NNPCL Finance and Accounts_Banking Counterparty.pdf

NNPC Limited Finance and Accounts Process and Procedures 17.0 Banking Counterparty Selection and Credit Acceptance Policy 17.1 Objectives NNPC Limited is committed to operating within the highest standards of integrity and ethics, and to fostering a culture of adherence to global best practice in t...

NNPC Limited Finance and Accounts Process and Procedures 17.0 Banking Counterparty Selection and Credit Acceptance Policy 17.1 Objectives NNPC Limited is committed to operating within the highest standards of integrity and ethics, and to fostering a culture of adherence to global best practice in the selection and maintenance of relationships with banking counterparties, and associated credit risk acceptances. Employees of NNPC Limited and its Subsidiaries have an obligation to perform their responsibilities in a manner which visibly supports and advances the company’s vision, mission, and ethical standards. 17.2 Scope/Applicability This policy applies to NNPC Limited and its wholly owned Subsidiaries. 17.3 Banking Relationship Policy Statements It is the policy of NNPC Limited and its Subsidiaries to ensure objectivity and transparency in the selection and maintenance of relationships with counterparties providing banking services, and in the acceptance of associated credit risks. Selection of banking counterparties, maintenance of such relationships, and acceptance of associated credit risk shall be based primarily on applicable investment grade credit rating thresholds as outlined in Table 1, Table 2, and Table 3 below, for Onshore Banks, Offshore Banks - Africa, and Offshore Banks – Others, respectively. To qualify for a relationship with NNPC Limited and its Subsidiaries, a financial institution must have an unexpired credit rating that meets at least one of the applicable credit rating thresholds outlined in the referenced tables. Table 1 – Credit Rating Threshold for Onshore Banks Onshore Banks Type of Relationship National Long-Term Rating (nga)1 S&P Fitch GCR Agusto & Co. Current & Deposit Accounts BBB BBB BBB A- Credit Acceptances BBB- BBB- BBB- Bbb+ 151 NNPC Limited Finance and Accounts Process and Procedures National Long-Term Rating Scale - denotes the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country or monetary union. National scale ratings are a risk ranking of issuers in a particular market designed to help local investors differentiate risk. Nigeria's national scale ratings are denoted by the unique identifier '(nga)'. National scales ratings are not comparable to international scales ratings or to other countries' national scale ratings. 1 Table 2 – Credit Rating Threshold for Offshore Banks - Africa Type of Relationship Current & Deposit Accounts Credit Acceptances Moody’s Intl Natl LT LT Banks Rating S&P Intl Natl LT LT Fitch Intl LT Natl LT Baa3 Aa1 BBB- AA+ BBB- AA+ Ba1 Aa2 BB+ AA BB+ AA Note: To qualify, banks in this category must be domiciled in jurisdictions with Sovereign International Long-Term Ratings no lower than Moody’s “Ba3”, S&P “BB”, or Fitch “BB-”. Table 3 – Credit Rating Threshold for Offshore Banks - Others Type of Relationship Moody’s Offshore Banks - Others International Long-Term Rating2 S&P Fitch Current & Deposit Accounts Baa1 BBB+ BBB+ Credit Acceptances Baa2 BBB BBB International Long-Term Rating Scale – bank is rated based on the global rating scale, which is ultimately subject to the Sovereign rating of the host country. 2 17.4 Procedural Guidelines 17.4.1 Establishment/Cessation of Banking Relationships Proposal for the establishment of a new banking relationship or cessation of an existing one shall be made by the Head, Banking Operations for NNPC Limited and by the Head, Finance and Accounts for Subsidiaries and forwarded to the Treasurer, NNPC Limited for processing. Proposals from Subsidiaries must be supported by the Managing Director. The Treasurer shall perform due diligence on all proposals for new banking relationships or termination of an existing one by NNPC Limited or its Subsidiaries, to validate the business case and compliance with minimum credit requirements, before transmission to the Chief 152 NNPC Limited Finance and Accounts Process and Procedures Financial Officer (CFO) for endorsement and