FinancialTermsandConditionsofGrantsandConcessionalLoans

GCF/B.06/166February2014MeetingoftheBoard19‐21February2014Bali,IndonesiaAgendaitem16

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RecommendedactionbytheBoard

ItisrecommendedthattheBoard:

(a) Takesnoteofthefinancialtermsandconditionsofgrantsandconcessionalloans,presentedindocumentGCF/B.06/16FinancialTermsandConditionsofGrantsandConcessionalLoans;

(b) AdoptsthedraftdecisionpresentedinAnnexItothisdocument.

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FinancialTermsandConditionsofGrantsandConcessionalLoans

I. PriorBoarddecisions

1. AtitsOctober2013meeting,theBoard,initsdecisionB.05/07,decidedtoadopt,fortheinitialoperationalizationoftheFund,theprinciplesandfactorsforthetermsandconditionsofgrantsandconcessionalloans,ascontainedinAnnexIIItodocumentGCF/B.05/23,andrequestedtheSecretariattodeveloptermsandconditionsofgrantsandconcessionalloansforconsiderationbytheBoardatitsfirstmeetingin2014,guidedbytheseprinciplesandcriteria,andtakingintoconsiderationprogressonthebusinessmodelframework.

2. Atthesamemeeting,theBoardalsoconsideredhowtheFundcouldmobilizefundsfromvarioussources(documentGCF/B.05/04)anddecided,initsdecisionB.05/04,thattheFundwillmaintainflexibilitytoreceivefinancialinputsandthat:

“theFundwillreceivegrantsfrompublicandprivatesources,andpaid‐incapitalcontributionsandconcessionalloansfrompublicsources,andmayreceiveadditionaltypesofinputsatalaterstagetobedecidedbytheBoard”.

3. ThisdocumentfocusesonthefinancialtermsandconditionsofgrantsandconcessionalloanstobeprovidedbytheFundinitsinitialstage.

II. Guidingprinciples

4. Theguidingprinciplesfordeterminingtermsoffinancialinstruments,adoptedbytheBoardinitsdecisionB.05/07(AnnexIIItodocumentGCF/B.05/23),are:

(a) Grantelementsshouldbetailoredtoincrementalcostortheriskpremiumrequiredtomaketheinvestmentviable,ortocoverspecificactivitiessuchastechnicalassistance;

(b) Seekingtherightlevelofconcessionality,soasnottodisplaceinvestmentsthatwouldotherwisehaveoccurred,includingforprivatesectorinvestment;

(c) Levelsofindebtednesscapacityoftherecipientshouldbetakenintoaccountsoasnottoencourageexcessiveindebtedness;

(d) Structuretermsonacase‐by‐casebasistoaddressspecificbarriers;

(e) Avoidcrowdingoutcommercialfinancing;

(f) Leveragingofotherfinancing,includingpublicandprivatefinancing,seekingtomaximiseleverageinthecaseofprivatefinancing;

(g) Promotelong‐termfinancialsustainability;and

(h) Applyduediligencetoassesstherisktotheinvestment.

5. Broadly,theapplicationoftheseguidingprinciples1wouldbeasfollows.Duringprojectorprogrammeappraisal2,theactivitytobefundedwouldbeassessedtodeterminetheincrementalcostortheexcessiveriskpremium3comparedtothealternative.Thiswouldenablethedeterminationoftheminimumgrantelementnecessarytomaketheinvestmentviable.The                                                            1Inparticular,thefirstguidingprinciple:“Grantelementsshouldbetailoredtoincrementalcostortheriskpremiumrequiredtomaketheinvestmentviable,ortocoverspecificactivitiessuchastechnicalassistance”.

2SeedocumentGCF/B.06/08.3Inthecaseoftheriskpremium,todeterminetheincrementalreturnthatwouldberequiredtobringittothedecisionhurdlerateoftheinvestor.

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grantelementwouldthenbeextendedtotheprojectorprogrammefundingeitherinpuregrantformorblendedaspartofaconcessionalloan.

6. AnnexIIaddressesinmoredetailhowtheproposedtermsandconditionswilladdresseachoftheaboveguidingprinciples.

III. Proposedtermsandconditionsofgrantsandconcessionalloans

3.1 Initialinstruments

7. Asindicatedabove,theFundwillinitiallydeliveritssupportthroughgrantsandconcessionalloans.ItwilldevelopandemployadditionalfinancialinstrumentsasnecessarytoeffectivelyachievetheobjectivesoftheFund,asmaybeapprovedbytheBoard.Implementingentities(IEs)andintermediarieswillplayanimportantroleintheinitialstageinappraisingprojectsandprogrammesand,whereappropriate,tailoringtherightblendoffinancialproductstomakeprogrammesviablewithoutdisplacingotherpotentialsourcesoffinance.

