Instruction No. 38/2009 on the Approval of Guarantors for Public Savings Operations on the UMOA Regional Financial Market

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UNION MONETAIRE OUEST AFRICAINE crepmf CONSEIL REGIONAL DE L'EPARGNE PUBLIQUE ET DES MARCHES FINANCIERS

INSTRUCTION N°38 / 2009
ON THE APPROVAL OF GUARANTORS IN THE CONTEXT OF PUBLIC SAVINGS OPERATIONS ON THE UMOA REGIONAL FINANCIAL MARKET

The Regional Council for Public Savings and Financial Markets,

Having regard to the Convention establishing the Regional Council for Public Savings and Financial Markets (hereinafter "the Council");

Having regard to the Annex to the Convention on the Composition, Organization, Operation and Powers of the Council;

Having regard to the General Regulation on the Organization, Operation and Supervision of the UMOA regional financial market;

Having regard to Instruction No. 36/2009 on public savings;

Having regard to the resolutions of the Council at its ordinary session held on 26 October 2009;

R E S O L V E D

Article 1: Object

This Instruction aims to define the conditions for the approval of guarantors for the issuance of guarantees admitted within the framework of public savings operations on the UMOA financial market.

Article 2: Eligibility Criteria

The following legal entities are authorized, after approval by the Regional Council, to act as guarantors in public savings operations on the UMOA financial market:

• international and regional financial organizations;
• public development assistance or cooperation institutions authorized by treaty, convention or agreement;
• and any other entity approved by the Regional Council.

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By way of derogation, credit institutions operating within the UMOA are automatically authorized to issue guarantees admitted in public savings operations on the financial market. However, the Regional Council's acceptance of their guarantees for a financial operation is subject to compliance by said institutions with the specifications annexed to this Instruction (hereinafter "the Specifications").

Article 3: Approval File

Any guarantor seeking the Regional Council's approval for guaranteeing securities issued via public savings on the UMOA financial market must provide it with the following documents:

(a) constitutive instruments; (b) composition of governing bodies, list and curricula vitae of executives; (c) certified financial statements for the last three fiscal years, accompanied by audit reports; (d) the last three reports issued by a rating agency approved by the Regional Council; (e) documents describing:

• the equity position;
• the organization and resources of the department responsible for monitoring guarantee commitments;
• the organization and resources implemented to ensure effective internal control;
• the list and amount of commitments undertaken;
• provisions to promote sustainable development and prevent money laundering;

(f) a letter (i) certifying the guarantor's compliance with the annexed Specifications and (ii) containing its commitment to respect said specifications; (g) and any other supplementary document requested by the Regional Council.

Article 4: Guarantor Approval Decision

The Regional Council's approval is granted based on the guarantor's compliance with the Specifications and its capacity to respond promptly and timely to any potential guarantee calls arising from its commitments.

The approval decision, notified to the guarantor, is published.

The approval decision does not constitute advance acceptance of all guarantees to be issued by guarantors.

Any modification affecting the characteristic elements listed in the approval file must be submitted to the prior authorization of the Regional Council.

Article 5: Supervisory Powers of the Regional Council

The Regional Council is invested with all inspection powers to ensure guarantors comply with the clauses and conditions of the Specifications. In this regard, it may request the submission of any document or information deemed useful for fulfilling its mission.

The Regional Council conducts, as necessary, any inquiries into alleged guarantor breaches.

The Regional Council may take the following measures against a guarantor in case of non-compliance:

a) withdraw its approval; b) adopt appropriate measures to ensure continued compliance with legal obligations; c) publish non-compliance with the obligations set out in this Instruction; d) refer to competent judicial authorities for potential criminal proceedings, as applicable.

Article 6: Transitional Provision

Guarantors have a period of two years from the entry into force of this Instruction to obtain rating and submit their rating reports to the Regional Council.

Article 7: Final Provision

This Instruction, which will be published as necessary, enters into force from the date of its signature.

Done at Abidjan, on 23 November 2009

The President Léné SEBGO

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SPECIFICATIONS FOR GUARANTORS

1. CONTEXT

The main guarantors of bond loans currently include Banks and Financial Institutions subject to UMOA banking regulation, issuers' parent companies, and regional and international financial organizations, some of which lack an independent regulatory authority.

Consequently, the financial policies and accounting and prudential practices of guarantors are not uniform. Among other things, (i) the quality of issued guarantees is not necessarily homogeneous and (ii) the approval of certain guarantors by the Regional Council for Public Savings and Financial Markets (CREPMF) may require an in-depth assessment of their medium and long-term solvency, which increases the burden of loan issuance procedures.

