AIMM Sector Framework Brief
Sector Economics and Development Impact Department
International Finance Corporation

DARP
July 2019

Development Impact Thesis – The central development thesis of IFC’s Distressed Assets Recovery Program (DARP) operation is thecounter-cyclical role played by IFC to break the negative feedback loop generated by economic slowdown and/or increased nonperforming loans (NPLs) resulting in reduced available capital, which in turn discourages new lending. IFC makes (i) direct investment
in DARP servicers; and (ii) investments in DARP platforms that invest in underlying distressed assets (DA) – these can be platforms thateither acquire one portfolio or several NPL portfolios or invest in single assets (either in the form of restructuring, special lending or
special situations). IFC invests in these instruments to:→ Release capital and inject liquidity in financial
institutions as they dispose distressed assets→ Restore credit and access to finance forindividuals and SMEs by normalizing obligations→ Support viable but distressed SMEs andcorporates in restructuring their obligations→ Support job preservation in SME and corporates
by addressing their NPL issues→ Introduce and enhance NPL resolution practices→ Reduce overall NPL volume in the market→ Restore lending capacity of financial institutions
and strengthen their balance sheets→ Mobilize capital and expertise for DA investmentsfrom domestic and international investors→ Market-wide adoption of specialized insolvency
processes and best resolution practicesProject
Outcomes

Development Gaps Addressed
•
•
•
•



Contributions toMarket Creation

Volatile financial systems
Volatile real sector, growth,and development
Limited active secondary
marketShallow capital markets



Rating Construct – All AIMM sector frameworks include detailed guidance notes that help define project outcomes and contributions
to market creation, aggregating to an overall assessment of development impact.
•

For project outcomes, stakeholders and environmental effects are the key components for which industry-specificbenchmarks define the context in which an IFC operation seeks to drive changes. This gap analysis is combined with aseparate set of impact intensity estimates that specify the expected results using predefined indicators.

•

For contributions to market creation, industry-specific market typologies define stages of development for five market
attributes (or objectives): competitiveness, resilience, integration, inclusiveness, and sustainability. These market typologies,
when combined with estimates of how much an intervention affects the development of a market attribute, provide thefoundation for IFC’s assessment of an intervention’s market-level potential for delivering systemic changes.
PROJECT OUTCOME INDICATORS
Impact on Financial Institutions• Number of distressed loans acquired (Individuals/MSMEs/Corporates)• Volume of distressed loans acquired (Individuals/MSMEs/Corporates)• Volume of liabilities supported (for investments in Single Assets only)• Increase in partner FI's capital (for NPL portfolio only)

Stakeholders

CONTRIBUTION TO MARKET CREATION INDICATORS
Market Structure• Entry of new servicers in the DA market• Market wide increase in investment in DAs (including mobilizing first time investors)
CompetitivenessImpact on Borrowers/Investees• Number of borrowers with obligations normalized or restructured(Individuals/MSMEs/Corporates)• Volume of obligations normalized or restructured (Individuals/MSMEs/Corporates)• Gross IRR - Underlying Assets (for investments in Single Assets only)• Knowledge transfer to Borrower/Investee (for investments in Single Assets only)
Impact on Employees• Improve employees' skills related to distressed assets acquisition and processing

Integration

Market Regulation• Improvement in legal/Institutional regulatory framework• Market-wide adoption of specialized processes and best practices by servicers (e.g.
methodologies, departments, trained officers, resolution practices)
Financial Integration• Trigger cross-border investments in DA (e.g. establish regional platform forinvestment in smaller economies)• Create secondary market for DA investing• Contribute to increased networking among FI and servicers, and regional/global
expansion of servicers
Capital Mobilization• Capital mobilization potential (e.g. develop platforms for DA (co)investment
facilities, first time investment in DA class)

Economy-wide• Impact on value-added (TBD)• Impact on employment (TBD)

Resilience

Market's Financial Stability• Increase in formalization of DA market

IFC’s Environmental and Social Performance Standards define IFC clients’ responsibilities for managing their environmental and social
risks. While for most IFC investments meeting Performance Standards reflects improved environmental and social performance,
effects from implementation of the standards are only claimed in the AIMM framework where a clear counterfactual can beestablished and where the investment intent is to improve environmental or social outcomes.
Sector Specific Principles or Issues – The following principles will be applied for projects rated under this framework:
Principle or
Issue

Treatment Under Framework

Pricing gap

A key challenge in developing a market for NPLs is closing the pricing gap, which is the difference between the price that aprospective seller of NPLs believes those assets should command and the significantly lower price that would convince a
prospective buyer that he or she has been fully compensated for the risk and uncertainty associated with the assets and for the
initially high transaction costs, especially in a highly underdeveloped market.

