Wholesale Banking

Wholesale banking is the same as corporate banking. Wholesale banking targets highly rated companies
and select growth companies to provide customised financial solutions. Working Capital Products are
Forex Services, Trade Services, and Transaction Banking, cash management services (CMS)

Today, large corporate customers and downstream correspondents demand increasingly sophisticated
products from their banks - but at the lowest possible cost. These challenges have created fierce
competition in the wholesale banking arena, spurring major competitors to grow ever larger and making
corporate treasurers even more difficult to satisfy. Additionally, the cost of these conflicting demands and
competitive pressures has created the need to find new sources of revenue.

In this pressure-packed environment, wholesale bankers have two basic choices - either ensure
your current operation is at peak efficiency so it can effectively meet your customers' needs, or
develop alternative strategies outside of your current operations environment.

Wholesale banking has the following benefits

 Increase fee revenue from deposit accounts, cash management services, treasury management
operations and lending activities
 Improve processes, operational efficiency and workflow design
 Contain costs and optimize staffing levels
 Increase scale and capacity
 Strengthen customer service and enhance quality

 Benchmark revenues, costs, pricing and service quality, as well as track customized key
performance indicators to provide tools to strengthen competitive postures

Wholesale banking has the following products:

CASH MANAGEMENT

Cash management is the efficient management of cash ( inflows and outflows) to improve liquidity and
returns while implementing adequate controls to manage risks.
Two decades ago Indian corporates faced the following serious problems:
UNCERTAINITY : as to availability of cash
LONG TRANSIT PERIOD: between banking cheques and receiving funds.
ADMINISTARTIVE WORK: in banking cheques and tracking progress
RECONCILIATION PROBLEMS: uncertainty of inflows and lack of details on each credit to the account.
Due to these business complexities cash management was introduced in1985 which started with basic
collections and went on to payments.

The process of collection is as follows:

 COOLECTION OF CHEQUES
 CLEARING AND SETTLEMENT
 FUNDS TRANSFER TO CONCERNATRATION ACCOUNT
 INVESTMENT MANAGEMENT
 The process of payments includes the following
 CUSTOMER PAYMNET INSTRUCTIONS
 DEBIT CUSTOMER CONCERNTRATION ACCOUNT
 INTERNAL/EXTERNAL FUND TRANSFER
 DELIVERY CLEARING OF INSTRUMENT

Cash management provides the following facilities:

 Guaranteed credit based on cheque location
 Cheques are picked up locally by the banks courier agent
 Cheques are cleared locally through correspondent banks
 banks have a good MIS that facilitates ease of reconciliation

Cash management has the following offerings

 payments and collections
 cross-border pooling and sweeping
 overnight investment accounts
 shared service centers
 continuous linked settlements
 wholesale lock boxes
 electronic bill payment and presentment(EBPP)
 receivables management
 electronic invoice presentment and payment (EIPP)

India is going to go trough a series of changes due to which c

Electronic banking is an umbrella term for the process by which a customer may perform banking
transactions electronically without visiting a brick-and-mortar institution. The following terms all refer to
one form or another of electronic banking: personal computer (PC) banking, Internet banking, virtual
banking, online banking, home banking, remote electronic banking, and phone banking. PC banking and
Internet or online banking are the most frequently used designations. It should be noted, however, that the
terms used to describe the various types of electronic banking are often used interchangeably.

PC banking is a form of online banking that enables customers to execute bank transactions from a PC via
a modem. In most PC banking ventures, the bank offers the customer a proprietary financial software
program that allows the customer to perform financial transactions from his or her home computer. The
customer then dials into the bank with his or her modem, downloads data, and runs the programs that are
resident on the customer’s computer. Currently, many banks offer PC banking systems that allow
customers to obtain account balances and credit card statements, pay bills, and transfer funds between
accounts.