8. Financialinstruments:ThefollowingfinancialinstrumentswillbedeployedbytheFundinitsinitialstageofoperations:

(a) Grants;and

(b) Concessionalloans:4

(i) Concessionalloans1(deeplyconcessional);

(ii) Concessionalloans2(moderatelyconcessional).

9. Lendingcurrencies:Grantsandthetwosetsofconcessionalloanswouldbemadeininternationalcurrenciesandinthelocalcurrencyoftheprojectorprogramme,dependingonthefundingrequirementsoftheprojectorprogrammeandotherconcerns,suchascountryindebtedness.Inthecaseoflocalcurrencyloans,theFundwillensurethatappropriateriskhedgingstrategies(suchascurrencyswaps)areinplaceandwillcloselymonitorexchangerisk.Anoperationalguidelineonhowtodealwithlocalcurrencylendingriskswillbedevelopedaspartoftheimplementationofthefinancialriskmanagementframework,undertheguidanceoftheRiskManagementCommittee.

10. Servicefee:Bothconcessionalloans1and2wouldchargeaservicefeeequivalentto0.75percent,consistentwiththepracticeofconcessionallendinginotherinstitutions,tocovertheFund’smobilizationcosts.

11. TheFund’sinitialfinancingterms(includingthoseofthePrivateSectorFacility(PSF))aresummarizedinTable1andFigure1.

12. AnnexIIIoffersacomparisonwiththeconcessionalandmarket‐basedtermsoftheCleanTechnologyFund(CTF),theInternationalDevelopmentAssociation(IDA)andtheInternationalFinanceCorporation(IFC).Theinterestrate,servicefeeandmaturityofconcessionalloans1iscomparabletoregularIDAloansaftertherecentadjustmentoflendingterms.TheservicechargeforCTF’ssofterconcessionalloansforprojectsandprogrammeswithnegativeratesofreturn,andratesofreturnbelownormalmarketthreshold,islower(0.25percent).

                                                            4Initsbroadestmeaning,concessionalfinancecomprisesfinancialproducts,includingloans,guarantees,andequityinvestments,providedontermsthatarebelowmarketrates.AccordingtotheOrganisationforEconomicCo‐operationandDevelopment(OECD)/InternationalMonetaryFund(IMF)definition,concessionalloansareloansextendedontermsmoregenerousthanmarketloans.Concessionalityisachievedeitherthroughinterestratesbelowthoseavailableonthemarket,theimpactofwhichcanbefurtherenhancedthroughafavourable,tenororrepaymentprofile.AmethodologytocalculatetheappropriateconcessionalityoffundingfromtheFundwillbedeterminedatalaterstage.

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Table1:FinancialtermsandconditionsofgrantsandconcessionalloansfortheinitialphaseoftheFund’soperations

Currency Interestrate Servicefee Maturity GraceperiodGrants International

LocalNorepaymentrequired

Concessionalloans1

International Local

0percent 0.75percent

15to40years

5to10years

Concessionalloans2

International Local

Benchmarkrateoflendingcurrency,e.g.:‐Euros:EuropeanCentralBankrate‐USdollars:UnitedStatesTreasurybondrate

0.75percent

8to15years

2to4years

13. Eachinstrumentcanbeusedseparatelyandthethreeinstrumentscouldbeblendedtogivetherightlevelofincentivestomakeprojectsandprogrammesviablewithoutdisplacingor“crowdingout”otherpotentialsourcesoffinancingthatwouldotherwisehavebeenprovided.ThiswillenabletheFundtoprovideabroadrangeofconcessionalsupport,rangingfrompuregrantstobenchmarklending(nearcommercial)rates,sothattheFundcantailoritssupporttoprovidetheabsoluteminimumsubsidynecessarytoachieveitstransformationalobjectives.Foreachprojectorprogramme,theamounttheconcessionalelementnecessarytomakeaninvestmentviableorcoverspecificactivitieswillbeassessedduringappraisal.

Figure1:Fundingflows

 

14. GrantsandconcessionalloansfromtheFundwillalsobeblendedwithIEs’andintermediaries’ownfinancing,toprovideafinalfinancingcosttoprojectsandprogrammesthatislowerthanitwouldhavebeenwithouttheFund’sparticipationinthatproject’sorprogramme’sriskprofile.Suchfinalblendedfinancingmightnotnecessarilybebelowmarketratesfortheentirefinancingenvelopeoftheprojectorprogramme,butitwouldbebelowthe

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ratethattheprojectorprogrammewouldhavereceivedonthatmarket,givenitsriskprofile.Inthisway,riskyactivitieswithahighpotentialofclimateimpactwillbeabletoobtainfinancing.

