An Active or “Structured” Approach to Managing Energy Project Finance Loan Portfolios

Abstract

By engaging in an active or ?structured? approach to portfolio management, banks involved in project finance lending can significantly improve their risk-adjusted returns to shareholders and enhance their ability to comply with Basel II and other regulatory requirements. In this approach, the portfolio manager works with the underwriting team not only to understand the credit quality of each new transaction, but also to determine how that transaction fits into an optimally diversified portfolio. Pricing of a new loan is sensitive to how it contributes to the risk of the entire portfolio. The portfolio manager actively buys and sells credit exposures where possible to create the most risk-efficient portfolio. The active sale of collateralized debt obligations (CDOs) frees up regulatory capital tied up with the underlying project finance loans. The bank transforms the credit risk function from a traditional buy-hold to an active originate-distribute-optimize approach.