Internet banking, sometimes called online banking, is an outgrowth of PC banking. Internet banking uses
the Internet as the delivery channel by which to conduct banking activity, for example, transferring funds,
paying bills, viewing checking and savings account balances, paying mortgages, and purchasing financial
instruments and certificates of deposit. An Internet banking customer accesses his or her accounts from a
browser— software that runs Internet banking programs resident on the bank’s World Wide Web server,
not on the user’s PC. NetBanker defines a “ true Internet bank” as one that provides account balances and
some transactional capabilities to retail customers over the World Wide Web. Internet banks are also
known as virtual, cyber, net, interactive, or web banks.

To date, more banks have established an advertising presence on the Internet— primarily in the form of
informational or interactive web sites—than have created transactional web sites. However, a number of
Banks that do not yet offer transactional Internet banking services have indicated on their web sites that
they will offer such banking activities in the future.

Although Internet banks offer many of the same services as do traditional brick-and-mortar Banks, analysts
view Internet banking as a means of retaining increasingly sophisticated customers, of developing a new
customer base, and of capturing a greater share of depositor assets. A typical Internet bank site specifies the
types of transactions offered and provides information about account security.

Because Internet banks generally have lower operational and transactional costs than do traditional brick-
and-mortar banks, they are often able to offer low-cost checking and high-yield Certificates of deposit.
Internet banking is not limited to a physical site; some Internet banks exist without physical branches,
Further, in some cases, web banks are not restricted to conducting transactions within national borders and
have the ability to make transactions involving large amounts of assets instantaneously. According to
industry analysts, electronic banking provides a variety of attractive possibilities for remote account access,
including:
 Availability of inquiry and transaction services around the clock;
 worldwide connectivity;
 Easy access to transaction data, both recent and historical; and
 “Direct customer control of international movement of funds without intermediation of financial
institutions in customer’s jurisdiction.”

OPENING AN ACCOUNT

There are several ways to open and fund an electronic banking account

Customers who have existing accounts at brick-and-mortar banks and want to begin using electronic
banking services may simply ask their institution for the software needed for PC banking or obtain a
password for Internet banking. Either approach requires minimal paperwork. Once they have joined the
system, customers have electronic access to all of their accounts at the bank. New customers can establish
an account either by completing a PC banking application form and mailing it to an institution offering
such a service or by accessing a bank’s web site and applying online for Internet banking. In either
instance, the customer can fund the new online account with a check, wire transfer, or other form of
remittance. No physical interface between the customer and the institution is required.

electronic trading system (SEN)

Registered institutions with SEN will be able to trade government securities, to do Repos, buy/sell backs
operations, and to carry out inter-bank money market operations among legally authorized financial
institutions. All this can be achieved in real time through remote working stations.

SEN operates under the following parameters:

 It can be operated with or without previous or subsequent identification of the counterpart,

depending on the type of market.
 Risk lines by term and market can be assigned by agents to their eventual counterparts.
 Quotes are shown to all agents and not just to one in particular.
 Automatic transaction closing, when bid and offer of the same instrument are compatible with the
amount, term, price, and rate between two different counterparts. The system will inform agents of
closed transactions and settlement conditions.
 Automatic restitution of Repos, Simultaneous and Interbank Deposits upon expiry date through an
interface with the DCV.
 Record and automatic numeration of all transactions carried out during each session.
  SEN is connected to the DCV and to the Deposit Accounts System, so that automatic settlement of
all transactions under the system can be carried out by the Central Bank.
 Operations undertaken through SEN will be reported to the Inspection or Surveillance Control
Authorities in accordance with the current regulations.
 A certificate shall be issued at the close of operations by any of the two parts as a prove of terms
and conditions provided under the transaction.

Definition Of Working Capital finance

Working Capital is technically defined as the difference between Current Assets and Current Liabilities,
i.e., "Current Assets-Current Liabilities," and is also know as Net Working Capital.

The working capital of a company reflects its ability to meet its obligations as they come due, and thereby
avoid bankruptcy. Thus, the amount of working capital may influence the character and scope of the
business. Working capital loans or financing are the funds usually required to finance working capital
short-falls.

