R2E2 Fund-Armenia Renewable Resources And Energy Efficiency Fund

1.1 On-lending

The objective of this component is the provision of sub-loans to the PFIs for on-lending to the UHP beneficiaries within the framework of Urban Heating Project.

Funds channeled by the Fund shall be utilized for financially viable projects related to heat generation and distribution in urban multi-apartment buildings; installation and procurement of heating systems for consumption purposes as well as gasification works with the purpose of heating. Specific types of investments eligible for funding shall be classified as follows:

a) Individual heating:

Procurement and installation of gas heaters or boilers;
Procurement and installation of metering and consumption controlling equipment;
Gasification for heating purposes;
Other investments to increase energy efficiency of apartments and buildings.

b) Centralized and autonomous heating:

Production, procurement, installation of boilers;
Rehabilitation and construction of external and internal distribution systems;
Procurement and installation of metering and regulating equipment to measure and control heat;
Other investments to increase energy efficiency of apartments and buildings, including insulation of roofs, windows and common spaces;
Cogeneration of power and thermal energy.

The equipment shall comply with the safety and security standards established by the RA Legislation as well as additional technical specifications proposed by the Fund.

Any individual, self entrepreneur or legal entity, including the Home Owner Association, condominium, which is or willing to be engaged in the urban heating project of multi-apartment buildings in Armenia (including heat generation, transmission and distribution, installation, as well as heating related gasification works) may become a project beneficiary.

Lending to the Fund by the Republic of Armenia shall be carried out in the format and manner stipulated in the Subsidiary Agreement concluded between the RA Ministry of Finance and Economy and the Fund (Annex 9).

The Fund will provide financing to beneficiaries through on-lending to eligible PFIs. The PFI shall retain 100 percent credit risk for allocation of loan proceeds for financing of investment projects.

Direct lending by the Fund to project beneficiaries may be offered as a fall-back if there is insufficient interest from local financial institutions or otherwise in case of joint decision of WB and BOT on direct lending to project beneficiaries by the Fund.

The procurement under this component shall be conducted by the Sub-loan Borrowers based on the commercial practices acceptable to the World Bank as described in Annex 13 hereto. For projects that exceed the US$ 5,000 the PFI shall ensure that Beneficiaries have obtained for goods and works procured through the credit proceeds: (i) at least two quotations if the amount is between US$ 5,000 and US$ 100,000; (ii) at least three quotations if the amount is over US $100,000.

In case of lending for procurement of individual residential heating devices and materials required for their installation, the procurement is made from the suppliers, which have:

Acceptable show room with access to the public;
Professional staff for demonstration of technical features of proposed equipments;
Provision of after sale services.

1.1.1 PFI Eligibility Criteria

PFIs could include commercial banks and/or non-bank financial intermediaries (credit institutions). PFIs should be required to meet the following criteria at all times:

Eligible Bank-PFIs should:
1) be at least 75% privately owned;
2) be interested and committed to servicing the range of clients and beneficiaries of the Project;
3) meet the existing prudential regulations related to: (a) minimum total and statutory capital adequacy; (b) exposure to a single, related, connected borrower and insider parties; (c) liquidity; (d) foreign currency position and exposure;
4) have average CAMELS rating of 3.5 or higher from the CBA for the last quarter;
5) have return on equity of at least 10% for the last two years;
6) have ratio of net provisioning to credit risk bearing assets not exceeding 1%,
7) undergo an annual audit in accordance with the International Financial Reporting 8) Standards (IFRS) and International Standards on Auditing (ISA) and have unqualified audit reports for the last two years;
8) have satisfactory internal control and audit procedures, including sound lending policies and procedures in respect of the entire credit cycle, problem loan management, write-offs of assets, credit approval authority, etc.

Eligibility criteria for NBFI-PFIs are as follows: The NBFI-PFIs should:
1) be at least 75% privately owned;
2) be licensed and supervised by the CBA;
3) be interested and committed to servicing the range of clients and beneficiaries of the Project;
4) be in compliance with the criteria and prudential regulations as established by the CBA related to: (a) minimum total and statutory capital adequacy, (b) single borrower limits (including related and connected parties and insiders); and (c) gross foreign currency exposure;
5) have ratio of net provisioning to credit risk bearing assets not exceeding 7.5%;
6) undergo an annual audit in accordance with the IFRS and ISA and have unqualified audit reports for the last two years;
7) have satisfactory internal control and audit procedures, including sound lending policies and procedures in respect of the entire credit cycle, problem loan management, write-offs of assets, credit approval authority, etc.

NBFI-PFIs should demonstrate a positive track record of compliance with the above criteria.

PFIs management should apply for participation in the Project by submitting an expression of interest supported by all relevant documents, including the latest available two annual financial statements and audit reports, and other information related to their prudential and regulatory compliance.

The PFI should also submit a disclaimer letter to the Fund authorizing the CBA to disclose information related to their prudential and regulatory compliance to comply with the provisions of the RA Law on Confidentiality in Banking. Information provided by the CBA should be made available to the World Bank Project Team and MOFE responsible officers. Information disclosure requirements should be limited to those necessary to enable the Fund and the World Bank to assess their eligibility in accordance with the above criteria.

