Section 5001.202 - [Effective 11/29/2024] Lender's credit evaluationFor each application, the lender must prepare a credit evaluation that is consistent with Agency standards found in this part. Lenders are required to only submit complete loan applications that have been approved by their institution after completion of their internal credit evaluation. The components of a lender's credit evaluation will include a written review and comment on the "Five Cs" of credit that are outlined in § 5001.202(b)(1) through (5) . The Agency should be able to obtain sufficient details on the project, the borrower, and the borrower's ability to repay the loan from the lender's credit evaluation.
(a)Lender's evaluation guidelines. The lender must conduct a credit evaluation using credit documentation procedures and underwriting processes that are consistent with generally accepted prudent lending practices for commercial, public and project financing, and also consistent with the lender's own policies, procedures, and lending practices. The underwriting process must include a review of each loan for which a loan guarantee is being sought under this part. Applications involving affiliated entities must include a global credit evaluation and if applicable a global historical and projected debt service coverage analysis. The lender should evaluate the relationships between all associated parties to determine potential risks which may affect our borrower and its ability to repay the loan. Entities which may have an impact on the borrower or significantly contribute to the repayment ability of the loan should provide financials for global analysis. Applications involving guarantor(s) must also include a global debt service coverage analysis of the guarantor(s) including the cash flow of the guarantor(s). In addition, the lender must review all applicable contracts, management agreements, and leases to determine they will not adversely affect either the borrower's repayment ability or the value of the collateral securing the guaranteed loan. The lender's evaluation must address any financial or other credit weaknesses of the borrower and project and discuss risk mitigation requirements imposed by the lender.(b)Credit factors. In performing its credit evaluation, the lender must analyze all credit factors associated with each proposed guaranteed loan and apply its professional judgment to determine that the credit factors and guaranteed loan terms and conditions, considered in combination, ensure guaranteed loan repayment. Credit factors to be analyzed include, but are not necessarily limited to, those areas identified and defined in paragraphs (b)(1) through (5) of this section. (1)Character. Those qualities that generally impel the borrower to meet its obligations as demonstrated by its credit history, including project and borrower debt structure and debt repayment ability. When applicable, an evaluation may include the character of persons with management control or a 20 percent or more ownership interest in the borrower. When the borrower's credit history or character is negative, the lender will provide satisfactory explanations to indicate that any problems are unlikely to recur. The ownership or membership structure of the project and borrower (including membership, sponsors, other equity investors), and the historical performance and experience of ownership and management specific to the project and industry. The historical performance and experience of any entities providing management or administrative services pursuant to contract should also be evaluated. For CF projects the commitment of the rural community or rural area to be served by the project should be evaluated. Borrower's management, and its for-profit, non-profit or governing board, as applicable, will be evaluated to ensure key management personnel are adequately trained and experienced.(2)Capacity. A borrower's ability to produce sufficient cash to repay the guaranteed loan as agreed, including the feasibility and likelihood of the project and borrower to produce sufficient revenues to service the project's debt obligations over the life of the guaranteed loan and, when applicable, result in sufficient returns to investors to ensure successful repayment of the guaranteed loan. The lender shall address any economic safeguards of the project, including capital expenditure budgeting or reserve funds and other contingency reserve funds such as maintenance reserve funds or debt service reserve funds, intended to protect and safeguard the Agency and lender in the event of default. The lender must make all efforts to:(i) Ensure that the borrower has adequate working capital, operating capital and reserves for capital expenditures, debt service, and maintenance as applicable; and(ii) Structure or restructure debt so the borrower has adequate debt coverage, documenting as applicable the necessity of any debt refinancing. The evaluation will be supported by a cash flow analysis.(3)Capital. The borrower must have the resources to adequately capitalize the project and demonstrate the ability to generate and maintain sufficient cash flow for its operations. The extent to which project costs are funded by the borrower in relation to project costs funded by the guaranteed loan or other Federal and non-Federal governmental assistance such as grants, tax credits, or other loans must be analyzed.