It is believed in some finance sector that the financing difficulties for small businesses only increase when
they seek funds for working capital (operating expenses, purchasing inventory, receivables financing). The
reason? They say, unlike a loan for the acquisition of fixed assets ( land, buildings, machinery and
equipment), a loan for working capital does not provide the lender with collateral thought to be as reliable
for repayment purposes.

The Absolute Need For Working Capital Loans

You see, new and small firms typically find themselves in working capital crunches. Without adequate
working capital, they cannot build inventory or purchase raw materials. Without adequate inventory, the
company cannot sell a sufficient number of products to improve its financial condition. If a sufficient level
of financing is not available, the company may either collapse or never realize its true potential.

Thus, the availability of credit is a key determinant in the ability of small firms to expand and grow. To
lessen these problems for small and new businesses and meet the demand, some private lenders have
instituted flexible working capital loan programs. In fact some lenders offer collateral or "promise of
repayment" to back up working capital loans.

New Market Has Evolved

Such arrangements with this new market involve third party entities (usually private lenders) who promise
repayment of a loan that is obtained from lending institutions for working capital purposes. By reducing the
lender’s risk, this promise of repayment increases the likelihood of the business obtaining a working capital
loan, and getting the loan at affordable rates.

This is indeed a creative working capital solution. Some professionals are beginning to call it "the working
capital sub prime market." Many small business owners are rushing to take advantage by going through this
back door (new market) to meet their working capital needs.

Structured Trade Finance:

The Structured Trade Finance in wholesale banking brings, to every transaction, the advantages of being
one of the world's largest arrangers of export credit and multilateral supported financing. The team
maintains a working relationship with all export credit agencies and can help structure the most efficient
and lowest cost financing alternative for cross-border transactions that involve the import of goods and
services.
Trade and Commodities Finance

The Banking and Finance Department provides a comprehensive legal service to clients in connection with
domestic and cross-border trade and commodities finance activities,. We It also includes trade finance
transactions involving export credit agencies.

The work of the Department in this sector typically involves the provision of legal advice, and the
preparation, negotiation and completion of documentation relating to the hard currency pre-export
financing and/or acquisition of commodities such as sugar, precious metals, base metals and oil; however,
we also act in relation to the trade of many other goods and services.

Risk Management:

Credit Risk Management System:

efficient allocation of capital across the asset portfolio of the Bank. The functions of this group include risk
identification, risk measurement, risk monitoring and portfolio level management of risk. It is the
responsibility of the group to ensure that while incremental credit exposure is granted to sectors with
positive outlook, the credit exposure to sectors with stable or negative outlook is contained

transactional services

fairness opinion

More than ever, today's financing, restructuring, and recapitalization transactions are complex and can
present conflicts between parties of interest. To minimize thes risks of litigation and to ensure transaction
fairness, it is essential to obtain an independent fairness opinion from a competent and credible firm. A
fairness opinion is a financial advisor's determination that consideration or financial terms in a merger,
acquisition, divestiture, securities issuance, or other transaction are fair from a financial point of view. A
fairness opinion may be rendered on behalf of a company, its shareholders, or a limited group of
shareholders (i.e., public shareholders or non-controlling shareholders). In addition, a fairness opinion
should consider whether the transaction is prudent or if the company should consider another form of
transaction, such as a leveraged recapitalization or a merger with another company.

Solvency and fraudulent conveyance

In these uncertain economic times, fraudulent conveyance in leveraged buyouts, restructurings, and
recapitalizations is a valid concern for parties involved in leveraged transactions. Therefore, an
independent, in-depth opinion of solvency and capital adequacy is crucial to protect corporate directors and
lenders. Using state-of-the-art financial analysis, FMV can ascertain a company’s ability to repay its debt as
it becomes due and determine whether a company has a reasonable capital base from which to operate.

