catalyzing private finance the relevance of world bank guarantees at time of risk aversion
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Catalyzing private finance The relevance of World Bank Guarantees at time of risk aversion. After September 11, risk aversion in the market has increased…. September 11, Argentina crisis, Enron bankruptcy have increased risk aversion Banks capital eroded Reduced availability of private PRI - PowerPoint PPT PresentationTRANSCRIPT
Catalyzing private finance
The relevance of World Bank
Guarantees at time of risk aversion
2
After September 11, risk aversion in the market has increased…
• September 11, Argentina crisis, Enron bankruptcy have increased risk aversion
• Banks capital eroded• Reduced availability of private PRI• Strategic investors reconsider portfolio in
emerging markets
3
A Partial Risk Guarantee can mitigate Government performance
risk• A Partial Risk Guarantee (PRG) will cover lenders in
case of a default on a covered contractual obligation to a project company leading to a Debt Service Default
Project Company
Government
CommercialLenders
Project Finance & Guarantees
Implementation Agreement
PPAIndemnityAgreement
Guarantee
Loan
4
A PRG can be effective when key risks include:
• Tariffs• Regulatory framework• Rights of way• Licenses• Expropriation• Termination amounts• Interference in arbitration process• Rule of law…
5
Novel type of PRG: “L/C Structure”
Letter of credit can be drawn if Government
defaults
Government commits to repay LC bank
World Bank guarantees LC Bank
Privatized entity
Government payment obligations
6
PRGs can be used to enhance privatization response
• Use of a PRG can result in– More bidders (“halo” effect of the Bank)– Increased upfront investment commitments– Increased sale value for the privatization – Lower tariffs (more attractive financing terms)– Mobilizes both local and foreign investors
7
PRGs can be used for a series of smaller projects
World Bank
Intermediary
A B Z
Projects
Governments
Guarantee Framework Agreement/ Indemnity
C
Retail of partial risk guarantees
Governm
ent obligations
8
PRGs can backstop municipal undertakings
World Bank
Intermediary
A B Z
Projects
Municipality
Indemnity agreement
C
Retail of partial risk guarantees
Municipal
obligations
Clawback
Government
9
Criteria for deployment of the PRG
• PRGs can be considered in the following situations:– Sectors in early stages of reform – Larger size/riskier operations – Operations highly dependent on
support/undertakings of governments
10
The WB Partial Risk Guarantee does not usually increase contingent
liabilities
• “The host government’s indemnity of the World Bank does not increase the government’s liabilities when the government is already directly obligated to the private sector on the same liabilities.”, IMF.
“Involving the Private Sector in Forestalling and Resolving Financial Crises – Private Project Finance Flows to Developing Countries,”
IMF Board Paper SM/99/211, August 20, 1999, page 21.
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Collaboration with MIGA:
PRG
MIGA
CUP
12
Collaboration with IFC & ECA
Azito power project in Cote d’Ivoire
Senior Debt Amount Tenor
(US$ millions) (years)IFC A 32 14 IFC B 30 10PRG-Guaranteed 30 12CDC Club 48 12
Subordinated Debt Fixed IFC 4 12 Fixed CDC Club 6 12Convertible IFC 4 12Convertible CDC 6 12
Total Debt 160
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• WB will guarantee debt service for specific periods
Partial Credit Guarantee
$150 million
Average financing term forChina without
World Bank Guarantee
Additional uncoveredrisk taken by
commercial banks
World BankGuaranteed
Total risk assumed by commercial banks
$50 million
0 3 6 9 12 15
Example: China Ertan Power
Project
14
Policy Based Guarantee: Leveraging adjustment loans
US $119mBank’s max.
exposure as of Apr 9,
01
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5 10
Interest
PrincipalPayments Guaranteed at Issuance
Example: Colombia Policy Based GuaranteeFitch BBB+ Moody’s Baa1S&P BBB NAIC 2
15
0 7 15
US $100m Bond
World Bank support for principalrepayment at maturity
Additional term provided by WB support
Longest term available to Philippines at the time
US Treasury + 2.50%
Similar structures have been used in the past for project-based partial credit guarantee in Lebanon, Jordan etc.
Various PCG structures can be developed
• Example: – Borrower: National Power Corporation,
Philippines– Terms: 15 year US$ 100 million bond maturing
in July 2009
16
PCGs can help in the following situations…
• Government or parastatals access to capital markets
• Finance government share in Private Public Partnerships
• Bond issues by public intermediaries, or public utilities
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Partial Guarantees help access private finance at improved terms
Debt Maturity Interest SpreadColombia(P. Credit)
Philippines(P. Credit)
10
15
7
6.5%
5%
2.5%3%
with Guarantee
without Guarantee
5
Cote d’Ivoire(P. Risk)
112
3%
2.75%
Uganda(P. Risk)
016 3.1%
8%
1Bangladesh(P. Risk)
3%2%14
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Mr. Suman Babbar Director, Project Finance & Guarantees Group
Infrastructure Economics and Finance DepartmentThe World Bank
1818 H Street, NWWashington, DC 20433 (USA)
Ph: +1 (202) 473-2029Fax: +1 (202) 522-0761
Email: [email protected]
For further information contact: