Large Bank Supervision Forum eBook

Internal Use Only

Critical Aspects of Guarantees and Sponsorships . . .

 The presence of a legally enforceable guarantee from a financially responsible guarantor may improve the prospects for repayment of the debt obligation and may be sufficient to preclude adverse loan classification or reduce the severity of the loan classification.  A financially responsible guarantor possesses the financial ability, the demonstrated willingness, and the incentive to provide support for the loan through ongoing payments, curtailments, or re-margining  Financially responsible sponsors are similar to guarantors in that they may also possess the financial ability, the demonstrated willingness, and may have an incentive to provide support for the loan through ongoing payments, curtailments, or re-margining  Financial institutions that have sufficient information on the guarantor’s global financial condition, income, liquidity, cash flow, contingent liabilities, and other relevant factors (including credit ratings, when available) are better able to determine the guarantor’s financial ability to fulfill its obligation.  An effective assessment includes consideration of whether the guarantor has the financial ability to fulfill the total number and amount of guarantees currently extended by the guarantor. A similar analysis should be made for any material sponsors that support the loan

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Internal Use Only

The estimated value of collateral is a critical element in the workout process . . .

 The agencies’ appraisal regulations require financial institutions to review appraisals for compliance with the Uniform Standards of Professional Appraisal Practice.  As part of that process, and when reviewing collateral valuations, financial institutions should ensure that assumptions and conclusions used are reasonable.  Further, financial institutions typically have policies and procedures that dictate when collateral valuations should be updated as part of financial institutions’ ongoing credit risk reviews and monitoring processes, as relevant market conditions change, or as a borrower’s financial condition deteriorates  In determining whether to obtain a new appraisal or evaluation, a prudent financial institution considers whether there has been material deterioration in the following factors: − The performance of the project; − Conditions for the geographic market and property type; − Variances between actual conditions and original appraisal assumptions; − Changes in project specifications (e.g., changing a planned condominium project to an apartment building); − Loss of a significant lease or a take-out commitment; or − Increases in pre-sale fallout

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© 2023 – FinPro, Inc.