Purchase or sale of a business

If you are in a position to purchase or sell a business, one of the most important steps toward an equitable
transaction is a thorough and objective analysis of value. A competent valuation can help a seller or a buyer
achieve the best financial results from the transaction. FMV Opinions will conduct a comprehensive
analysis of the company's financial statements, facilities, management, operations (past, present, and
future), strategies, competition, markets, market share, and economic climate. When the research is
complete, we provide a detailed report documenting our findings and conclusions.

After the transaction occurs, or as part of the negotiations, it may be necessary to allocate the purchase
price among various assets. FMV Opinions provides purchase price allocation valuations for intangible
assets, such as customer lists, consulting contracts, and patents.

Transaction consideration valuation

In today’s complex financial environment, it is common for the sellers of businesses to receive
consideration consisting of assets other than cash, such as consulting agreements, lease adjustments,
contingent payments, debt, options, convertible securities, guarantees, floors, ceilings, etc. For accounting
and tax reporting purposes, these complex considerations require an accurate, thorough and supportable
valuation.

Custodial & security Services

Services Provided

Under custodial and security services the following is provided

 Settlement of stock exchange trades

 Safekeeping of certificates and related documentation
 Registration
 Banking services including foreign exchange
 Income collection
 Corporate actions
 Proxy voting
 Reporting

Correspondent Banking

Correspondent Banking provides credit, deposit, collection, clearing and payment services to banks and
financial institutions. These services are only for financial institutions

Correspondent banking attracts new business, increase profits and function more efficiently by establishing
a relationship with a correspondent bank that not only offers products and services, but the advice and
expertise you need to stay competitive
 You can monitor, gain wider and easier access to your account information, or check on a
transaction.
 You can monitor your account balance, access a summary of transactions processed since your last
statement, or obtain full details of selected transactions online.
Direct Correspondent Services
correspondent banking customers benefit from a broad array of products and services, among them
accelerated collection on cash letters, a wide range of credit facilities, a variety of international payment
services, increased investment opportunities and more
Third Party Correspondent Services
Augment the retail and commercial financial services you offer customers without large capital
expenditures for development. Available on a wholesale basis and with us acting behind the scenes as
provider, our products and services will help you reduce expenses and generate new revenues

Project Finance

More and more major construction projects involve project financing. Contractors, engineers and
designer-builders are finding their work, compensation and risks are shaped by this method of financing.
The following guide is provided to help them understand the overall process, their role in it and the risks
involved

Project financing involves non-recourse financing of the development and construction of a particular
project in which the lender looks principally to the revenues expected to be generated by the project for the
repayment of its loan and to the assets of the project as collateral for its loan rather than to the general
credit of the project sponsor

Project financing is commonly used as a financing method in capital-intensive industries for projects
requiring large investments of funds, such as the construction of power plants, pipelines, transportation
systems, mining facilities, industrial facilities and heavy manufacturing plants. The sponsors of such
projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to take
the risks and assume the debt obligations associated with traditional financings. Project financing permits
the risks associated with such projects to be allocated among a number of parties at levels acceptable to
each party.

Principal Advantages and Objectives

Non-recourse. The typical project financing involves a loan to enable the sponsor to construct a project
where the loan is completely "non-recourse" to the sponsor, i.e., the sponsor has no obligation to make
payments on the project loan if revenues generated by the project are insufficient to cover the principal and
interest payments on the loan. In order to minimize the risks associated with a non-recourse loan, a lender
typically will require indirect credit supports in the form of guarantees, warranties and other covenants
from the sponsor, its affiliates and other third parties involved with the project.

Maximize Leverage. In a project financing, the sponsor typically seeks to finance the costs of development
and construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to
100 percent debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at
risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in
certain circumstances, also may permit reductions in the cost of capital by substituting lower-cost, tax-
deductible interest for higher-cost, taxable returns on equity.
Off-Balance-Sheet Treatment. Depending upon the structure of a project financing, the project sponsor
may not be required to report any of the project debt on its balance sheet because such debt is non-recourse
or of limited recourse to the sponsor. Off-balance-sheet treatment can have the added practical benefit of
helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other
indentures and credit agreements to which the sponsor is a party.