subsequent approval by the Chief Executive Officer (CEO) for NNPC Limited or Managing Director for each Subsidiary. Approval must be granted by the CEO to establish a new banking relationship or terminate an existing one for NNPC Limited, and by the Managing Director for each Subsidiary, upon the endorsement of the CFO. 17.4.2 Credit Risk Assessment NPC banking relationships shall be categorized into three risk levels: Low Risk – Bank is lead or member of a consortium of lenders to NNPC Medium Risk – NNPC accepts bonds, guarantees and letters of credit from bank High Risk – NNPC operates a current and/or deposit account relationship with bank In addition to delivering efficient and competitively priced products and services, NNPC Limited and its Subsidiaries’ Relationship Banks shall be required to have adequate:  Capital base  Liquidity  Electronic payment system  Spread/range of services These and other requirements shall be tested periodically via a counterparty credit evaluation exercise, to be performed by Treasury as part of the requirements for the maintenance of banking relationships. The minimum credit rating threshold set out in Section 3.0 of this document for qualifying banks also takes cognizance of the risks levels and requirements enumerated above, to provide some mitigation. 17.4.3 Opening and Closing of Bank Accounts Operational bank accounts shall be maintained with approved Relationship Banks by NNPC Limited and its Subsidiaries for the purpose of revenue collection and settlement of creditor obligations. NNPC Limited and its Subsidiaries shall also open escrows and other 153 NNPC Limited Finance and Accounts Process and Procedures special accounts with the Relationship Banks where required for specific purposes. Every new account opening request to a Relationship Bank shall be supported with a Resolution issued by the Board of NNPC Limited or that of the respective Subsidiary. Bank Accounts Opening Proposals to open a new bank account with an approved Relationship Bank in any currency shall be made by the Head, Banking Operations for NNPC Limited, and by the Head, Finance and Accounts for each Subsidiary; and forwarded to the Treasurer for review and advice, and to the CFO for endorsement. Proposal for the opening of a bank account by a Subsidiary must be supported by the Managing Director. Where required in the constitutive loan documentation or Account Bank Agreement of NNPC Limited or any of its Subsidiaries; the Security Trustees, Global Facility Agents, and any other necessary party shall be notified, and their consent sought for any bank account to be opened or closed. Bank Accounts Closing Bank accounts shall be evaluated for closure under the following conditions:  The need for the account no longer exists.  The bank has been involved in criminal/fraudulent activities.  The bank has been placed on the distress list of the Central Bank of Nigeria (CBN) or other international or local regulatory body.  The bank’s credit rating falls below the level specified in this Policy Guideline for a period of up to 12 (twelve) months.  The bank consistently delivers ‘Poor’ level of service based on the periodic assessment against the key performance indicators (score card) agreed in the Service Level Agreement, for a period of two (2) years. Proposals for the closing of an existing bank account shall be made by the Head, Banking Operations for NNPC Limited and by the Head, 154 NNPC Limited Finance and Accounts Process and Procedures Finance and Accounts for the Subsidiaries and transmitted to the Treasurer for further processing. Proposals for the closing of a bank account by a Subsidiary must be supported by the Managing Director. 17.4.4 Counterparty Evaluation and Benchmarking NNPC Limited and its Subsidiaries aim to minimize credit exposure to external counterparties through periodic evaluation. This involves setting maximum financial exposure limits and minimum credit requirements for banks and other financial intermediaries that the entities conduct business with. The Treasury Division shall perform an annual counterparty credit evaluation of all Relationship Banks, using industry standards and global best practice. The evaluation benchmark shall be derived from the provisions of the CBN prudential guidelines and Basel III requirements. Where the evaluation outcome shows that a Relationship Bank no longer meets the minimum requirement for banking relationship, NNPC Limited and its Subsidiaries shall place such bank on a ‘Watch List’ for an initial “Watch Period” of one year, and immediately take the following measures to minimize its exposure:  Reduce the overall daily exposure limit set for such bank to a maximum of existing exposure on credit acceptances plus provision for acceptable level of daily transaction volumes.  