AFD - 2018 Registration document

6 CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH IFRS ACCOUNTING PRINCIPLES ADOPTED BY THE EUROPEAN UNION Notes to the consolidated financial statements

Monitoring the risks of sovereign counterparties The French government covers arrears and loan write-offs in the sovereign activity through its reserve account which, at the end of 2018, had a balance of €741M, i.e. 4.6% of sovereign outstandings (latest agreement signed on 8 June 2015). There is a special automatic penalty system for sovereign loans: P arrears of over two months: suspension of approvals and signatures; P arrears of over four months: suspension of payments. The official bilateral creditors who are members of the Paris Club submit their arrears on their sovereign debt for review at the monthly review meetings known as the Tour d’horizon . AFD takes part in these meetings under the guise of the French Ministry of Finance. Where applicable, the Paris Club can grant debtor countries restructuring arrangements or write off their debt. The restructuring arrangements may affect AFD debts. The financial impact of these arrangements on AFD is absorbed by the French Treasury. In the event of arrears of over 18 months on a sovereign debt, the third party in question is downgraded to doubtful and the sum is taken from the Treasury’s reserve account. Monitoring the risks of non-sovereign counterparties As a reminder, 2017 saw the creation of the Portfolio Management and Specialised Support Department (GPS) within the Operations Department. This includes the Portfolio Management and Quality Division (GEP), formerly the Non- Sovereign Loans Financial Monitoring Division (PNS). This division remains responsible for financial monitoring of non- sovereign loans from the first instalment (monitoring the financial commitments of counterparties, or “covenants”, monitoring recovery and management of waivers, amendments and restructuring). In 2018, the quarterly updating of permanent credit files was taken over by a new dedicated structure, the Counterparty Regulatory Knowledge Division (CRC), created in September 2017. The risk assessment sheets, which contain the categories for the different rating methods, are updated every six months (annually for local authorities) by local offices (or Operational Departments at Head Office, for multi-country risks). The exercise consists of the following stages: P collection and control of qualitative and financial data (accounting documentation, latest available company accounts, qualitative assessment of the borrower and/or the beneficiary and the exposure situation);

P proposal for an intrinsic rating accompanied by a reasoned assessment report and any shareholder support which, automatically cross-referenced with the country risk, generate a credit rating in the risk assessment sheet. The investment officers within the Portfolio Management and Quality Division (GEP) perform a first-level control. Credit analysts in the Credit Risk Assessment Division (CRD) perform second-level checks and validate credit ratings. Third parties that are more than 90 days past due (180 days for local authorities in French Overseas Departments and Collectivities) or that pose a known credit risk (CCC credit rating) are downgraded to “doubtful” and impairments of the corresponding exposures are estimated, taking into account the associated guarantees. The risk assessment sheets are updated independently of the six-monthly review cycles in the event of a new appraisal, the signing of a new loan agreement or a major event which affects the quality of the borrower. The downgrading to doubtful or reclassification as performing and the recoverability rates of doubtful debts are reviewed each quarter by the Counterparty Risk Committee (CORIS) before closing the accounts. Collective provisions for performing loan outstandings and the Group’s guarantees have been estimated quarterly in accordance with new IFRS 9 since the beginning of 2018. Borrowers with a high credit risk, because of their size or likelihood of default (especially all doubtful third parties), are included on a watchlist and monitored particularly closely. The watchlist, which summarises the key information relating to these third parties (outstandings, undisbursed balances, credit rating, current situation, etc.), is composed of different compartments: simple sub-supervisory borrowers, restructured sub-supervisory borrowers, restructured borrowers and pre-litigation or litigation cases. It identifies counterparties in financial difficulty who have benefited from a forborne exposure. The watchlist is updated each quarter by the Group Risk Management Department (DRG) and sent to the Counterparty Risk Committee (CORIS), which reviews the current situation of all cases, decides which counterparties should be added to, or removed from, the list, can set up legal monitoring for some cases, and can authorise dispensation from the recovery procedures. The criteria for inclusion on the watchlist are as follows: P large borrowers (exposure greater than €100M) in the speculative category;

P occurrence of a significant adverse event;

P financial difficulties (credit rating less than or equal to B- or restructuring);

P visit and interview with the counterparty;

emergence of arrears.

P

P preparation of the evaluation grid and spreadsheets for analysis and calculation of financial and prudential ratios;

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REGISTRATION DOCUMENT 2018