How should the minimum coverage for corporate loans from sectors other than Energy Generation be interpreted? The standard states that companies other than those in the fossil fuel sector are to have a minimum coverage of 67%. For example, in the corporate loan portfolio, 20% are companies from the power generation sector of which 10% are fossil fuel companies. In this case, the 67% is to be counted: a) with 100% including companies in the power generation and fossil fuel sectors b) with 90% excluding companies in the power generation sector that are not fossil fuel companies c) with 80% excluding all companies in the power generation and fossil fuel sectors. Please confirm which approach should be used.
Please see the draft Version 2 of the Near-Term Financial Sector SBT Guidance for proposed clarifications in Table 5.2. In it, the 67% minimum coverage requirement is calculated separately from the 100% requirement for electricity generation.
OK, thank you for your answer.
In this case, the 67% coverage for long-term corporate loans is calculated on the basis of: 100% including the fossil fuels sector, or 100% excluding the fossil fuels sector?
Ok, I understand. Only this refers to the latest version of the standard, and there is no such detailed explanation in the current standard.
Please confirm that in the current version of the standard, in corporate loans for long-term debt, 100% coverage should include Fossil fuels companies and other sectors (excluding power generation and CRE).
Under Version 1.1, the minimum coverage requirements for long-term corporate loans are:
- 100% for electricity generation companies;
- 95% for fossil fuel companies;
- 67% for real estate companies; and
- 67% for companies in all sectors other than the above.
Dear Howard,
In the new version, as you mentioned, there is an updated way to calculate coverage for corporate loans. The footnote confuses me “The 67% minimum coverage requirement should strictly apply to lng-term loans to listed companies in all sectors other than the electricity generation and fossil fuel sector”.
Conclusion 1: you need to cover 67% of your listed non power, non fossil fuel exposure.
The next sentence says “FIs, however, may also include any of the following in the calculation to determine if they have met this 67% minimum” and then a list follows listing electricity generation loans and fossil fuel loans among others.
Conclusion 2: it’s not so strict as in the previous sentence, you just have to cover 67% of listed loans. If fossil fuel companies and electricity companies both make up 67% of your total listed portfolio, you don’t need to cover any other sector.
Which of the two conclusions is correct?
Thank you for your consideration.
Hi Arend, please note that “should” indicates a recommendation while “shall” indicates a requirement and “may” indicates an option. Hence, we recommend Conclusion 1 but Conclusion 2 is allowed (if your targets cover those two sectors that make up 67% of your portfolio). However, please also note that Version 2 has not been finalized yet and is subject to revisions.