Terminate term deposits, reduce current account balance and transaction volumes to match the revised daily exposure limit set for the bank, as stated above.  Additional financial instruments shall not be accepted from such bank.  The Treasury Division shall gather and evaluate market intelligence on the impacted bank on an ongoing basis during the watch period.  Where the bank’s credit rating remains at the downgraded level during the Watch Period, but with a 'Stable’ or ‘Positive’ financial 155 NNPC Limited Finance and Accounts Process and Procedures outlook, NNPC Limited and its Subsidiaries shall retain the revised exposure limit till the end of the Watch Period.  Where the credit rating and financial health of the institution deteriorates during the Watch Period, NNPC Limited and its Subsidiaries shall take immediate steps to reduce exposure to such Relationship Bank. This might include the full suspension of current account transactions and replacement of financial instruments received from such bank with instruments from acceptable banks.  Once the bank’s rating is restored to the minimum level acceptable, a recommendation for restoration of full banking relationship shall be made by the Head, Banking Operations to the Treasurer for support, and to the CFO for endorsement and the CEO’s approval. 17.4.5 Acceptance of Financial Instruments It is the policy of NNPC Limited and its Subsidiaries to accept Performance Bonds, Bank Guarantees, Letters of Credit, and other forms of financial instruments or guarantees only from onshore and offshore banks that meet applicable investment grade credit rating threshold as defined in sections 3.0 of this Policy Guideline. This is premised on the necessity to ensure that the financial and counterparty credit risks of NNPC Limited and its Subsidiaries are appropriately managed. The Treasury Division shall provide the guidelines, exposure limits, corporate advisory service, and support for NNPC Limited and its Subsidiaries in the review, verification, and acceptance of all financial instruments, including renewals. The Legal Division shall provide oversight of the templates as well as the terms and conditions of all financial instruments received by NNPC Limited and its Subsidiaries, to ensure adequate legal protection for the entities. Financial Instruments accepted must be in line with the approved templates provided by the Legal Division. The Treasury Division shall be the custodian of original financial instruments issued in favor of NNPC Limited; while the Head, Finance and Accounts of each Subsidiary shall have custody of original financial instruments issued in favor of the Subsidiaries, with copies provided to the Treasury Division within two (2) workdays receipt for recording. 156 NNPC Limited Finance and Accounts Process and Procedures A counter-guarantee from a financial institution that meets the credit rating threshold may be accepted as risk mitigation, where the primary financial counterparty does not meet the credit rating threshold. Where a guarantee is accepted in lieu of retention on contract, such guarantee must comply with the relevant contracting and procurement guidelines. Acceptable Financial Instruments The following credit instruments shall be accepted by NNPC Limited and its Subsidiaries:  Letters of Credit (LC) – Issued by financial institutions on behalf of customers, for product sales.  Bank Guarantees (BG) – Issued by financial institutions on behalf of vendors, where upfront payment is required to be made on contracts.  Performance Bonds (PB) – Issued by financial institutions on behalf of vendors to guarantee performance on contracts.  Parent Company Guarantees (PCG) – Issued by a rated parent company on behalf of a subsidiary, to guarantee the subsidiary’s performance on contract. 