Inadequate insolvency
regimes

Well-functioning insolvency regimes are particularly important for a highly underdeveloped DA market and have two mainfunctions: (i) to preserve value; and (ii) to distribute value. As these two functions occur successively, certain attributes of an
insolvency regime that can initially extinguish value (such as immunities, as they apply to secured or privileged debt) may
significantly reduce the ultimate amount of value that is available to be distributed.

Lack of secondary DA
markets

An active DA secondary market is needed to attract and maintain investors seeking to deploy capital across multiple types of DA
classes. Secondary trades increase the ability for investors to generate liquidity events for its DA portfolio and promote easiness oftransacting. However, DA secondary markets are typically underdeveloped in many emerging markets and lower the value of DA.

Data unavailability andinformation asymmetry

Buyers want to have information regarding the nature and status of defaults, a history of attempts to enforce the loan agreement,
lender-borrower correspondence, and inter-creditor correspondence. Adequate transparency regarding potential flaws in thegoverning legal documents is essential to allow NPL buyers to ascertain their value recovery and financial-return prospects. NPL
information and data quality issues with which banks must deal include missing historical data regarding exposures, discrepancies
between loan documentation and data records, missing or incomplete documentation, breaks or anomalies in the chain of title,
flawed data on loan collateral and valuation methods, and frequent changes in data sources that exacerbate data quality problems.

Treatment of negative
effects

No negative effects are anticipated. In cases where negative effects occur, these would be assessed on a case by case basis and only
if it is material enough to affect the project assessment.

Project Outcomes – Depending on the type of project, the stakeholders are (i) financial institutions (FIs) and other credit originators,
benefiting from balance sheet clean-up, improved profitability, and expanded lending capacity; (ii) borrowers(MSMEs/Corporates/Individuals) or investees (stressed or distressed but viable companies/projects) whose obligations are normalized
or restructured and can regain access to credit as well as retain their most valuable assets; (iii) jobs preserved in the firms that benefit
from resolution, restructuring or special lending; and (iv) employees of the DARP servicers in which IFC invests.
The development gap is an estimate of the development challenge that is being addressed by the project and provides context for the
project’s development outcomes. The gap is sector- or segment-specific and is benchmarked against all emerging market countries.
The gap assessment uses data collected by IFC from various public sources. The table below illustrates an application of some of themain outcome gap indicators and their benchmarking. Apart from gap indicators that are naturally bound, all gap indicators arenormalized to be scale-free (e.g. relative to GDP or to total population).
COUNTRYCONTEXT

AccessLow Gap

Medium Gap

Large Gap

Very Large Gap

The following are >1 STD
above EM median:

The following are within 1 STD
EM median:

The following are < 1 STD
below EM median:

The following are below EM
15th percentile:- Quality of the judicial
processes index (0-18)- Resolve Insolvency - yrs- Resolve Insolvency - Cost %- Resolve Insolvency Recovery rate (cents on $)- Resolve Insolvency Strength of insolvency
framework index (0-16)- Change in NPL to Total
Gross Loans (%) over 3 yrs- NPLs to Total Gross Loans- Quality of the judicial
processes index (0-18)- Resolve Insolvency - yrs- Resolve Insolvency - Cost %- Resolve Insolvency Recovery rate (cents on $)- Resolve Insolvency Strength of insolvency
framework index (0-16)- Change in NPL to Total
Gross Loans (%) 3 yrs- NPLs to Total Gross Loans- Quality of the judicial
processes index (0-18)- Resolve Insolvency - yrs- Resolve Insolvency - Cost %- Resolve Insolvency Recovery rate (cents on $)- Resolve Insolvency Strength of insolvency
framework index (0-16)- Change in NPL to Total
Gross Loans (%) 3 yrs- NPLs to Total Gross Loans- Quality of the judicial
processes index (0-18)- Resolve Insolvency - yrs- Resolve Insolvency - Cost %- Resolve Insolvency Recovery rate (cents on $)- Resolve Insolvency Strength of insolvency
framework index (0-16)- Change in NPL to Total
Gross Loans (%) 3 yrs- NPLs to Total Gross Loans