Maximize Tax Benefits. Project financings should be structured to maximize tax benefits and to assure
that all available tax benefits are used by the sponsor or transferred, to the extent permissible, to another
party through a partnership, lease or other vehicle.

Disadvantages. Project financings are extremely complex. It may take a much longer period of time to
structure, negotiate and document a project financing than a traditional financing, and the legal fees and
related costs associated with a project financing can be very high. Because the risks assumed by lenders
may be greater in a non-recourse project financing than in a more traditional financing, the cost of capital
may be greater than with a traditional financing

Project Financing Participants and Agreements.

Sponsor/Developer. The sponsor(s) or developer(s) of a project financing is the party that organizes all of
the other parties and typically controls, and makes an equity investment in, the company or other entity that
owns the project. If there is more than one sponsor, the sponsors typically will form a corporation or enter
into a partnership or other arrangement pursuant to which the sponsors will form a "project company" to
own the project and establish their respective rights and responsibilities regarding the project

Additional Equity Investors. In addition to the sponsor(s), there frequently are additional equity investors
in the project company. These additional investors may include one or more of the other project
participants.

Construction Contractor. The construction contractor enters into a contract with the project company for
the design, engineering and construction of the project

Operator. The project operator enters into a long-term agreement with the project company for the day-to-
day operation and maintenance of the project.
Feedstock Supplier. The feedstock supplier(s) enters into a long-term agreement with the project company
for the supply of feedstock (i.e., energy, raw materials or other resources) to the project (e.g., for a power
plant, the feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood
pulp).

Product Offtaker. The product offtaker(s) enters into a long-term agreement with the project company for
the purchase of all of the energy, goods or other product produced at the project.

Lender. The lender in a project financing is a financial institution or group of financial institutions that
provide a loan to the project company to develop and construct the project and that take a security interest
in all of the project assets

Contents. The feasibility study should analyze every technical, financial and other aspect of the project,
including the time-frame for completion of the various phases of the project development, and should
clearly set forth all of the financial and other assumptions upon which the conclusions of the study are
based, Among the more important items contained in a feasibility study are:

 Description of project.
  Description of sponsor(s).
 Sponsors' Agreements.
 Project site.
 Governmental arrangements.
 Source of funds.
 Feedstock Agreements.
 Offtake Agreements.
 Construction Contract.
 Capital costs.
 Working capital.
 Equity sourcing.
 Debt sourcing.
 Financial projections.
 Market study.
 Assumptions
 Management of project

Security. The project loan typically will be secured by multiple forms of collateral, including:

Mortgage on the project facilities and real property

Assignment of operating revenues

Pledge of bank deposits

Comprehensive General Liability.

Assignment of any letters of credit or performance or completion bonds relating to the project under which
borrower is the beneficiary

Liens on the borrower's personal property.

Assignment of insurance proceeds.

Assignment of all project agreements

Pledge of stock in project company or assignment of partnership interests

Project finance collateralized debt obligations (CDOs) will allow portfolio investors a greater
opportunity to participate in power and other infrastructure debts markets

Collateralized debt obligations (CDOs) and its more specific siblings, collateralized bond obligations
(CBOs) and collateralized loan obligations (CLOs), are a successful application of sophisticated
securitization techniques originally developed for collateralized mortgage-backed securities (CMBS) to
facilitate the resolution of the Savings and Loan crisis in the US in the 1980s. According to Moody's, there
were over US$120bn of CDOs in 2000, making CDOs the second largest type of asset-backed security
(ABS) after credit card ABS.
The core concept of CDOs is that a pool of defined financial assets will perform in a predictable manner
(that is, with default rates, loss severity/recovery amounts and recovery periods that can be reliably
forecast) and, with appropriate levels of credit enhancement applied thereto, can be financed in a cost-
efficient fashion that reveals and captures the arbitrage between the interest and yield return received on the
CDO's assets and the interest and yield expense of the securities (CDO securities) issued to finance them.
Each of the recognized rating agencies (Fitch, Moody's and Standard & Poor's) have developed CDO
criteria and statistical methodologies and analyses to "stress" a pool of CDO assets to determine the level of
credit enhancement required for their respective credit ratings for the CDO securities to finance such pools.

