Specialised lendingSpecialised lending

Specialised lending

1. A corporate exposure must be classified as a specialised lending exposure if it possesses the following characteristics, either in legal form or economic substance:

   1. the exposure satisfies the definition of object finance, project finance or commodities finance as set out in paragraph 27 of this Attachment, is not a property exposure and is not secured by derivatives or other securities such as bonds or equities;
   2. the exposure is typically to an entity that was created specifically to finance or operate physical assets;
   3. other than the income that it receives from the assets being financed, the borrowing entity has little or no other material assets or activities, and therefore has little or no independent capacity to repay the obligation;
   4. the terms of the obligation give the ADI a substantial degree of control over the assets and the income that it generates; and
   5. as a result of the characteristics detailed in 26(a) to 26(d) of this paragraph, the primary source of repayment of the obligation is the income generated by the assets rather than the independent capacity of a broader commercial enterprise.

2. The specialised lending asset class includes the following three sub-classes:

   1. project finance, refers to the method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the loan;
   2. object finance, refers to the method of funding the acquisition of equipment where the repayment of the loan is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender; and
   3. commodities finance, refers to short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities, where the loan will be repaid from the proceeds of the sale of the commodity and the borrower has no independent capacity to repay the loan.

3. Where an issue-specific external credit rating is available for a specialised lending exposure, an ADI must apply the risk weights in Table 10.

4. An ADI must apply the risk weights in Table 13 to its unrated specialised lending exposures, including any exposures with an issuer-specific external credit rating.

5. Risk weights for unrated specialised lending exposures