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The core outcomes for DARP projects include access to DA finance and economy wide effects through jobs preservation (applicable
only for single assets investments). Access refers to the availability of DA finance for both FIs (owners of the distressed loans) and forthe companies (borrowers or investees) or households (borrowers) in the FIs' portfolios. In cases where operations involve theacquisition of an NPL portfolio from an FI, the core indicators are (i) volume of distressed loans acquired and (ii) volume of distressedloans normalized/restructured. For investment in single assets, the core indicators are (i) volume of FI debt supported; (ii) gross IRR ofthe underlying assets; and (iii) knowledge transfer to investee. Economy-wide effects are considered for single asset investment and it
is related to the impact of alleviating debt distress on the affected companies and its impact on employment. Due to an inadequate
resolution regime and/or underdeveloped DA markets, liquidation is often the only available alternative, and when viable businesses
are liquidated instead with unnecessary job losses and loss of human and intangible capital. One measure is the number of jobs
preserved at the distressed companies that DARP projects support.
PROJECTINTENSITY

Below Average- Absolute change in numberof NPLs acquired by therespective DARP platform is• Volume of distressed loans
insignificant compared toacquired
the total number of• Number of distressed loans
outstanding NPLs in theacquiredmarket for that asset class• Volume of liabilities- Absolute change in volume
supported (note: may onlyof NPLs acquired (measured
apply to certain Single Assets
as outstanding balance of
projects)
the loans) by the respective• Capital increase of partner FI
DARP platform is(if DARP platform is set up to
insignificant compared toacquire NPLs from one
the total volume of
specific FI)
outstanding NPLs in themarket for that asset class- Interest Coverage Ratio:
Underlying single assets of
the relevant DARP platform
have very small volume ofliabilities that is at risk of
becoming distressed in theabsence of newcapital/financing provided- Very small increase in thecapital of the partner FI
compared to the lastreporting period

Access (financial
institutions)AverageAbove Average

Significantly Above
Average- Absolute change in numberof NPLs acquired by therespective DARP platform
ranges is slightly significant
compared to the total
number of outstanding NPLs
in the market for thatparticular asset class- Absolute change in volume
of NPLs acquired (measured
as outstanding balance ofthe loans) by the respective
DARP platform slightly
significant compared to thetotal volume of outstanding
NPLs in the market for thatparticular asset class- Interest Coverage Ratio:
Underlying single assets of
the relevant DARP platform
have small volume ofliabilities that is at risk of
becoming distressed in theabsence of newcapital/financing provided- Small increase in the capitalof the partner FI comparedto the last reporting period- Absolute change in numberof NPLs acquired by therespective DARP platform issignificant compared to thetotal number of outstanding
NPLs in the market for thatparticular asset class- Absolute change in volume
of NPLs acquired (measured
as outstanding balance ofthe loans) by the respective
DARP platform is significant
compared to the total
volume of outstanding NPLs
in the market for thatparticular asset class- Interest Coverage Ratio:
Underlying single assets of
the relevant DARP platform
have a large volume ofliabilities that is at risk of
becoming distressed in theabsence of newcapital/financing provided- Large increase in the capitalof the partner FI comparedto the last reporting period- Absolute change in numberof NPLs acquired by therespective DARP platform isvery significant compared tothe total number ofoutstanding NPLs in themarket for that asset class- Absolute change in volume
of NPLs acquired (measured
as outstanding balance ofthe loans) by the respective
DARP platform is verysignificant compared to total
volume of outstanding NPLs
in the market for asset class- Interest Coverage Ratio:
Underlying single assets of
the relevant DARP platform
have a very large volume ofliabilities that is at risk of
becoming distressed in theabsence of newcapital/financing provided- Very large increase in thecapital of the partner FI
compared to the lastreporting period