Typically, CDOs require the CDO assets to meet certain eligibility criteria (including diversity, weighted
average rating, weighted average maturity and weighted average spread/coupon). A CDO will allocate the
interest and principal proceeds of such assets on periodic distribution dates according to certain collateral
quality tests (typically an overcollateralization ratio and an interest coverage ratio). CDO securities are
usually issued in several tranches. Each tranche (other than the most junior tranche) has a seniority or
priority over one or more other tranches, with "tighter" collateral quality tests that are set to trigger a
diversion of interest and principal proceeds that would otherwise be allocable to more junior tranches that
will then be used to redeem or otherwise retire more senior tranches. The resulting subordination of such
junior tranches constitutes the required credit enhancement for the more senior tranches and allows the
CDO securities of such senior tranches to receive a credit rating that reflects such seniority or priority.
Some CDOs utilize insurance "wraps" for the same effect.

CDOs often allow principal proceeds to be reinvested in additional eligible CDO assets during a specified
reinvestment period.

In addition, the CDO is usually managed by a collateral manager, who must identify eligible CDO assets
and monitor them for the CDO. Most CDOs allow a portion of the CDO assets to be traded annually, which
allows an adept collateral manager to enhance the arbitrage opportunity of the CDO.

Generally, CDOs are either "balance sheet" CDOs or "arbitrage" CDOs. Balance sheet CDOs are
transactions structured as "sales" for accounting and regulatory capital purposes but are "debt" for tax
purposes. Commercial banks use balance sheet CDOs primarily for portfolio management and regulatory
capital efficiency.

By contrast, arbitrage CDOs are structured as sales for all purposes, including tax.

Arbitrage CDOs are either "cash flow" CDOs or "market value" CDOs, and are distinguished by an
overcollateralization ratio determined by reference to the par or principal amount of the CDO assets
(adjusted for defaulted CDO assets), in the case of a cash flow CDO, or to the market value of the CDO
assets, in the case of a market value CDO.

Typically, a market value CDO will require more equity than a cash flow CDO, but will allow greater
trading by the collateral manager. To facilitate such trading, the capital structure of a market value CDO
usually includes a substantial revolving credit facility to allow the collateral manager to efficiently manage
the capital of the CDO and to trade CDO assets more easily.

While balance sheet CDOs are an important portfolio management and regulatory capital tool, especially
for commercial banks, the remainder of this article will discuss typical arbitrage CDOs.

The CDO issuer is usually established outside of the US (for example, the Cayman Islands) and must not be
engaged in trade or business in the US in order to avoid US taxation. The offering of CDO securities must
be carefully structured to satisfy other applicable legal requirements, including (but not limited to):

 the perfection of the collateral lien on and security interest in the CDO assets;
  the exemption of such offering from registration requirements under applicable US securities laws
and similar laws of other jurisdictions in which such CDO securities are offered;

 the avoidance of registration under the US Investment Company Act; and

 the exemption from adverse consequences under ERISA,

which requirements, together with a description of the innumerable variations of and refinements to the
basic CDO structures described here, are beyond the scope of this article.

Why?

Project finance loans, leases and other debt are regarded as attractive assets for CDOs due to their higher
recovery rates and shorter recovery periods than comparable credit-quality corporate debt obligations. This
allows the CDO securities to be issued at a corresponding lower cost (since less credit enhancement is
required to obtain the same credit ratings), which effectively "expands" the arbitrage opportunity for such
CDO.

