export‐import bank – office of inspector general - exim

EXPORT‐IMPORTBANK–OFFICEOFINSPECTORGENERAL

OFFICEOFINSPECTORGENERALEXPORT‐IMPORTBANKoftheUNITEDSTATES

ReportontheAssetManagementDivision’sRiskRatingProcess

September23,2016

OIG‐EV‐16‐02


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


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

`

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.


5

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


6

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



7

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



8

Term Description

Origination EXIMBank’sTradeFinanceDivisionandStructuredandProjectFinanceDivision.Thesedivisionsareresponsiblefortheorigination(i.e.,structuring,obtainingcreditapprovalanddocumentingthetransaction)ofallmedium‐andlong‐termtransactionsexcludingtransportationandaircraft.

PMCG PortfolioMonitoringandControlGroup,EXIMBankAMDPCPM ProjectandCorporatePortfolioManagementGroup,EXIMBank

AMDTPMD TransportationPortfolioManagementDivision,EXIMBank



9

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;



10

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.



11

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.



12

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.



13

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



14

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.



15

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)



16

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)



17

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



18

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)



19

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)



20

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.

1234567891011

‐4 ‐2 0 2 4 6 8 10

DSCRiskFactorGrade

DebtServiceRatio(UCACashFlowCoverage)

(b) (4)

(b) (4)

(b) (4)(b) (4)

(b) (4)



21

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



22

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)



23

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.


PleaseseeAppendixA,ManagementResponseandOIGEvaluation.

(b) (4)

(b) (4)

(b) (4)

(b) (4) (b) (4) (b) (4)

(b) (4)

(b) (4)



24

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.



Point of Inquiry 2: DoestheAMDcreditriskreviewprocessresultinaccurate,timelyriskratingsandconformtoindustrybestpractices?

Finding 2: AMD’sreviewprocessproducesriskratingsthataretimelyandgenerallyalignedwithcomparableratingsfromcreditratingagencies.However,therearesomedeparturesfromindustrypracticesthatshouldbeaddressed.

Finding2A:EXIMinternalguidanceprescribeswhichmetricstousetodetermineindividualriskfactorratingsandprovidesaqualitativeframeworktoassessrisks.However,furtherrefinementsareneededforbothquantitativeandqualitativeanalysestoreflectindustrypractice.



25

Finding2B:AstheoverallBCLratingisgenerallybasedonafixedweightednumericalaverageofindividualriskfactorgrades,especiallyhighriskfactorsmaynotbeadequatelyreflectedintheoverallBCLrating.

Finding2C:SovereignsupportforindividualborrowersisnotappliedconsistentlyintheBCLriskratingprocess.

Recommendations:ToenhancetheaccuracyofEXIMBank’sBCLriskratingmodels,OIGrecommendsthattheBankundertakethefollowinginitiatives:

3. Introducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangeswheneverpossibleandre‐evaluatethesebenchmarksonscheduledintervals.

4. Adoptaconsistentmethodologyforevaluatingqualitativecriteria.Forexample,Bankguidanceshouldincludeaconsistentmethodologyforratingadjustmentsduetolevelsofsovereignsupportandclearriskratingcriteriaforindividualriskfactors.

5. Inaccordancewithratingagencybestpractices,ascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.





26

APPENDIX A: MANAGEMENT RESPONSE AND OIG EVALUATION



27



28



29

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.


RECOMMENDATION 3

Recommendation 3: Introducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangeswheneverpossibleandre‐evaluatethesebenchmarksonscheduledintervals.

Management Response: EXIMBankconcurswiththisrecommendation.AMDwillevaluateandintroducequantitativebenchmarksforkeyriskmetricsincludingsectorspecificrangesandupdateitsguidelinesintheAMDOperatingManual.




30

RECOMMENDATION 4

Recommendation 4: Adoptaconsistentmethodologyforevaluatingqualitativecriteria.Forexample,Bankguidanceshouldincludeaconsistentmethodologyforratingadjustmentsduetolevelsofsovereignsupportandclearriskratingcriteriaforindividualriskfactors.

Management Response: EXIMBankconcurswiththisrecommendation.AMDwillimplementaconsistentmethodologyforriskratingqualitativecriteria,assignment,andadjustmentinlinewithcurrentAMDOperatingManualguidelinesandwilldevelopfurtherguidanceonriskratingadjustmentandotherriskratingevaluationmethodologyissues.


RECOMMENDATION 5

Recommendation 5: Inaccordancewithratingagencybestpractices,ascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.

Management Response: EXIMBankconcurswiththisrecommendation.AMDwillevaluateriskfactorgradeweightingandwilldeveloprevisedguidelinestoascribegreaterweighttokeyriskfactorswhenthoserisksrepresentamaterialadverserisktotheoverallcreditqualityofthetransaction.


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


Yes Open

15EXIMBankOIGhasrequestedtargetcompletiondatesforeachoftheoutstandingrecommendations.

16“Resolved”meansthat(1)Managementconcurswiththerecommendation,andtheplanned,ongoing,andcompletedcorrectiveactionisconsistentwiththerecommendation;or(2)Managementdoesnotconcurwiththerecommendation,butalternateactionmeetstheintentoftherecommendation.

17UpondeterminationbytheEXIMBankOIGthattheagreed‐uponcorrectiveactionhasbeencompletedandisresponsivetotherecommendation,therecommendationcanbeclosed.



31

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.


provided

Yes Open

4. TheBank’sAMDwilladoptaconsistentmethodologyforriskratingqualitativecriteria,assignment,andadjustment;anddevelopadditionalguidanceonriskratingadjustmentandotherriskratingmethodologyissues.


provided

Yes Open

5. TheBankwillreviewtheweightingofriskfactorgradesandupdateitsguidelinestoascribegreaterweighttokeyriskfactors.


provided

Yes Open



32

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)



33

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



34

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)



35

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)



36

APPENDIX E: CORPORATE RISK RATING CHART

Source: AMD Operating Manual, March 2009

(b) (4)



37

Source: AMD’s Operating Manual, March 2009 (b) (7)(E)

(b) (4)



38

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)



39

ACKNOWLEDGEMENTS ThisreportwaspreparedbyOfficeofInspectionsandEvaluations,OfficeofInspectorGeneralfortheExport‐ImportBankoftheUnitedStates.SeveralindividualscontributedtothisreportincludingDonaldReid,SeniorInspector;DanielWong,Inspector;JenniferFain,DeputyAIGIE;andMarkThorum,AIGIE.

OfficeofInspectorGeneralExport‐ImportBankoftheUnitedStates811VermontAvenue,NWWashington,DC20571202‐565‐3908http://www.EXIM.gov/about/oig

export‐import bank – office of inspector general - exim

Documents