To harmonize financial policies as well as accounting and prudential practices of guarantors, CREPMF has established these Specifications to which guarantors other than Union banks and financial institutions (the "Guarantors") must comply to be authorized to guarantee bond loans.

The rules and requirements contained in these Specifications converge with UMOA banking regulation. The assessment of guarantees issued by Union banks and financial institutions is made in accordance with its provisions.

2. OBJECT

Given that the reliability and solvency of guaranteeing organizations are fundamental, these Specifications aim to specify the requirements that Guarantors must meet.

CREPMF determines the eligibility of these Guarantors based on criteria depending on their nature and main activities.

3. REQUIREMENTS

3.1 Legal Form and Regulation

(a) Guarantors must be legal entities:

(1) private or public companies; or

(2) public bodies created by decree or treaty;

(b) Guarantors' management rules must give particular attention to good governance, the promotion of sustainable development, and the prevention of money laundering;

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(c) Guarantors must comply with their Articles of Association, policies promulgated by their governing bodies, and rules governing their activities; and

(d) In case of contradiction between the provisions of these Specifications and those established by the Guarantor's governing bodies or regulatory authorities, the Specifications' provisions prevail regarding the eligibility of the Guarantor to guarantee bond loans on the UMOA financial market.

3.2 Experience and Technical Resources

Guarantors must:

(a) benefit from experience in medium and long-term financing or guaranteeing of investment projects located in UMOA countries, or, failing that, other Sub-Saharan African countries. For new companies, their promoters must demonstrate such experience;

(b) possess a competent operational unit to evaluate, structure, implement and supervise investment loans -or guarantees of such loans- within the issuer's field of activity; and

(c) have an internal control system enabling, in particular, to (i) verify compliance with policies, provisions and regulations applicable to their activities, and (ii) ensure the quality of financial and accounting information.

3.3 Share Capital and Equity

(a) The share capital of Guarantors must comply with the minimum amounts stipulated by UMOA banking regulation;

(b) The actual equity of any Guarantor must be at least equal to its minimum share capital;

(c) The total amount of tangible fixed assets and permanent participations of any Guarantor (including, where applicable, its investments in branches) cannot exceed the amount of its actual equity;

(d) The total amount of loans extended by a Guarantor to persons participating in its management, administration, directorship, control or operation cannot exceed the equity percentages indicated below:

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(i) 20% for Guarantors whose activities are mainly oriented towards short-term financing and guarantees.

(ii) 8% for Guarantors whose activities are mainly oriented towards medium and long-term financing and guarantees.

These provisions also apply to natural and legal persons who hold or control 10% or more of voting rights within the Guarantor.

3.4 Risk Coverage

Guarantors must maintain at all times a minimum "equity-to-risk" ratio. This ratio comprises the Guarantor's actual equity in the numerator and its net risks in the denominator.

(a) Actual equity consists of "core equity" (mainly capital, reserves, provisions for general risks and retained earnings), and "complementary equity" (mainly investment grants, blocked shareholder accounts, and relatively long-term subordinated securities/bonds).

(b) Net risks are determined as the sum of on-balance sheet and off-balance sheet risks, adjusted by weighting factors ranging from 0% to 100%, applied as follows:

(i) 0% to liquid assets and securities/receivables for which the counterparty is a State or Central Bank;

(ii) 20% to receivables and securities guaranteed by a State, and securities, loans and guarantees for which the counterparty is a bank or financial institution;

(iii) 50% to customer loans secured by firm mortgages; guarantee commitments to customers (other than for loan repayment); and credits benefiting from Central Bank classification agreement; and

(iv) 100% to other distributed loans, guarantees for loan repayment contracted by customers, non-performing receivables (net of provisions), securities issued (or guaranteed) by entities other than States, and fixed/diversified assets.

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(c) The minimum "equity-to-risk" ratios to be observed are as follows:

(i) 8% for Guarantors whose activities are mainly oriented towards short-term financing and guarantees; and

(ii) 20% for Guarantors whose activities are mainly oriented towards medium and long-term financing and guarantees.

The potential commitment of Guarantors, all risks combined, and after weighting, ranges between 5 and 12.5 times the amount of their actual equity, depending on the inherent risks of their commitments.

3.5 Coverage of Assets by Stable Resources

To limit transformation risk, Guarantors must finance at least 75% of their fixed assets and other medium and long-term commitments (investments, loans, other facilities and other assets whose recovery cannot be obtained before two years or more) with stable resources (actual equity and bonds, deposits and other resources having a residual maturity of more than two years).