The higher recovery rates and shorter recovery periods of project finance debt is primarily attributable to
the tighter covenants and events of default under typical project finance documentation. Moreover, when an
event of default does occur, that project participants are relatively limited in number and are highly-
motivated to consensually resolve such default as expeditiously as possible.

The rating agencies also report a steady and growing amount of rated project finance bonds and other debt
that can serve as a supply for project finance CDOs. For several years, issuance of project finance debt has
exceeded US$100bn annually. The rating agencies have extensive experience with project finance and have
elaborate rating methodologies and criteria for project finance debt. For example, Standard & Poor's (S&P)
has issued comprehensive guidance for project finance debt in its August, 2000 Debt Rating Criteria for
Energy, Industrial and Infrastructure Project Finance that is based on S&P's extensive experience in rating
over 500 projects in 35 countries.

Additionally, commercial banks and other originators of project finance debt can have their project finance
portfolios "shadow" rated in a process in which the rating agency will "map" the rating system of such
originator to its own rating system and determine its rating of a particular project finance debt obligation by
application of such mapping. This process requires the rating agency to undertake substantial due diligence
regarding the originator's rating process (including its underwriting criteria and credit approval procedures)
and historical information regarding the performance of the originator's project finance portfolio.

Commercial banks are uniquely positioned to take advantage of the opportunity presented by CDOs of
project finance debt. Generally, commercial banks are experienced and capable originators of project
finance debt and have a competitive advantage over other financial institutions in their ability to provide
flexible funding for a project's precommercial development, including construction during which draws
may be accelerated or delayed. However, projects are usually capital intensive and project assets will have
long useful lives requiring a corresponding longer tenor financing. Commercial banks are constrained in
their ability to provide such longer tenor financing by the shorter duration of the assets on the balance sheet
of a typical commercial bank (that is, such bank's demand or short-term deposits). While a commercial
bank could provide shorter-term project financing, it (and the project's sponsors) would face a refinancing
risk at the maturity of such financing. Other originators of project finance debt, even if not balance sheet
constrained, can benefit from project finance CDOs: by the additional liquidity that a project finance CDO
brings to an otherwise illiquid asset class and, as stated above, by using a CDO to release otherwise
required regulatory capital and promote regulatory capital efficiency.

Significantly, in October 1999, S&P issued its Rating Considerations for project finance CDOs.
Now?

S&P's Rating Considerations for project finance CDOs are based on its belief that project finance CDOs
will be an important step in expanding the participation of portfolio investors in the broader infrastructure
debt markets. S&P expects to refine its rating methodology for project finance CDOs based on its
experience with respect thereto for three inherent key credit issues; namely,

 How do post-default recovery rates and timing compare for projects, especially in the emerging
and developed countries, where project loans are increasingly being originated?
 How diverse are project risks really likely to be across sectors and regions -- particularly, should
project debt experience some generic challenges such as construction, operating, or political risks
across a number of countries?

 How does default likelihood change over the life of a loan? With regards to loans, there is
evidence, for example, that they are less likely to default after they have amortized a substantial
amount of debt.

Notwithstanding that, at this time, project finance CDOs may be more art than science, Credit Suisse First
Boston ("CSFB") has taken 2 important steps towards answering these issues in its 2 project funding
transactions:

 Project Funding I, a project finance portfolio primarily of US projects, that closed in 1998; and
 Project Funding II, an international project finance portfolio, that closed in early 2000 1.

As one might expect, an international portfolio presented substantially more difficult structuring and rating
challenges, including sophisticated structural features to mitigate otherwise applicable withholding tax on
the project finance debt from several troublesome jurisdictions. Notwithstanding such difficulties, the
promise of project finance CDOs is so strong that S&P and other rating agencies report that a significant
number of other financial institutions have expressed interest in, and are pursuing, possible project finance
CDOs.

Only time will tell whether the substantial promise of project finance CDOs will be realized, but results to
date are encouraging.