient
overthelifeoftheloans. Performfurtherduediligenceonthemismatchof . Conductongoingreviewofthefinancialmodel,makingadjustmentsfor
projectdevelopments.
The2014MonitoringPlanof calledfor:“prepareananalysisofthelikelyimpacton futurefinancialconditionbyadjustingthemodelforpossiblehigherthanoriginallyprojectedcostsofpurchasingahedgeontheremainingdebtin2017.”The2015reportdidnotstatetheresultandthefinancialprojectionsexcludedasensitivityanalysis.
AccordingtotheBoardMemo,theDOJwasinvestigating
forunrelatedallegedactsofbriberypendingsince2008;19however,theMonitoringPlanexcludedthisinvestigationasaCRTIriskandnofurtherduediligencewasreportedasconductedintheratingreport.20
ThefollowingkeyIssueswerecitedintheMonitoringPlansof2013and2014butnotevaluatedinsubsequentreports: In2013,theMonitoringPlanrequiredtracking plantoraise
,statingsuchanincreasewouldsignificantlybenefitthecompany.The2014RatingReportmadenomentionoftheresultorimpactonthecompany,althoughunreferencedattachmentsaffirmedthattheplanwasbeingtrackedandthattherehadbeennochangein
In2014,theMonitoringPlanincludedtheclosemonitoringofthe
company’s toimproveproductivityofthe .The2015ratingreportmadenomentionoftheresultorimpactonthecompany,althoughunreferencedattachmentsaffirmedthattheplanwasbeingtrackedandthatthestatusquoof hadnotchanged.
Source: OIG observations from EXIM risk rating reports
18AccordingtoEXIMBank,thesefactorswereorwillbeaddressedaspartofthescheduledtimingpursuanttothetransactiondocumentationrequirements.Forexample,extensiveduediligenceonthe
wasconductedinthelatterhalfof2015aspartoftheBank’smultidivisional
19
20Aspartofthe2016riskratingprocess,aCRTIreviewoccurredonthistransactionand wasclearedthroughthisreview.
(b) (4)
(b) (4)
(b) (4)
(b) (4) (b) (4)
(b) (4)
(b) (4)
(b) (4) (b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)(b) (4)
(b) (4)
(b) (4)
(b) (4)
(b) (4)
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ACKNOWLEDGEMENTS ThisreportwaspreparedbyOfficeofInspectionsandEvaluations,OfficeofInspectorGeneralfortheExport‐ImportBankoftheUnitedStates.SeveralindividualscontributedtothisreportincludingDonaldReid,SeniorInspector;DanielWong,Inspector;JenniferFain,DeputyAIGIE;andMarkThorum,AIGIE.
OfficeofInspectorGeneralExport‐ImportBankoftheUnitedStates811VermontAvenue,NWWashington,DC20571202‐565‐3908http://www.EXIM.gov/about/oig