The Fund shall examine the supporting documents attached to the PFI’s expression of interest, with major focus on general creditworthiness and financial portfolio ratios. A special evaluation committee established for the PFI selection purpose by the BOT shall thereafter consider the PFI applications accompanied by the Fund experts’ conclusion. After decision is reached by the evaluation committee the list of eligible PFIs shall be submitted to the BOT for approval. Once approved, the Sub-Loan Agreement, attached as Annex 10 hereto, shall be concluded between the Fund and selected PFI.
The Fund can proceed with the PFI selection twice a year.

Eighteen months after SLA signing, the Fund may, at its own discretion, specify other co-financing condition of the project for making new allocation from the credit line.

1.1.2 On-Lending Scheme

According to the financing mechanism on-lending to the PFIs shall be carried out in the form of a credit line. The total amount of the line of credit shall be US$4,200,000 (four million two hundred thousand) equivalent, with total allocations to a single project not exceeding US$500,000 (five hundred thousand).

The credit line shall be made available to the PFI on the SLA effective date with maturity of up to 7 (seven) years. There will not be any pre-specified credit line allocations for PFIs.

Given the specificity of beneficiaries and projects financed by the PFIs, the sub-loans shall be classified into the following two groups:

The reference on-lending rates shall be set every six months, starting January 15 of each year, or the following business day. The interest rate is fixed for each tranche. To access the loan proceeds under the credit line the PFIs selected by the Fund and having entered into an SLA shall duly submit an application to the Fund in conformity with the established procedure.

Any withdrawal under the sub-loan shall be made against the PFI application to the Fund and thereafter, accompanied by the FM’s conclusion, submitted to the Fund Management for approval. In case of approval within three working days following the submission of the application, Sup-Loan Memorandum shall be signed between the Fund and the PFI, with disclosure of names of the parties, loan amount, interest rate and maturity. Within three banking days following the Memorandum, the loan amount shall be transferred to the correspondent account of the PFI. The maturity of loan shall be up to 84 (eighty-four) months upon the effective date with the principal amount repayable at the end of the term. The PFI may carry out multi-time lending throughout the effective term, revolving the funds only for purposes of the project.

The Fund shall retain the right of recalling the allocated funds prior to the maturity date, on the grounds and terms set forth in Annex 10 hereto.

Given the targeted nature of the Project additional 2% per annum payable on the last date of each calendar month, shall apply towards the PFIs for allocated and undisbursed amounts. Furthermore, the Fund reserves the right of recalling portions of the allocated-and-undisbursed funds that remain 20 percent or more of the total allocated funds for three consecutive months.

The PFI shall, as a security for the liabilities assumed by Sub-loan Agreement, pledge the right to claim towards the Borrower (Project Beneficiary) within a month after on-lending to each Beneficiary in favor of the Fund, including the rights towards fulfillment of liability and outstanding interest, covering all expenses connected with pledging. As an additional security the PFI shall furnish to the Fund the evidence issued by the CBA on recording of non-acceptance collection monetary liabilities of its balances in the corresponding account in the CBA, based on which the Fund is authorized to collect overdue debt of the Borrower on non-acceptance basis from all existing correspondent accounts of the latter in the CBA.

The Borrower fully and individually bears the risk of complete or partial non-repayment by the Beneficiary who obtains credit from him. Occurrence of such event does not free the Borrower from fulfilling the liabilities towards the Fund under the Agreement.

To finance projects in amounts over $5000, at least 30% co-financing by the Beneficiary shall be a lending condition.

Under the credit line, to obtain the loan amount, the PFI selected by the Fund and granted a Loan Agreement shall duly (application form is attached) submit an application to the Fund. For each Beneficiary, a separate application shall be submitted, in which the requested amount, term, name of beneficiary (name, surname), location (residence), project implementation site, credit objective, security measures (estimated by an independent, certified evaluator based on comparison method) shall be specified.The FM shall submit the application with his/her decision to the Fund management.

Upon receiving an application from the PFI, the Fund shall, within 5 working days, inform on consistency or inconsistency of application with the requirements of the Agreement. In case of a positive response, the Lending memorandum shall be signed between the Lender and the PFI specifying names of parties, loan amount, currency, interest rate, maturity, mane of Beneficiary.

According to the memorandum the loan shall be transferred to the correspondent account of Borrower within three banking days, provided the following requirements have been fulfilled:

a) The Borrower has duly signed Credit Agreement with the Beneficiary and
b) The Borrower has duly signed an agreement to secure Beneficiary obligation on the credit (collateral, warranty, bank guarantee), and
c) The Pledge Agreement on the Borrower’s right to claim towards the Beneficiary and towards the security measures was duly signed between the Borrower and the Lender

The term of loan repayment shall match to repayment term of loan extended to the Borrower, but not more than 84 months. The principal amount shall be repaid in equal parts twice a year, on the 5th of May and 5th of November of every calendar year. Moreover, a grace period is granted for repayment of principal, within the period of which the repayment of principal is not made and the interest rate set forth in the Agreement is only paid. The grace period for loans with up to two years maturity shall be up to 6 months and for credits with two and more years maturity shall be up to one year. The grace period anticipated by this paragraph shall be applied in the Sub-loan Agreement signed with the Beneficiary by the PFI.

In cases specified in the Agreement (Annex 10), the Fund may submit to the Borrower a claim for execution of payment commitments before the due date.

As an additional security measure the PFI shall furnish to the Fund evidence issued by the CBA on recording of non-acceptance collection monetary liabilities of its balances in the corresponding account in the CBA, based on which the Fund is authorized to collect overdue debt of the Borrower on non-acceptance basis from all existing correspondent accounts of the latter in the CBA.