(4)Collateral. This criterion refers to the security pledged for the guaranteed loan. The lender is responsible for obtaining and maintaining proper and adequate collateral for the guaranteed loan. All collateral must secure the entire guaranteed loan. The lender is prohibited from taking separate collateral for the guaranteed and unguaranteed portions of the guaranteed loan or requiring compensating balances or certificates of deposit as a means of eliminating the lender's exposure on the unguaranteed portion of the guaranteed loan. Collateral can include, but is not limited to: General obligation bonds; revenue bonds; pledges of taxes or assessments; assignments of facility revenue and byproduct revenue, as well as other assets such as land, easements, rights-of-way, water rights, buildings, machinery, equipment, inventory; accounts receivable, other accounts, contracts, cash, assignments of leases and leasehold interests. Intangible assets may serve as collateral, provided they do not serve as primary collateral. For purposes of determining compliance with this requirement, leasehold improvements such as buildings and other structures on leased property are considered tangible assets and can serve as primary collateral. It is the lender's responsibility to obtain, document, file, record and take all actions necessary to properly perfect and maintain adequate collateral to protect the interests of the lender and the Agency. (i) The lender must determine the market value of collateral as established by an appraisal in accordance with § 5001.203 .(ii) The lender should discount collateral consistent with sound loan-to-discounted value practices which must be adequate to secure the guaranteed loan in accordance with this section. To assess collateral adequacy and appropriate levels of discounting, the lender should give consideration to the type, quality, location, marketability, and alternative uses of the collateral and the basis for the valuation of the collateral, e.g. collateral valued on a cost or replacement valuation or market or comparable sales valuation may require variance of discount factors. The lender must provide satisfactory justification of the discounts being used.(5)Conditions. This paragraph (b)(5) refers to the general business environment, including the regulatory environment affecting the business or industry, and status of the borrower's industry. Consideration will be given to items listed in paragraphs (b)(5)(i) through (ix) of this section and when applicable the lender should submit supporting documentation (e.g., feasibility study, market study, preliminary architectural or engineering reports, etc.) in accordance with §§ 5001.304 through 5001.307:(i) Availability and depth of resource/feedstock market, strength and duration of purchase agreements and availability of substitutes;(ii) Analysis of current and future market potential and off-take agreements, competition, type of project (service, product, or commodity based);(iii) Energy infrastructure, availability and dependability, transportation and other infrastructure, and environmental considerations;(iv) Technical feasibility including demonstrated performance of the technology and integrated processing equipment and systems, developer system performance guarantees, or technology insurance;(v) Complexity of construction and completion, terms of construction contracts, experience and financial strength of the construction contractor or engineering, procurement, and construction (EPC) contractor;(vi) Contracts and intellectual property rights, licenses, permits, and state and local regulations;(vii) Creditworthiness of any counterparties, as applicable;(viii) Industry-related public policy issues; and(ix) Other criteria that the lender or Agency deems relevant to the project.(6)Content. The credit evaluation must be sufficiently detailed to describe the proposed loan, business and project scenario and document that the proposed loan is sound. The credit evaluation must include:(i) A written evaluation of each credit factor listed in paragraphs (b)(1) through (5) of this section and any additional factors as appropriate; and(ii) A written evaluation of the feasibility study, business plan, technical report, and engineering and architectural reports, as applicable; and(iii) Spreadsheets and analysis of the financial statements provided in accordance with § 5001.303 , with appropriate ratios and comparisons with industry standards (such as Dun & Bradstreet or the Risk Management Association). The spreadsheets should enable a reviewer to easily scan the data, spot trends, and make comparisons. Steps taken or proposed to address any financial or industry weakness must be reasonable and adequately addressed.(iv) Financial projections deviating from historical financial performance must be substantiated and documented. The borrower's projections should be consistent with their past performance. Increases to revenues, profit margins or profitability should be reasonable and substantiated in the analysis.(v) Projected operational cash flow analysis on a quarterly basis for borrowers with seasonal cyclical cash flow.(vi) Operational cash flow analysis on a quarterly basis from the current financial statements through start-up or occupancy for projects involving construction when lenders are requesting the loan note guarantee prior to completion of construction The lender and borrower are required to provide a construction schedule with their application for a loan guarantee prior to construction completion. The projected cash flow needs should mirror the quarterly construction costs as the project is being completed. The cash flow analysis must indicate whether this cash flow is being provided by the guaranteed loan, borrower equity, or other sources.85 FR 42518, July 14, 2020, as amended at 85 FR 62197, Oct. 2, 2020; 86 FR 70356, Dec. 10, 2021; 87 FR 7367, Feb. 9, 2022 85 FR 42518, 10/1/2020; as amended at 85 FR 62197, 10/2/2020; 86 FR 70356, 12/10/2021; 87 FR 7367, 2/9/2022; 89 FR 79717, 11/29/2024