17.4.6 Funds Exposure Management To manage concentration risk, maximum financial exposure limit to each Relationship Bank shall be set by the Group Treasury Division for NNPC Limited and its Subsidiaries as a whole. It is the Policy of NNPC Limited and its Subsidiaries that the total exposure to a single financial institution shall not exceed 30% of the aggregate cash balance of all NNPC entities at any point in time. The Group Treasury Division shall provide a monthly group-wide Funds Exposure Report to the Senior Management Team (SMT) of NNPC Limited. Exposure to Onshore Banks Subject to the credit rating of the financial institution, maximum exposure to an onshore financial institution (for current/deposit 157 NNPC Limited Finance and Accounts Process and Procedures accounts and credit acceptances >60 days) in Nigerian Naira equivalent (functional Naira) shall not exceed 50% of its Tier-1 capital. Similarly, maximum exposure to an onshore financial institution for short-dated credit acceptances only (<=60 days) shall not exceed 50% of its Tier-1 capital, as shown in Table 4 below: Table 4 – National Long-term Credit Issuer Exposure Thresholds Band S&P, Fitch & GCR Agusto & Co. % of Tier-1 Capital 1 AAA Aaa 50% AA+ Aa+ AA Aa AA- Aa- A+ A+ 2 3 A A- 4 BBB+ 5 BBB 40% 30% A Current/Deposit Accounts & Credit Acceptance Threshold >60 Days 20% A- 15% 6 10% BBB- Remarks Bbb+ 7 50% Credit Acceptance Threshold >60Days Credit Acceptance Threshold <=60 Days Exposure to Offshore Banks – Africa Subject to the credit rating of the financial institution, maximum exposure to an Offshore - Africa financial institution (for current/deposit accounts and credit acceptances >60 days) shall not exceed 15% of its Tier-1 capital in US Dollar equivalent (functional dollar) on the National Long-Term Credit Rating scale and 35% on the Global Long-Term Credit Rating scale, as shown in Table 7.2.1 and Table 7.2.2 below. For short-dated credit acceptance (<=60 days), maximum exposure to an Offshore - Africa financial institution shall not exceed 50% of its Tier-1 capital in US Dollar equivalent (functional dollar) on both the National Long-Term Credit Rating and Global Long-Term Credit Rating scales, as shown in Table 5 and Table 6 below. Table 5 - National Long-Term Credit Issuer Exposure Thresholds (OffshoreAfrica) Band Moody's S&P, Fitch & GCR % of Tier-1 Capital 1 Aaa AAA 15.00% Remarks Current/Deposit Accounts & 158 NNPC Limited Finance and Accounts Process and Procedures 2 Aa1 AA+ 3 Aa2 AA Credit Acceptance Threshold >60 Days Credit Acceptance Threshold >60 Days Credit Acceptance Threshold <=60 Days 12.50% 10.00% 50.00% Table 6 - Global Long-Term Credit Issuer Exposure Thresholds (Offshore Africa) Band Moody's S&P & Fitch % of Tier-1 Capital 1 Aaa AAA 35.00% Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- 4 Baa1 BBB+ 5 Baa2 BBB 6 Baa3 BBB- 2 3 7 Ba1 Remarks 30.00% Current/Deposit Accounts & Credit Acceptance Threshold 25.00% 20.00% Credit Acceptance Threshold >60Days Credit Acceptance Threshold <=60 Days 10.00% BB+ 8 50.00% Exposure to Offshore Banks - Others Maximum exposure to an Offshore - Others financial institution shall not exceed 5% of its Tier-1 capital in US Dollar equivalent (functional dollar), subject to the credit rating of the financial institution as shown in Table 7 below: Table 7. – Global Long-term Credit Issuer Exposure Thresholds Band Moody's S&P & Fitch % of Tier-1 Capital 1 Aaa AAA 5.0% Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- 2 3 4.5% Remarks Current/Deposit Accounts & Credit Acceptance Threshold 4.0% 159 NNPC Limited Finance and Accounts Process and Procedures Band Moody's S&P & Fitch % of Tier-1 Capital 4 Baa1 BBB+ 3.5% 5 Baa2 BBB 3.0% Remarks Credit Acceptance Threshold In determining the exposure limit for offshore banks (Africa and Others), the provisions of any subsisting lenders agreement and loan covenants shall be taken into consideration. Funds in offshore banks shall be distributed based on a combination of the following criteria:  Funds required to meet loan repayment and dividend payment.  Funds for short-medium term investment in the money market.  Funds required to meet routine creditor payment obligations.  