3.6 Risk Concentration

Guarantors must limit the risks they take on a single beneficiary, as well as on the number of beneficiaries receiving high-amount facilities (major beneficiaries).

Unless a derogation is granted by CREPMF:

(a) The total amount of risks taken on a single beneficiary is limited to the following percentages of the Guarantor's actual equity:

(i) 75% for Guarantors whose activities are mainly oriented towards short-term financing and guarantees; and

(ii) 30% for Guarantors whose activities are mainly oriented towards medium and long-term financing and guarantees.

(b) Risks taken on major beneficiaries are capped as follows:

(i) for Guarantors whose activities are mainly oriented towards short-term financing and guarantees: the global volume of risks individually reaching 25% of the Guarantor's actual equity is limited to 8 times the amount of actual equity.

(ii) for Guarantors whose activities are mainly oriented towards medium and long-term financing and guarantees: the global volume of risks individually reaching 10% of the Guarantor's actual equity is limited to 3.2 times the amount of actual equity.

"Single beneficiary" refers to natural or legal persons who (i) constitute a single entity for risk purposes due to power, control or influence held by one on the others, or (ii) are linked such that financial difficulties encountered by one would automatically lead to similar difficulties for the others.

3.7 Liquidity Ratio

Guarantors must permanently maintain a certain "liquidity ratio" calculated as the ratio between realizable or mobilizable assets within 3 months and short-term liabilities, including guarantees likely to be called within 3 months.

The minimum acceptable liquidity ratios are:

(i) 0.75 for Guarantors whose activities are mainly oriented towards short-term financing and guarantees.

(ii) 1.00 for Guarantors whose activities are mainly oriented towards medium and long-term financing and guarantees.

3.8 Accounting Plan

Guarantors must submit their accounting plan to CREPMF for approval, which is granted based on the following criteria:

(a) The content of accounts must be clearly defined;

(b) The accounting principles adopted must comply with internationally prevailing practices;

(c) Accounting methods, particularly valuation methods, rules and procedures for preparing and presenting financial statements must comply with internationally prevailing practices;

(d) The accounting organization must be clearly defined in the procedures manual covering, among others, the recording of operations, preparation of accounts (including consolidated accounts), and preparation of financial statements.

3.9 Provisioning for Non-Performing Risks

Guarantors must observe the following minimum provisioning rules for non-performing risks:

(a) Direct State Risks: Provisioning is optional.

(b) State-Guaranteed Risks: Progressive 5-year provisioning of 100% of the receivable if it is not included in the State budget.

(c) Private Risks:

(i) Receivables without real guarantees: 100% provisioning during the fiscal year in which these receivables are reclassified as doubtful or disputed.

(ii) Receivables with real guarantees: Optional provisioning during the fiscal year of reclassification and the following fiscal year. The provision must reach 50% of total risk by the end of the third fiscal year, and 100% by the end of the fourth fiscal year.

Unpaid interest (and credit-lease rents) over 3 months and credited to the income statement must be fully provisioned. Any receivable deemed irrecoverable must be immediately written off to the profit and loss account.

3.10 Accounting Treatment of Guarantees

Once effective, bond loan guarantees are accounted for off-balance sheet at their maximum amount. They may be split into virtual commitments, corresponding to the undisbursed amounts of guaranteed loans, and normal commitments, corresponding to the outstanding balances of guaranteed loans.

Guarantees called for settlement following the issuer's default are kept off-balance sheet as contentious commitments until payment of the called amounts.

After payment, these amounts are accounted on-balance sheet as receivables due from the defaulting issuer and are subject to provisions for contentious risks until an agreement is reached regarding their repayment.

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3.11 Portfolio Quality

The quality of Guarantors' commitment portfolios is estimated based on arrears in interest and principal payments. Guarantors whose portfolios present arrears exceeding 12% of the outstanding commitments (net of provisions) are not eligible for CREPMF approval.

3.12 Financial Information

Guarantors must submit to CREPMF an updated statement of commitments undertaken at the end of each quarter.

At the latest thirty days after approval by their competent governing bodies, Guarantors must also submit to CREPMF their financial statements certified by acceptable Auditors or Company Auditors, accompanied by reports prepared by them.

Furthermore, they are required to inform the Regional Council of any event likely to influence their situation or lead to a modification of their approval conditions.

Any Guarantor is required to transmit to CREPMF any rating from one or more specialized rating agencies and to communicate information and reports published about it by said agencies.