Asian Regional Public Debt

Management Forum
Kuala Lumpur – 5 November 2009

ADB Commercial Cofinancing and

Credit Enhancement Products
Roland C. J. Pladet
Senior Guarantees and Syndications Specialist
Office of Cofinancing Operations
Asian Development Bank
 Topics

„ ADB Financing Instruments

„ Credit Enhancements
„ Benefits of Credit Enhancements
„ Why Credit Enhancements needed?
„ ADB’s Credit Enhancement Products
ADB Financing Instruments

„ Loans to sovereign and nonsovereign

obligors
„ Equity investments in nonsovereign
entities
„ Grants and technical assistance
„ Credit Enhancement Products (CEPs)
 Credit Enhancements
„ Form of risk mitigation

„ Offered by public and private organizations

 MDBs (ADB, IBRD, AFDB, IADB, IDB, MIGA, IFC)
 Export credit agencies (NEXI, Sinosure, OPIC…)
 Private political risk insurers (Lloyds of London…)
 Development agencies (JBIC, USAID, AFD…)
 Banks/Hedge Funds in the form of credit default swaps

„ Widely used by lenders and investors to improve

and/or diversify their risk exposure
 Benefits of Credit Enhancements

„ Encourage lenders and investors to finance

projects in Developing Member Countries
(DMCs) that they may otherwise consider too
risky to undertake
„ Enable lenders to provide longer maturities
„ Improve credit ratings of capital market issues
„ Reduce financing costs
 Benefits of ADB Credit Enhancements
„ Lenders
„ Take comfort in ADB’s due diligence, in particular, to
ensure that a project is economically, financially and
technically sound, and does not have a negative
impact on the environment (ADB Safe Guards)
„ Are assured that ADB’s participation in a project can
help resolve potential disputes between a DMC
government, the owners, and the lenders
 Why are Credit Enhancements
Needed?

„ Investment requirements for the Asia-

Pacific region are enormous:

„ $470 billion of investment in infrastructure

each year over the next 10 years……..
 Why are Credit Enhancements
Needed?

„ DMC Governments and ADB, and other

multilateral and bilateral development
partners, can finance only a portion of the
amount of investment a DMC requires
„ The financing gap will have to be filled by
commercial banks and investors
 Why are Credit Enhancements
Needed?

„ Political risks continue to be ranked as a main

constraint to the flow of FDI in DMCs
„ Private investment in infrastructure is also perceived
as high risk, especially when it comes to regulatory
and contractual risks
„ New banking regulations under Basel II make lending
in some DMCs prohibitively expensive
 Loan provisions for sovereigns (BBB-C) can range
from 50%-150% depending on rating, but
potentially “0%” with an ADB guarantee
 Why are Credit Enhancements
Needed?

„ In the current global economic and financial

crisis, commercial lenders are hesitant to
lend, especially to infrastructure projects in
DMCs
„ For many commercial lenders, some form of
credit enhancement will be required to
continue/resume lending to DMC projects
 ADB Credit Enhancement Products

„ Include various types of guarantees covering

„ Political risks (PRG)
„ Breach of contract, political violence, expropriation, transfer
restriction, nationalization, sovereign non-payment
„ Comprehensive (credit) risks (PCG)
„ Political and commercial risks
„ Loans and guarantee syndications
„ “B” loan
„ Guarantee-of-record
„ Unfunded risk participations
„ reinsurance
 Extent of Risk Coverage CEPs

B-Loan

Political Risk Guarantees (PRG)

Partial Credit Guarantees (PCGs)

CI Expro PV Breach Commercial

Risk Spectrum
 ADB Guarantees
„ Can cover debt only, no equity investments
„ Wide range of debt instruments
„ Bank loans, shareholder loans, loan guarantees
„ Foreign and domestic lenders, and investors
(shareholder loans)
„ Long tenors (up to 15-20+ years)
„ Procurement
„ Goods and services must be sourced from an ADB
member country
„ Economy and Efficiency
 Guarantees
Sovereign vs Nonsovereign Operations

„ ADB can provide guarantees with or without

a sovereign counter-guarantee

„ Guarantee Fees
„ With sovereign counter guarantee: 20 bps per
annum
„ Without sovereign counter guarantee: market-
based
Political Risk Guarantees
„ Currency inconvertibility/non-transfer
„ Expropriation/discriminatory government action
Adverse change in agreed legal, regulatory
environment, or tax regime
„ Political violence
„ Can include terrorism/sabotage
„ Arbitration Award Default / Denial of Justice
„ Supply contracts/Off-take agreements with government
counter-party or other government undertakings
„ Sovereign non-payment
PRG with Direct Participation