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PROJECTINTENSITY

Below Average- Absolute change in numberof borrowers being
normalized is insignificant• Number of borrowers withcompared to the totalloans normalized orborrowers acquired by the
restructured
relevant DARP platform for• Volume of loans normalized
the life the projector restructured- Absolute change in volume• Gross IRR of underlyingof the obligations ofassets (note: may only apply
borrowers being normalized
to certain Single Assets(measured as outstanding
projects)
balance of the loans• Knowledge Transfer toacquired) is insignificant
Investee (note: may only
compared to the total
apply to certain Single Assets
borrowers acquired by the
projects)
relevant DARP platform forthe life the project- Gross IRR is below theaverage range of gross IRR
based on DARP experience- Borrowers/investees do not
engage actively with the
DARP servicer with limited to
no knowledge transfer

Access (borrowers &investees)

AverageAbove Average- Absolute change in numberof borrowers being
normalized is slightly
significant compared to thetotal borrowers acquired by
the relevant DARP platform
for the life the project- Absolute change in volumeof the obligations ofborrowers being normalized(measured as outstandingbalance of the loans
acquired) is slightly
significant compared to thetotal borrowers acquired by
the relevant DARP platform
for the life the project- Gross IRR is within the
average range of gross IRR
based on DARP experience- Some borrowers/investees
engage actively with DARP
servicer, who provides someknowledge transfer with aclear hands-on investment
management process- Absolute change in numberof borrowers being
normalized is significant
compared to the totalborrowers acquired by therelevant DARP platform forthe life the project- Absolute change in volumeof the obligations ofborrowers being normalized(measured as outstandingbalance of the loans
acquired) is significant
compared to the totalborrowers acquired by therelevant DARP platform forthe life the project- Gross IRR is above theaverage range of gross IRR
based on DARP experience- Many of theborrowers/investees of therelevant DARP platform
engage actively with the
DARP servicer

Significantly Above
Average- Absolute change in numberof borrowers being
normalized is very significant
compared to the totalborrowers acquired by therelevant DARP platform forthe life the project- Absolute change in volumeof the obligations ofborrowers being normalized(measured as outstandingbalance of the loans
acquired) is very significant
compared to the totalborrowers acquired by therelevant DARP platform forthe life the project- Gross IRR is significantly
above the average range ofgross IRR based on DARP
experience- Majority of theborrowers/investees of therelevant DARP platform
engage actively with the
DARP servicer

Employees- Employees use rudimentary - Employees use basic pricing
pricing models andmodels and collection
collection practices, while
practices, while the servicers
the servicers have nothave not adopted best
adopted best practices in thepractices in the acquisitionacquisition and resolution ofand resolution of NPLs
NPLs and/or get low ratings
and/or get low ratings- Employees use standard- Employees use pricing
pricing models andmodels and collection
collection practices, while
practices that are of global
the servicers have notstandard, while the servicers
adopted best practices in the
fully adopt best practices inacquisition and resolution of
the acquisition and
NPLs and/or get low ratings
resolution of NPLs and/or
get very high ratings

Economy-wide- Very few jobs being
preserved relative to thetotal number of employeesof the investees at the timeof investment- Significant number of jobs
being preserved relative tothe total number of
employees of the investees
at the time of investment• Improve employees’ skills
related to distressed assets
pricing• Number of jobs preserved atborrowers with loans
normalized (for single assets
projects)- Moderate number of jobs
being preserved relative tothe total number of
employees of the investees
at the time of investment- Number of jobs being
preserved is sizable relative
to the total number of
employees of the investees
at the time of investment

The AIMM methodology considers the uncertainty around the realization of the potential development impact being claimed, making
a distinction between the potential outcomes that a project could deliver and what could be realistically achievable in the project’s
development context. The table below presents the key types of risk factors for water and wastewater services operations.
PROJECT
LIKELIHOOD

Project Factors

Sector Factors

Assessment
Considerations• Experience and track record of the investor/servicer in therelevant asset class• Project's projected growth relative to the recent history of thesponsor and available scalable capacity• Expansion into markets (e.g. new country or sub-national)• IFC providing AS or is part of systematic WBG engagement
addressing insolvency regime• Target sector's market risks (e.g. lack of restructuring culture)• Specific regulatory risks (e.g. weak legal framework or lack offramework for asset transfers)• Central bank supervision perimeter and capacity (e.g. lack ofclear provisioning framework)• Supporting government policies and programs (e.g. regulatory
reform agenda or national bad bank)Contribution to Market Creation – This assesses the degree to which a project induces systemic changes in the market throughcatalytic effects and focuses on up to two major attributes for each project. The “market” here is defined as the distressed assets
market in emerging market countries or other developed financial markets with overhanging NPLs.
The table below focuses on core market attributes that IFC investment projects typically affect. IFC’s detailed guidance note includes
more information on how IFC investment projects may contribute to changes in the other market attributes.

