{"id":"circulars/cssf-18-705","title":"Circular CSSF 18/705","type":"circular","date":"2018-12-19","kind":"circular","html":"

Circular CSSF 18/705 is a CSSF circular, published 19 December 2018. Subject: General valuation principles, introduced by the Law of 22 June 2018, to be applied for the determination of the fair value of renewable energy assets that are eligible assets for the cover pool of covered bond banks.

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Legal basis: Law of 22 June 2018 introducing covered bonds into the financial sector law.

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Relevant for: Credit institutions.

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Text

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Luxembourg, 19 December 2018

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To all banks issuing covered bonds

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Re: General valuation principles, introduced by the Law of 22 June 2018, to be applied for the determination of the fair value of renewable energy assets that are eligible assets for the cover pool of covered bond banks.

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Ladies and Gentlemen, The purpose of this circular is to put into force prudent valuation standards applicable to the valuation of renewable energy projects that are part of the cover pool of a covered bond bank. Based on Article 12-5 (7) and Article 12-7 (2) of the Law of 22 June 2018, amending the Law of 5 April 1993 on the financial sector, as amended, with respect to the introduction of renewable energy covered bonds, the CSSF is required to provide details on prudent valuation standards to be applied to renewable energy (hereinafter “RE”) projects that are part of the cover pool of a covered bond bank. Although the outlined valuation standards are based on guidelines and principles defined by internationally recognised institutions, they shall be considered as minimum standards applicable to covered bond banks (hereinafter “CBB”). As a result, they do not represent an exhaustive list of principles. The bank shall assess and document whether the application of additional and complementary principles might be appropriate or even required for the valuation of a specific renewable energy project. The valuation standards defined by the circular are those applicable to the determination of fair value (FV) of individual renewable energy projects, where FV is defined according to International Financial Reporting Standards (IFRS 13).

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Definitions

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  1. In the context of this circular, FV is defined according to IFRS 13 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The FV forms the basis for all other valuation indicators used in the context of covered bond issuance, such as the estimated realisation value (ERV/“Beleihungswert”), the collateral value (CV) and the cover pool value (CPV). CPV means the asset related credit exposure in the cover pool, which is limited to the CV, whereas CV shall mean ERV after the application of haircuts prescribed in Article 12-5 (7) of the Law of 22 June 2018. 2. The ERV is the sustainable lending value and is calculated from all discounted operating free cash flows generated by the project-related production or technical units by applying project specific risk-adjusted discount rates. The ERV shall cover all relevant risks of the underlying RE project to derive the project specific sustainable CV and has to represent the residual project lifetime. Consequently, the ERV, defined as the value prior to the application of haircuts prescribed in Article 12-5 (7) of the Law, shall not exceed the FV of the RE project.
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Minimum valuation principles

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2.1

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Independence, qualification and responsibility of the appraiser

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  1. The process of selection of the appraiser of the RE projects by the CBB shall be based on a number of principles: i. The selected appraiser must be operationally independent from any banking activities that are directly related to the underlying RE project, such as the credit-decision process or the issuance of the covered bonds. In general, the bank has to get sufficient comfort that the selected appraiser does not have any potential conflicts of interest that could materially distort the valuation process of the RE project. Moreover, it must be excluded that the appraiser has any legal relationships with the operator of the RE project (including the beneficial owner) or any other economic interests in the project. The selected appraiser can be an employee of the bank. Retained appraisers that are employed by the bank are subject to a number of independence conditions: a.
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The text above is the opening of the document; the PDF carries the whole.

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Document page, PDF. Source: Commission de Surveillance du Secteur Financier (CSSF), reproduced with the CSSF's consent. The French text prevails.

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