Beyond what is currently in the criteria, please can you provide information on the following:
• Provide further definition/explanation of the asset class Corporate Loan
• Provide further definition/explanation of the asset class Private equity, debt & VC
• Explain the difference between electricity project finance and electricity corporate loan
These questions are in the context of a financial institution where the majority of their private debt exposure consists of loans provided to private companies. In this case, where should such private debt be allocated?
Similarly, where should private debt for private real estate companies be classified? How is this mutually exclusive to commercial real estate loans?
Thanks for your questions.
- The corporate loan asset class is specific to banks, and refers to on-balance sheet loans and lines of credit with unknown use of proceeds to businesses, nonprofits, and any other structure of
organization. Revolving credit facilities and overdraft facilities as well as business loans secured by real estate, such as commercial real estate– secured lines of credit, are also included in the business loans asset class.
- Private debt involves the lending activity carried out by entities other than banks
- Private equity are equity securities of companies that have not gone public (i.e. are not listed on a public exchange) (Source: Private equity laid bare)
- Venture capitals are professional equity co-invested with the entrepreneur to fund an early stage (seed and start-up) or expansion venture.(Source: Industry Glossary - American Investment Council)
- On your question about power generation loan vs. project finance, project finance is defined as on-balance sheet loan or equity (private) with known use of proceeds that are designated for a clearly defined activity or set of activities, such as the construction of a gas-fired power plant, a wind or solar project, or energy efficiency projects.
From your description, if the FI is not a bank, their debt financing should be included in Private Debt, including debt to private real estate companies.
Please can you expand more as to the difference between banks and non bank FI’s?
Why is it that corporate loans are specific to banks? If classed as a non bank, would a corporate loan to companies (whether listed or unlisted) always be classed as ‘private debt’?
Could you please let me know what type of financial institution it is? Could you describe to me further what this FI’s private debt activity entails?
It is a financial services and asset management company, with products and services including investment management, lifetime mortgages, pensions, annuities, and life assurance.
Based on the above description, would all ‘lending’ activity fall under private debt?
To provide further clarification on this topic:
- Corporate loan: lending activities by financial institutions with banking licenses(mostly banks)
- Private debt: all lending activities unless they falls under activities related to a banking license.
Hi there, I had a follow up to this thread specifically about the “Private Debt” distinction. In the comment above, there seems to be no distinction made between non-bank lending activities with a private company as the counterparty vs non-bank lending activities with a public company as the counterparty.
However, footnote F on page 58 of the SBTi for FS guidance states that “Private debt refers to debt to private companies whose shares are not traded on a stock market.”
Does this mean that non-bank lending activities with a public company as the counterparty fall under the “public debt” criteria? Or is this still considered private debt? Or does it go someplace else?
Thank you for your help
Thanks for following up. Below are our updated definitions for private debt and corporate loan which hopefully provides more clarity:
- Corporate loan: On-balance sheet loan given to private and public companies by financial institutions with banking licenses
- Private credit, or private debt, is the investment of capital to acquire the debt of companies (as opposed to acquiring equity). In the context of SBTi finance, they are issued by any FIs without banking licenses.
I have a follow up query as well. Please can you confirm, for Banks, for corporate loans, is it acceptable to also include off-balance sheet undrawn exposures for RCFs? The reasoning for including these off-balance sheet, undrawn exposures is that the bank has a legal obligation to provide funds up to the RCF full amount if the client needs to draw that.
The minimum coverage requirements for corporate loans is min. 67% of base year corporate lending (loan value), can this be adjusted to account for 67% of the exposure on and off-balance sheet?
Hi there - just wondering if there were any thoughts on the above query? Thanks!
I think it’s fair to liken RCF with a line of credit or some other form of short-term debt. As you have noted, table 5.2 in the guidance makes it optional for FIs to include these asset classes in its targets, ie it is up to the FI to decide. So there is no clear requirement from SBTi regarding undrawn portions of credit. However, we see increasingly that banks want to include the total limit of the facility. See for example Barclays BlueTrack.
If the FI is an insurer with an asset management division then would their commercial real estate be considered private debt and thus optional? If it’s optional, would they then get to choose the coverage level if they do report?
This would be in scope as asset management is in scope and as such mandatory. Please see table 5.2 on p 55 in the SBTi guidance for FIs.
Please can i confirm that this is a position change from the SBTi?
Originally it was my understanding that an insurer with an asset management division would sit under private debt? Is there now a shifted focus to asset class over the type of financial institution (i.e. bank vs non bank)?
SBTi for Finance focus has always been on the asset class and not on the type of institutions. We have provided particular criteria and guidance for some types of institutions for certain situations, but the main focus is on asset classes. So, this is not a position change.
Thanks for confirming. In the above chain the below was stated … does this still remain the same?
“Corporate loan: lending activities by financial institutions with banking licenses(mostly banks).
Private debt: all lending activities unless they falls under activities related to a banking license.”
Thank you for the provided inputs.
As an asset manager, we hold within our private debt portfolio project finance relating to electricity generation. According to table 5.2 in the SBTi FI Guidance document, project finance is a mandatory activity for target setting, while private debt is not. Can you confirm that we therefore do not have to set targets on our financing projects?
Thank you very much for your guidance.
Thank you for engaging with the community.
I understand the focus on the asset class. However, we as an asset manager hold commercial real estate loans as part of private debt. Is it then also mandatory for us to set targets on private commercial real estate loans, or is this out of scope?
(cf. also my question below which goes into the same direction. Unfortunately, I was not able to find further guidance on what applies if investments could be assigned to multiple asset classes/activities).
Thank you very much for your support.
No, the focus for SBTi is primarily on the asset class.
Correct, and this is what you should follow, primarily.
These are in scope.
Thank you very much for your answer, Donald, much appreciated.
“Correct, and this is what you should follow, primarily.”
Are you confirming that we have to set targets for electricity generation project finance and commercial real estate loans irrespective of the fact that it is private finance?