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MFXCounterpartyCreditAssessment Overview AspartofMFXSolutions’standardon-boardingprocess,allprospectivecounterpartiesmustundergoa creditassessment.MFXreliesonananalyticalandreportingmethodologydevelopedbyLuminisAdvisors toassessthefinancialandbusinesscharacteristicsuniquetotheimpactinvestmentsector. Thecreditassessmentisatypicaldeskreview-styleduediligenceevaluation.Detailsoftheprocess,data requirements,methodology,scoring,andcostconsiderationsareprovidedbelow. Ifahedgeisenteredinto,pleasenotethatthecreditassessmentmustbeupdatedannuallyforaslongas thehedgeisactive.Pleasealsonotethatallcreditassessmentreports–CounterpartyRiskReports(initial) andSurveillanceReports(annualupdates)–areconfidentialdocumentsandonlyintendedforMFX’s internaluse.Assuch,thesereportsarenotavailableforpublicdistributionorcirculationbyMFXorour counterparties. CreditAssessmentProcess Preliminary analysis • Datacollec*on • Ini*alreviewand analysis • 1-2weeks Counterparty interviews Dra4report Counterparty feedback Finalizereport • Telephoneinterviews • Writedra<report • Senddra<reportto • Amenddra<report withkeypersonnel • Luminis'internalra*ng counterpartyforreview basedoncounterparty feedback commiBee • Follow-updiscussion withcounterparty • Submitfinalreportto MFX • 1-2days • 2-3weeks • Upto1week • Upto1week DataRequirements EachprospectivecounterpartymustprovidetoLuminiscertaindataandinformationasrequiredto completethecreditassessment.Generallyspeaking,thisincludesallrelatedlegaldocuments,financial information,investment/portfoliodetails,andmanagement/operatingpolicies.Foracompletelistof requiredmaterial,pleasecontactLuminisdirectly(seeContactInformationbelow). AnalyticalandReportingMethodology Eachprospectivecounterpartywillbeassessedonitsshort-termcreditworthiness,specificallyconcerning itsabilitytomeetitscontractualobligationsunderthegoverningISDAwithMFX. Forinvestmentfunds,theanalysisisprimarilyconcernedwiththefollowingkeycriteria:(1)FinancialRisk, includingprofitability,liquidityandtreasurymanagement,structuralrisk,capitaladequacy,andmarket risk;(2)PortfolioRisk,includingcreditrisk,sovereignrisk,andassetquality;and(3)OperationalRisk, includingmanagementandgovernance,investmentprocess,portfoliomanagement,andriskmonitoring. Formicrofinanceinstitutions(MFIs),theanalysisreliesonthefinancialstrengthratingderivedfrom MicroRate’sstandardratingmethodologyforMFIs.(MicroRateistheleadingmicrofinanceratingagency andLuminis’corporatepartner.) Scoring Inaccordancewiththeanalyticalandreportingdeterminations,eachprospectivecounterpartyisassigned acounterpartyriskscore.ThisscoreisusedbyMFXtodeterminethemaximumallowablehedgingvolume. Therangeofscores,descriptionsofeach,andthecorrespondingtradinglimits,areasfollows: Forinvestmentfunds: Counterparty RiskScore Creditworthiness Tier1 High Creditworthiness Tier2 Medium Creditworthiness Tier3 Low Creditworthiness Tier4 NotCreditworthy Max.hedging volume Description Thesecounterpartiesareconsistentlyprofitable,maintainexcellentliquidity,andwhose portfolioshaveminimalexposuretohigh-riskinvestees/markets.Managementis superior,withdistinguishedcommercialexperience,localmarketknowledge,and excellenttrackrecords. Thesecounterpartiesareprofitable,althoughcapitalizationissusceptibletostructural riskand/orinvestorbaseissusceptibletoredemption.Portfolioqualityisaverage (credit,country,andconcentration)asismanagement. Thesecounterpartiesaretypicallysmall,leveredfundswithaveragetopoor performancetrackrecords,belowaverageportfolioqualityand/orheavyexposureto riskymicrofinancemarkets,materialinterestrateand/orunhedgedlocalcurrencies,and inexperiencedmanagementand/orweakportfoliomanagementpractices. Thesecounterpartieshaveweakand/ornoprofitabilitytrackrecords,innewand/or highlyilliquidsectors,andsignificantfund-levelrisks(structural,market,asset-liability management,etc.).Assetqualityispoor,withnumerouslossestodate.Managementis newand/oronlyhasdevelopmentexperience. 25%notionalof MFX’stotal portfolio 20%notionalof MFX’stotal portfolio 10-15% notionalof MFX’stotal portfolio Nohedging allowed ForMFIs: Counterparty RiskScore Creditworthiness Financial Strength Tier1 High Creditworthiness A Tier2 Medium Creditworthiness A- B+ Tier3 Low Creditworthiness B B- Tier4 NotCreditworthy C+,C,C- D+,D,D- E+,E Description Financialinstitutionswithhighlong-termsustainabilityandhigh creditworthiness.Performanceisexcellent.Lowshort-tomedium-term risk. Financialinstitutionswithgoodlong-termsustainabilityandgood creditworthiness.Performanceisgood.Modestorwell-managedshort-to medium-termrisk. Financialinstitutionswithmoderatelong-termsustainabilityandmoderate creditworthiness.Performanceisfair.Moderatetohighshort-tomediumtermrisk. Financialinstitutionswithweaklong-termsustainabilityandpoor creditworthiness.Performanceispoor.Hightoveryhighshort-to medium-termrisk. Max.hedging volume 10%notionalof MFX’stotal portfolio Nohedging allowed Costs Thecreditassessmentfeescheduleispresentedbelow.PleasenotethatMFXmanagestheentirehedging process,fromtheon-boardingstagethroughtrading.Assuch,allcostsassociatedwiththecredit assessmentsareadministereddirectlybetweenthecounterpartyandMFX. Forinvestmentfunds: • Initialcounterpartyriskreport:US$6,000 • Annualsurveillancereport:US$1,500 ForMFIs: • Initialcounterpartyriskreport:Variable,pleasecontactMFXtodiscuss • Annualsurveillancereport:Variable,pleasecontactMFXtodiscuss ContactInformation Forquestionsaboutthecreditassessment,[email protected]. Forallotherinquires,[email protected].