Government
Counter-Guarantee

PRG Banks,
ADB investors, and
ADB others
Takes Retain
political commercial
risk(s) risks
Direct
Loan/ Commercial
Equity/ Loan
Technical Borrower
Assistance
(Anchor)
PRG with Indirect Participation

Government
Counter-Guarantee

PRG Banks,
ADB investors, and
ADB others
Takes Retain
Public political commercial
Sector risk(s) risks
Loan /
Technical
Assistance
Commercial
(Anchor) Loan
Borrower

Government
;Credit Guarantees
„ Provide ‘comprehensive’ cover
„ Political risks, and

„ Commercial or credit risks

„ Usually for part of debt owed by

„ Governments, SOEs or commercial

borrowers under
„ term loans, notes, bonds and other debt

„ SMEs and other targeted borrowers in a

portfolio under a “Facility”

;Credit Guarantees

„ Denominated in major convertible currencies

„ …adn can also cover regional or local

currency debt to
„ Mitigate FX risk

„ Help develop local capital markets

CG with direct participation

Government
Only when needed … counterindemnity
say for a newly privatized SOE

Int. & Local

CG
ADB ADB Banks &
Investors
Takes a
Direct Must keep
share of the
Loan/ some risk
Equity/
risk
Technical
Loan in
Assistance major or
(Anchor) local
Borrower currency
 Syndications

„ Loan Syndications
- “B” loan
„ Guarantee syndications
- Guarantee-of-record
- Reinsurance
- Unfunded risk participation
Fronting Arrangement via a A/B Loan Structure

Disbursement
and debt
service
passes
through ADB
ADB = Syndicate
ADB Lender members
of record (Banks, investors &
others)

A Loan B Loan
Take nearly
all risks

Borrower
B loan - Benefits to Borrower

„ One loan agreement – ADB is lender-of-

record and administers loan
„ Longer tenors
„ Wider funding base
„ ADB’s due diligence:
„ Financial, technical, economic

„ Environment and social safeguards

 B loan - Benefits to Participants

„ Participants benefit from ADB’s privileges and

immunities under the Charter
„ Take comfort in ADB due diligence regarding
environment and social safeguard compliance
„ ADB’s relationship with DMC
„ Preferred access to foreign exchange in the
event of country foreign exchange shortage
„ Recognized country risk mitigant under Basel
II
„ Excluded from general country debt
rescheduling
Parallel or Co-guarantor Structure

Government
no sharing of recoveries counterindemnity

only when needed…

PRG
ADB several Banks,
liability
Public or Private investors &
Co-guarantor(s) others
take political risk(s) retain
commercial
risks
Commercial
Loan
Borrower
Fronting Arrangement via a GoR Structure
pro rata sharing of ceding commission
recoveries against may flow back to Government
payment of ceding DMC (if claim free)
counterindemnity
commission

only when needed…

Public or Private
Co-guarantor(s)
ADB = PRG Banks,
Guarantor investors &
ADB several
of Record liability others
retain
take political risk(s) commercial
risks

Commercial
Loan
Borrower
 Benefits of Guarantee-of-record
„ One guarantee agreement – ADB is
guarantor-of-record
„ ADB shares projects risks with participants
„ ADB shares due diligence with participants
- Financial, technical, economic
- Environment and social safeguards
„ Longer tenors (tail-end maturities)
„ Lower guarantee fees
- First loss/excess
 Benefits of Guarantee-of-record

„ “Advocacy role” (high probability that disputes

will be resolved, except for physical damage)
„ High probability of recovery, if guarantee paid
- Preferred access to foreign exchange in the event
of foreign exchange shortages
- ADB as lender can finance payments under
guarantee
„ Lower provisioning required under Basel II
„ Low probability of general country debt
rescheduling
Reinsurance DMC
Government
Counter-guarantee $100

Guarantee
Guarantee
ADB $100 Holder
$20

Participation
Agreement

$80

Reinsurance Provider
(AEB/DFI/ECA/PRI)
 Reinsurance

„ Allows ADB to transfer some or all of the risks

„ Guarantee holder takes ADB credit risk only
„ ADB shares recoveries pari passu with
guarantor/insurer
„ ADB assumes guarantor/insurer counter-party
risks
„ Lowers costs if structured on “first loss/excess”
„ Helps private guarantors/insurers gain comfort
and build actual deal experience in DMCs
Unfunded Risk Participation

Loan

ADB Borrower
$100

Participation
Agreement
Guarantee
$80

Participant
Bank/AEB
 For further information, please contact:

„ Roland C. J. Pladet
Senior Guarantees and Syndications Specialist
OFFICE OF COFINANCING OPERATIONS
Asian Development Bank
6 ADB Avenue, Mandaluyong City, Philippines
Tel +63 2 632 6178
Fax +63 2 636 2456
Email: [email protected]

or visit our website at

„ www.adb.org/Cofinancing/