15. AnexampleofsuchblendingisprovidedinFigure2.

Figure2:BlendingoftheFund’sgrantsandconcessionalloanswithimplementingagencies’andintermediaries’ownfinancing

16. TheFundmayconsiderestablishinggeneralcriteriaforconcessionaltermsbasedonclassificationofcountries(e.g.smallislanddevelopingStatesandleastdevelopedcountries),typeofproject(adaptation,mitigation,privatesector),andspecificsectors.ThesecriteriawouldbepartoftheFund’sinvestmentframework(seedocumentGCF/B.06/11).

17. GrantsprovidedintheinitialphaseoftheFund’soperationsaretraditionalgrantswithoutrepaymentobligation,exceptintheeventthatdisbursementswereobtainedduetocorruptionorfraudulentaction.Atalaterstage,variousspecialtypesofothergrantscouldbeconsidered,suchasgrantslinkedtoperformance(e.g.forthedevelopmentofnewtechnologies)orgrantswithrepaymentobligations(e.g.revolvinggrantfacility).Suchgrantsmightbeusefulinthecontextofcertaintypesofmitigationprogrammes.

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18. Fundpolicyconcerningcountryindebtedness:Thetermsandconditionsforlendingactivitieswilltakeintoaccounttheexpectedriskandthereturnoftherespectiveprojectorprogramme,includingacountry’sindebtednessandabilitytorepay.TheFundwillpayparticularattentiontoavoidcontributingexcessivelytosovereignindebtedness.Astheprojectandprogrammebeneficiarieswillbeeitherpublic,private,orpublic‐privatepartnerships,inthecasesofpublicactivitiesandpublic‐privatepartnerships,thedegreeofincreasedsovereignindebtedness(loans)orcontingentliabilities(guarantees)wouldbeassessed.ClosecoordinationwithcountryauthoritiesandtheIMFwouldbeundertakentoavoidbreachingloanandliabilitylimits,forexample,byrelyingongrantsonlyforpublicprojectsorprogrammesinhighlyindebtedcountriesandcountrieshavingbenefittedfromtheHighlyIndebtedPoorCountry(HIPC)debtreductioninitiative.CountryindebtednesswillalsobeactivelytrackedaspartoftheFund’sfinancialriskmanagementframework.

3.2 Keygrantandloandocuments

19. ThekeydocumentsthatwillberequiredfortheinitialmodalitiesoftheFund’soperationsare:

Grants

(a) Termsheet;

(b) Grantagreement;and

(c) Project/programmeagreement.

Loans

(a) Termsheet;

(b) Loanagreement;and

(c) Project/programmeagreement.

20. Thelegaldocumentswilldeterminetheagreement’stermsandconditions,maturity,andotherconditions,includingdefaultanddescribetheproject/programmeanditsmilestonesindetails.ThisprocessislaidoutindocumentGCF/B.06/08.

21. ThesegrantandloandocumentswouldbenegotiatedwithIEsandintermediariesandwouldbebasedonstandardFundtemplates,preparedbytheFund’sGeneralCounsel.

22. AnnexIVprovidesadraftsampletermsheettemplate.

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AnnexI:DraftdecisionoftheBoard

TheBoard:

ApprovesthefinancialtermsandconditionsofgrantsandconcessionalloanspresentedinTable1fortheinitialphaseoftheFund’soperations.

Table1:FinancialtermsandconditionsofgrantsandconcessionalloansfortheinitialphaseoftheFund’soperations

Currency Interestrate Servicefee Maturity GraceperiodGrants International

LocalNorepaymentrequired

Concessionalloans1

International Local

0percent

0.75percent

15to40years

5to10years

Concessionalloans2

International Local

Benchmarkrateoflendingcurrency,e.g.:‐Euros:EuropeanCentralBankrate‐USdollars:UnitedStatesTreasurybondrate

0.75percent

8to15years

2to4years

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AnnexII:Guidingprinciplesandfinancialtermsandconditionsofgrantsandconcessionalloans

Guidingprinciples Instruments

Grantelementsshouldbetailoredtoincrementalcostortheriskpremiumrequiredtomaketheinvestmentviable,ortocoverspecificactivitiessuchastechnicalassistance

Theincrementalcostsortherequiredriskpremiumwillbeassessedduringtheappraisaloftheproject.IEsandintermediarieswillappraisetheprojects.

Seekingtherightlevelofconcessionality,soasnottodisplaceinvestmentsthatwouldotherwisehaveoccurred,includingforprivatesectorinvestment

ThelevelofrequiredconcessionalitywillbeassessedduringappraisaltominimizetheuseoftheFund’sresources.

Blendingoffinancialproductswilldeterminetheaverageoverallconcessionality.

Countryriskshouldbeincludedintheevaluation.

Levelsofindebtednesscapacityoftherecipientshouldbetakenintoaccountsoasnottoencourageexcessiveindebtedness

Targetstobeestablished,basedonOfficialDevelopmentAssistance(ODA)practice.

ClosecoordinationwithcountryauthoritiesandIMF.

InhighlyindebtedcountriesorcountrieshavingbenefittedfromtheHIPCinitiative,grantsonlywouldbeprovidedforpublicactivitiesandthepublicshareofpublic‐privatepartnerships.

Structuretermsonacase‐by‐casebasistoaddressspecificbarriers

Specifictermsforeachfundedactivitywillbedeterminedbasedonbarriersassessedduringtheappraisaloftheproject.

Avoidcrowdingoutcommercialfinancing Thelevelofrequiredconcessionalitywillbeassessedduringappraisaltoavoidunderpricing.

Leveragingofotherfinancing,includingpublicandprivatefinancing,seekingtomaximizeleverageinthecaseofprivatefinancing

MaximizingexternalfinancingisconsistentwiththeguidingprincipleofminimizingtheFundgrantelementneededforproject/programmeviability.

Promotelong‐termfinancialsustainability Onlyprojectsthatdemonstratefinancialviability,intheformofanacceptablefinancialrateofreturnandotherratios(e.g.debtservicecoverageratio)willbefinancedtobesetintheinvestmentandfinancialriskmanagementframeworks.

Applyduediligencetoassesstherisktotheinvestment TheFundwillcarryoutdiligenceoftheappraisaloftheprojectpreparedbytheintermediaryorIEtoassessproject’sorprogamme’sriskprofile.

   

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Termsoffinancialinstruments

TheaverageconcessionalityorgrantelementofthefinancialinputstotheFundThegrantelementofconcessionalfinancewillbetailoredtoprovidetheappropriateincentivetofacilitatetheimplementationofmitigationandadaptationactivities 

Interestrate Servicefee

Maturity Graceperiod

Grants Norepaymentrequired

Concessionalloans1

0percent 0.75percent

15to40years

5to10years

Concessionalloans2

Benchmarkratebasedoncurrencyoflending

0.75percent

8to15years 2to4years

Concessionalformsoffinancewillbedesignedtominimizemarketdistortionsandpotentialdisincentivestoprivateinvestment

IEs’andintermediaries’termswillapply.Duringappraisal,anassessmentwillbedeterminedhowtoavoidmarketdistortionsandpotentialdisincentivestoprivateinvestment.

Theexpertiseandcapacityofintermediariesandimplementingentities

IEsandintermediarieswillappraiseprojectsandprogrammes.

TheFundwillassesstheirexpertiseandcapacityasapartofaccreditation.

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AnnexIII:Financialtermsandconditionsofotherinstitutionsprovidingconcessionalmarket‐basedloans

I. CleanTechnologyFund(CTF)

1. TheCleanTechnologyFund(CTF)offersgrantsandtwoloanproducts:

(a) Softerconcessionalloans(0percentinterestrate,40yearsmaturity,10yearsgraceperiod,0.25percentservicecharge)forprojectswith:

(i) Negativeratesofreturn;and

(ii) Ratesofreturnbelownormalmarketthreshold;

(b) Harderconcessionalloans(0percentinterestrate,20yearsmaturity,10yearsgraceperiod,0.75percentservicecharge)forprojectswithi)ratesofreturnnearorabovenormalmarketthreshold,butbelowriskpremiumforprojecttype,technologyorcountry,andii)ratesofreturnnearorabovenormalmarketthreshold,butaccelerationindeployingthelowcarbontechnologywillhavehigheropportunitycosts.

2. InterestrateandothertermsofCTFprivatesectorloansareindividuallytailoredtotheprojectontheprincipleof“minimumconcessionality”,andarenotdisclosedbymultilateraldevelopmentbanks(MDBs).

Source:CleanTechnologyFund,FinancingProducts,TermsandReviewProcedures,forPublicSectorOperations,November2013.

II. InternationalDevelopmentAssociation(IDA)

2.1 IDA‐16

3. TheInternationalDevelopmentAssociation(IDA)’slendingtermswereadjustedinJuly2011toreflecttheeconomiccapabilitiesofIDA’sclients:

(a) ThelendingtermsofferedtoIDA’smoreeconomicallyadvancedrecipients(blendandgapcountries)werehardenedtoreflecttheirstrongerfinancialcapacity.Thenewtermscombinetheoldblendterms(35yearmaturities)forblendcountriesandhardenedtermcredits(20yearmaturities)forgapcountriesintoanewblendcreditwith25‐yearmaturity,5‐yeargraceperiodand1.25percentinterestrate(inadditiontothestandardservicechargeof0.75percentandcommitmentcharges);

(b) ThematurityofIDA’shardtermcreditswasshortenedfrom35yearsto25years,witha5‐yeargraceperiod,andexpandedeligibilitytoincludeallblendcountries.Finally,allsmallislanddevelopingStatesarenoweligibletoreceiveassistanceonregularcreditterms.

Table2:SummaryofIDA’scurrentlendingtermsbyproducttypeinfinancialyear2013

Producttype Maturity(years)

Graceperiod(years)

Servicecharge1(percent)

Interest(percent)

Grants n/a n/a n/a n/aRegular 40 10 0.75 n/aBlend 25 5 0.75 1.25Hardterm 25 5 0.75 1.5Partialriskguarantee

n/a n/a 0.75 n/a

1)0.75percentofthedisbursedandoutstandingcreditbalance.Source:IDA16Mid‐TermReview,ImplementationandResultsProgressReport.

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2.2 IDA‐17

4. TheInternationalDevelopmentAssociationproposedthatconcessionalloans(frompartners)havetermsasfollows:

(a) Maturity:Maturitieswouldbeeither25or40yearstomatchthetermsofIDA’scredits;

(b) Graceperiod:Graceperiodwouldbe5yearsfora25‐yearloanor10yearsfora40‐yearloan;

(c) Principalrepayment:Principalrepaymentsofconcessionalloanswouldbeginafterthegraceperiod;

(d) Coupon/Interest:IDAconcessionalloanswouldhaveanall‐inspecialdrawingrights(SDR)‐equivalentcouponofupto1percent;

(e) Currencies:IDAwouldacceptconcessionalloansinSDRoranyoneoftheSDRbasketcurrencies,namelytheUSdollar,Euro,JapaneseyenandBritishpound.

Source:IDA17ConcessionalPartnerLoans,November21,2013.

III. InternationalFinanceCorporation(IFC)

5. TheInternationalFinanceCorporation(IFC)pricesitslendingbasedonamatrixofcountryandprojectrisks,whichisnotpubliclydisclosed,andiscontinuouslyupdatedbasedonmarketdevelopments.Thisiscomparedwithotheravailableindicators,say,recentbondissues;aloaninsamesectorinanothercountrywiththesamecreditrating,andthefinaltermsaredecidedupon.

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AnnexIV:Drafttermsheettemplate(sample)

GREENCLIMATEFUNDTERMSHEET

Summaryoffinancialtermsandconditions

(date)

Project/programmetitle

Project/programmeobjective

Borrower

Guarantor

Implementingentityorintermediary

Projectsponsor

Activitytobefunded

Countryorregion

HowdoestheactivityseekingGreenClimateFundfundingsupportthecountry’s/region’sobjectivestolimitorreducegreenhousegasemissionsand/orclimatechangeadaptation?

Explanation:

Theme(adaptationormitigation)

Doestheactivitysupportclimatechangeadaptationinavulnerablecountry?(yes/no)

IsthisactivityfundedthroughthePrivateSectorFacility?(yes/no)

Totalactivityfinancing

RequestedGreenClimateFundfunding

   

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Financialinstrumentsandterms

Grant Amount(US$million)

Currency Disbursementperiod

Fee/charges Reimbursable? Ifreimbursable,term,schedule

(Yes/no)

ConcessionalloanI Amount(US$million)

Currency Maturity

Interestrateandaccrualperiod

Graceperiod Disbursementperiod

Fees/charges

ConcessionalloanII Amount(US$million)

Currency Maturity

Interestrateandaccrualperiod

Graceperiod Disbursementperiod

Fees/charges

TotalGreenClimateFundfundingprovided(Grant+loan)

Amount(US$million)

Specialconditions

Conditionsprecedenttoeffectiveness(CP)

1. CP12. CP23. CP34. …

Loancovenants

1. Covenant1(e.g.minimumdebtservicecoverageratio–DSCR)

2. Covenant23. Covenant34. …

__________