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MARKETTYPOLOGY

CompetitivenessHighlyDeveloped

Moderately
Developed− Many servicers, most ofthem quite sophisticated, forthe relevant DA class− Many specializedinternational/domestic DA
investors participating in theacquisition of NPLs on aregular basis, or regularparticipation of first-time
investors in the country
and/or the relevant DA class− Strength of insolvency
framework index is very high− Quality of the judicial
processes index is very high− Very strong
legal/institutional regulatory
framework in the country− Servicers in the country
follow resolution bestprocesses and/or practices
at par with other moremature DA markets and, if
rated, have strong ratings− Some servicers for relevant
DA class, a few of them witha certain degree ofsophistication− Some specializedinternational/domestic DA
investors participating in theacquisition of NPLs on aregular basis and a few
investors participating
opportunistically, or limited
percentage of NPL saletransactions withparticipation of first-time
investors in the country
and/or the relevant DA class− Strength of insolvency
framework index is high− Quality of the judicial
processes index is high
− Strong legal/institutional
regulatory framework in the
country− Servicers in the country haveincorporated someresolution processes and/or
adopted best practices fromother more sophisticatedmarket and, if rated, havemedium ratings

5

Underdeveloped

Highly Underdeveloped− Existing servicers are notactive or few
unsophisticated servicers forrelevant DA class− Few specializedinternational/domestic DA
investors participating in theacquisition of NPLs or very
limited percentage of NPL
sale transactions withparticipation of first-time
investors in the country
and/or the DA class− Strength of insolvency
framework index ismoderate− Quality of the judicial
processes index is moderate− Weak legal/institutional
regulatory framework in the
country− Servicers in the country
follow very basic resolution
processes and/or practices
and, if rated, have low
ratings− No servicers active in the
country− No specializedinternational/domestic DA
investors participating in theacquisition of NPLs or no
NPL sale transactions withparticipation of first-time
investors in the country
and/or the DA class− Strength of insolvency
framework index is low− Quality of the judicial
processes index is low− Very weak legal/institutional
regulatory framework in the
country− Servicers in the country do
not follow any standard
resolution processes and/or
practices and are not rated

MARKETTYPOLOGY

Integration

Resilience

HighlyDeveloped

Moderately
Developed− Many domestic servicers or
specialized investors in DA
operate both in theirdomestic market and haveestablished multi-country
presence. International
servicers or specialized DA
investors operate regularlyin that country− Many banks participate
regularly (ownership orcommercial) in servicing
companies or act asinvestors in the acquisitionof NPLs either from theirbalance sheet or from otherfinancial institutions− Many established multiinvestor DA platforms
operating on a regular basis.
First time investors in DA
class participate regularly in
NPL sale transactions alone
or in partnership withexisting investors.
− Many rated securitizationsof NPLs either from credit
originators (bank, financial
institutions, retailers,
utilities) or other investors(selling NPLs that they havepreviously acquired) haveoccurred in the last three
years, with the participationof institutional investors not
specialized in DA.