Short-term deposits held for a specific purpose at agreed interest rate. Exposure to Money Market Funds i. Offshore Money Market Funds Investment The key considerations for investment in an offshore money market fund shall include market share of the Asset Manager amongst the top 10 global money market fund managers (IMMFA - Institutional Money Market Funds Association), the fund size, as well as credit rating of the portfolio to be invested in. NNPC Limited and its Subsidiaries shall invest in a portfolio of money market funds with a minimum acceptable credit rating of either AAAm by S&P, AAAmmf by Fitch or Aaa-mf by Moody’s. The choice of a money market investment option shall not be restricted to any particular time frame. The proportion of holding in each money market fund shall be proposed by the Head, Banking Operations from time-to-time; for review and support by the Treasurer and approval of the CFO. ii.  Onshore Money Market Funds Investment NNPC Limited and its Subsidiaries shall invest funds in the Nigerian Money Market through onshore Money Market Investment 160 NNPC Limited Finance and Accounts Process and Procedures Managers registered with The Securities and Exchange Commission (SEC) as fund/portfolio manager. Investments shall be in Nigerian Naira. The onshore Money Market Funds to be invested in must have a minimum National portfolio credit rating of “A+(f)”. This is to maintain adherence to the conservative fund investment principle of Security, Liquidity, and Yield (in that order).  Assets shall be held mostly in permissible short term, low risk securities, products and portfolios approved by SEC. The Fund portfolio may include Federal Government of Nigeria (FGN) Treasury Bills, FGN Bonds (with term to maturity of less than one year), certificates of deposits, commercial papers and other money market instruments approved by the Central Bank of Nigeria (CBN).  Funds shall be invested based on a proposal by the Head, Banking Operations; for review and support by the Treasurer, and approval of the CFO. 17.4.7 Performance Management  The Treasury Division shall develop and implement Service Level Agreements (SLAs) with all NNPC Relationship Banks group wide.  On a biannual basis (January and July of each calendar year), the Treasury Division, in liaison with the Treasury Department of each Subsidiary, shall review the performance of operational Relationship Banks against the Key Performance Indicators (KPIs) agreed in the Service Level Agreements (SLAs). Identified actions shall be documented and tracked for closure. A full year performance report shall be produced at the end of each year and presented by the Treasury Division to the CFO. This shall serve as one of the inputs for the biennial evaluation of banking relationships by NNPC Limited and its Subsidiaries, which will hold in July of every other year. 161 NNPC Limited Finance and Accounts Process and Procedures  To ensure the sustenance of their value proposition at the most optimal cost to NNPC Limited and its Subsidiaries, the Treasury Division shall undertake a robust assessment of the cumulative performance of all operational Relationship Banks every two years. This assessment shall be based on the outcome of the annual service reviews and counter party evaluation outcome for the period under consideration. The result and recommendation shall be presented to the CFO for a decision on the retention or cessation of banking relationship with each institution.  Quarterly service review meetings shall also be held with Money Market Funds Managers, to review funds’ performance and advise on portfolio adjustments. Recommendation shall be made by the Treasurer, to divest holdings from poor performing funds portfolio and where necessary, cease relationship with poor performing Money Market Funds Managers. 17.5 Compliance The Governance, Risk and Compliance team (GRC) shall perform a biennial review of the execution of this Policy for compliance and report any infringement to the Board. Where the need arises, the GCEO is authorized to grant exceptions to the application of this policy, and thereafter seek ratification from the NNPC Limited Board. 17.6 References This Policy forms part of the Finance and Accounts Directorate Financial Risk Management Policy. 162