Ensure that a formal, consistent, and transparent process is in place that governs the use of the program in the event of covenant breaches on the part of issuing banks.
5. IEG identified numerous cases where GTFP guarantees were issued at a time when the issuing bank was in breach of at least one covenant. In other cases, lines were frozen or suspended in the event of covenant breaches. A clear and transparent process to govern use of the program in the event of a breach of covenant in order to ensure that IFC's development contribution through covenant enforcement is maintained as well as to protect IFC against potential losses was not present.
Original Response: Agreed: IFC has completed a full analysis of the breaches and has undertaken the necessary steps including issuing waivers and related internal processes in concert with each regional portfolio manager. As with all IFC portfolio investments, the Program has had an established practice where, portfolio managers assess materiality of breaches, and issue waivers where needed, as well as notifying the GTFP team when to freeze or drop a GTFP line, subject to the materiality of the breach. There have been numerous instances where GTFP has frozen lines in Vietnam, Bangladesh, Belarus, Ecuador, Sierra Leone, etc. because of covenant breaches - as well as suspending banks from the program. While in some instances portfolio communication has occurred informally, it is indeed important to immediately develop a formal, consistent, transparent process where portfolio informs the GTFP team quarterly of GTFP banks that have breaches, with a documented recommendation for each of what action, if any, should be taken. It should be noted that in no instance did GTFP ever contravene Portfolio's instructions, and while new business was conducted with GTFP counterparties that were in covenant breach, due to the nature of the risks associated with the trade finance product itself, zero losses have been incurred in the $22 billion in trade that GTFP has directly supported. The formalization of the treatment of GTFP client covenant breaches has already been implemented.
IFC Action 10: Analysis of breaches and document internal process. Ensure related parties follow procedure
Indicator: Procedure document completed, distributed
Target: Procedure document completed, distributed
Timeline: 1Q15
IEG rates the Implementation Progress as Complete and Implementation Status as "Inactive all Actions are Completed", given the fact that the FY15 Management update provided sufficient evidence in terms of establishing new procedures and guidelines. Also, IEG acknowledges that sufficient examples were provided on the GTFP Annual Review process in the MNA region regarding covenant breaches by issuing banks and the appropriate actions taken by IFC Portfolio teams. IEG finds this evidence sufficient enough to upgrade the Implementation Progress as Complete and Implementation Status as "Inactive all Actions are Completed".
In the absence of information from the Management, IEG keeps the rating on Implementation Progress as Substantial and Implementation Status as Active (Rated). In its FY15 Update, IEG acknowledged that substantial progress has been made in terms of establishing new procedures and guidelines to facilitate migration to the new set of five streamlined covenants for Issuing Banks in the GTFP network. However, as indicated by IEG in its FY15 Update, there is not concrete evidence on whether these procedures and guidelines are being followed consistently across all the Regions. Furthermore, as evidence, IEG requested from the Management for information on the number of GTFP transactions that were processed (from the time these procedures were effective until to-date) were GTFP Clients were in breach of at least one covenant. This information would enable IEG to determine whether there has been a drop in the number of such cases from 1,200 cases during 2010 and 2012 reported in the GTFP report. However, this information was not provided by the Management to IEG. Furthermore, in the absence of information from the Management in FY16, IEG keeps the rating for Implementation Progress and Implementation Status as Unchanged.
A review of internal documents provided by IFC indicates that significant steps have been taken to establish measures, controls and review processes of GTFP facilities and covenant changes. IEG also reviewed examples of issuing banks in the MNA region that were in breach of covenant(s) and the action taken by the GTFP team. Thus IEG acknowledges that substantial progress has been made in terms of establishing new procedures and guidelines to facilitate migration to the new set of five streamlined covenants for issuing banks in the GTFP network. However, there is no concrete evidence on whether these procedures and guidelines are being followed consistently across all the regions. That is, in order to change the status of this recommendation to High, IEG needs information on the number of cases of GTFP transactions that were processed (from the time these procedures were effective until to-date) were clients were in breach of at least one covenant. For example, in IEGâs GTFP report there were 1,200 such cases over the period 2010-12. A significant drop in this indicator would indicate that the new procedures are being followed strictly.
New procedure has been established, including guidelines to facilitate migration to the new set of five streamlined covenants for GTFP clients and enhance coordination between investment and trade teams. A memo, summarizing all the procedures, was sent to all portfolio staff and management in June 2013. It included also communicating covenant breaches and actions to the trade team, the retroactive migration of existing GTFP clients to streamlined set of covenants, the Implementation of the new Legal agreements, the Process for permanent GTFP facility enhancement over the currently approved limits / tenor, and the Process for temporary GTFP facility enhancement over the currently approved limits / tenor. A summary of the new procedures that have been established was provided last year.
Based on the evidence from IFC (email from IFC's Portfolio Officers, Credit Department and Trade Finance), there is evidemce of the review process by IFC's Portfolio teams regarding convenant breaches.
New Procedure established. Documentation of said procedure in progress.