Underdeveloped

Highly Underdeveloped− Some domestic servicers or
specialized investors in DA
operate in their domestic
market and sporadically inother countries. Someinternational servicers or
specialized DA investors
operate in that country
opportunistically− Some banks haveparticipation (ownership orcommercial) in servicing
companies or act asinvestors in the acquisitionof NPLs either from their B/Sor from other financial
institutions− Several established multiinvestor DA platforms
operating on a regular basis.
NPL sale transactions being
funded mostly by existing
investors and not by firsttime investors in DA class(being totally or partially)
who participate sporadically.
− Several rated securitizationsof NPLs either from credit
originators (bank, financial
institutions, retailers,
utilities) or other investors(selling NPLs that they havepreviously acquired) haveoccurred in the last three
years, with the participationof institutional investors not
specialized in DA− Few domestic servicers or
specialized investors in DA
operate in their domestic
market and sporadically inother countries. Limited
number of international
servicers or specialized DA
investors operate in thatcountry opportunistically− Few banks haveparticipation (ownership orcommercial) in servicing
companies or act asinvestors in the acquisitionof NPLs either from their B/Sor from other financial
institutions
Few established multiinvestor DA platforms in the
country. NPL saletransactions being funded byexisting investors and not by
first time investors in DA
class (totally or partially).
− Few rated securitizations of
NPLs either from credit
originators (bank, financial
institutions, retailers,
utilities) or other investors(selling NPLs that they havepreviously acquired) haveoccurred in the last three
years, with the participationof institutional investors not
specialized in DA− If existing, domestic
servicers or specialized
investors in DA operate onlyin their domestic market anddo not have multi-country
presence. No international
servicers or specialized DA
investors operate in thatcountry− No banks have participation(ownership or commercial)in servicing companies or act
as investors in theacquisition of NPLs either
from their balance sheet orfrom other financial
institutions.
− No established multiinvestor DA platforms in the
country. NPL saletransactions being funded byexisting investors and not by
first time investors in DA
class (totally or partially).
− No rated securitizations of
NPLs either from credit
originators (bank, financial
institutions, retailers,
utilities) or other investors(selling NPLs that they havepreviously acquired) haveoccurred in the last three
years.

− Most of the NPL transactions − NPL sale transactions (either(either bilateral orbilateral or competitive) arecompetitive) are being madebeing made public
public on a regularsporadically− No NPL sale transactions(either bilateral orcompetitive) are being madepublic− No market exists

In general, most individual projects are not expected to make a significant and immediate systemic market change, unless the projectis a pioneer in a non-existent or nascent market. Instead, most projects are expected to have incremental effects on the market. In
other words, it takes more than one intervention to move a market to the next stage. This means that integrated and concerted
efforts are often needed to generate substantial market effects. For example, cumulative World Bank Group efforts over time will
have a stronger effect on markets than non-integrated and non-concerted interventions. Where a project is explicitly part of aprogrammatic approach, the expected movement induced by the program should be the basis for the assessment where timeboundmovements, market effects, and indicators are available. The most important effects from IFC’s DARP operations are:
MARKET
MOVEMENT

CompetitivenessMarginal

Meaningful

Significant

Highly Significant− Entry of new servicers in relevant DA class− Entry of new international/domestic investors in relevant DA class− Improvement in legal/institutional regulatory framework− Market-wide adoption of specialized processes and best practices by servicers (e.g. methodologies, departments, trained officers,resolution practices).

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MARKETMOVEMENT

Marginal

Meaningful

Significant

Highly Significant

Integration− Triggering cross-border investment in DA through establishment of multi-investor regional platforms and/or entry of international
investors− Increased number of FIs initiating participation (ownership or commercial) in servicing companies or as investors in the DA
acquisition− Capital mobilization potential (e.g. develop regional/global platforms for DA (co)investment facilities, first time investment in DA
class)− Formation of secondary market for DA investing

Resilience− Increase in formalization of DA market

The market likelihood adjustment follows the principles for the likelihood adjustment for project outcome potential. In general, thelikelihood assessment includes sector-specific, as well as broad country risks that may prevent potential catalytic effects fromoccurring, plus political economy or policy/regulatory risks that may constrain market systemic change. Due to the diversity of market
creation attributes and channels, most of the likelihood factors are expected to be sector, or intervention specific.
MARKET
LIKELIHOOD

Assessment
Considerations

Sector Factors

Political / Policy Factors• Concentration in the distressed assets market (e.g. barriers to • Regulatory and legal infrastructure (e.g. Insolvency index forentry, number of market participants relative to the size of thejurisdiction)
DA market, etc.)• Government policies and commitment (e.g. regulatory reform• Strength of the channel for competitive pressures andagenda or national AMC)
incentives to adopt innovations• Medium term macroeconomic outlook, and capacity to absorb
sectoral shocks• Presence of WBG upstream work about sector regulation etc.

7