Prudential Regulation Authority Rulebook

1.

A firm may assign a bond or loan for which a credit assessment by a nominated external credit assessment institution is not available and for which debtors have not posted collateral by way of a collateral arrangement that meets the criteria set out in 3G8 to credit quality step 2 if all of the criteria set out in 3D18.3 and 3D18.4 are met with respect to the bond or loan.

2.

A firm may assign a bond or loan for which a credit assessment by a nominated external credit assessment institution is not available and for which debtors have not posted collateral by way of a collateral arrangement that meets the criteria set out in 3G8, other than a bond or loan assigned to credit quality step 2 under 3D18.1, to credit quality step 3 if all of the criteria set out in 3D18.3 and 3D18.5 are met with respect to the bond or loan.

3.

The criteria in this rule are as follows:

1. (1) the firm’s own internal credit assessment of the bond or loan meets the requirements listed in 3D19;
2. (2) the bond or loan is issued by a company which does not belong to the same corporate group as the firm;
3. (3) the bond or loan is not issued by a company which is a UK Solvency II undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an alternative investment fund manager, a UCITS management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;
4. (4) no claims on the issuing company of the bond or loan rank senior to the bond or loan, except for the following claims:
   1. (a) statutory claims and claims from liquidity facility providers provided that those statutory claims and claims from liquidity facility providers are in aggregate not material relative to the overall senior debt of the issuing company;
   2. (b) claims from trustees; and
   3. (c) claims from derivatives counterparties;
5. (5) the bond or loan provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments;
6. (6) the contractual terms and conditions of the bond or loan provide for the following:
   1. (a) the borrower is obliged to provide audited financial data to the lender at least annually;
   2. (b) the borrower is obliged to notify the lender of any events that could materially affect the credit risk of the bond or loan;
   3. (c) the borrower is not entitled to change the terms and conditions of the bond or loan unilaterally, nor to make other changes to its business that would materially affect the credit risk of the bond or loan;
   4. (d) the issuer is prohibited from issuing new debt without the prior agreement of the firm;
   5. (e) what constitutes a default event is defined in a way that is specific to the issue and the issuer; and
   6. (f) what is to happen on a change of control; and
7. (7) the bond or loan is issued by a company that meets all of the following criteria:
   1. (a) the company is a limited liability company;
   2. (b) the company has its head office in the UK;
   3. (c) more than 50% of the annual revenue of the company is denominated in currencies of countries which are members of the OECD;
   4. (d) the company has operated without any credit event over at least the last 10 years;
   5. (e) at least one of the following requirements is fulfilled with respect to each of the last three financial years ending prior to the date on which the SCR is being calculated:
      1. (i) the annual turnover of the company exceeds GBP 8,800,000;
      2. (ii) the balance sheet total of the company exceeds GBP 8,800,000; or
      3. (iii) the number of staff employed by the company exceeds 50;
   6. (f) the sum of the company’s annual earnings before interest, tax, depreciation and amortisation (‘EBITDA’) over the last five financial years is greater than 0;
   7. (g) the total debt of the company at the end of the most recent financial year for which figures are available is no higher than 6.5 times the average of the company’s annual free cash-flows over the last five financial years;
   8. (h) the average of the company’s EBITDA over the last five financial years is no lower than 6.5 times the company’s interest expense for the most recent financial year for which figures are available; and
   9. (i) the net debt of the company at the end of the most recent financial year for which figures are available is no higher than 1.5 times the company’s total equity at the end of that financial year.

4.

The yield on the bond or loan, and the yield on any bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values:

1. (1) the average of the yields on the two indices determined in accordance with 3D18.6; and
2. (2) the sum of 0.5% and the yield on the index that meets the requirement in 3D18.6(4).

5.

The yield on the bond or loan, and the yield on bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values:

1. (1) the average of the yields on the two indices determined in accordance with 3D18.7; and
2. (2) the sum of 0.5% and the yield on the index that meets the requirement in 3D18.7(2).

6.

For the purposes of 3D18.4, a firm must use, for the bond or loan referred to in 3D18.1, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements:

1. (1) both indices are broad indexes of traded bonds for which an external credit assessment is available;
2. (2) the constituent traded bonds in the two indices are denominated in the same currency as the bond or loan;
3. (3) the constituent traded bonds in the two indices have a similar maturity date as the bond or loan;
4. (4) one of the two indices consists of traded bonds of credit quality step 2; and
5. (5) one of the two indices consists of traded bonds of credit quality step 4.

7.

For the purposes of 3D18.5, a firm must use, for the bond or loan referred to in 3D18.2, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements:

1. (1) both indices meet the requirements set out in 3D18.6(1), (2) and (3);
2. (2) one of the two indices consists of traded bonds of credit quality step 3; and
3. (3) one of the two indices consists of traded bonds of credit quality step 4.

8.

For the purposes of 3D18.4, where the bond or loan referred to in 3D18.1 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with 3D18.6, a firm must adjust the yield on the bond or loan to reflect those differences.

9.

For the purposes of 3D18.5, where the bond or loan referred to in 3D18.2 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with 3D18.7, a firm must adjust the yield on the bond or loan to reflect those differences.