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Creating Opportunities with World Bank Guarantees

Creating Opportunities with World Bank Guarantees. Banking and Debt Management (BDM) World Bank Treasury January 7, 2010. Why use guarantees?. Guarantees mobilize private sector capital for development by sharing risks Guarantees can help clients to: access longer financing terms

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Creating Opportunities with World Bank Guarantees

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  1. Creating Opportunities with World Bank Guarantees Banking and Debt Management (BDM)World Bank Treasury January 7, 2010

  2. Why use guarantees? • Guarantees mobilize private sector capital for development by sharing risks • Guarantees can help clients to: • access longer financing terms • lower financing costs • Increase/diversify private sector sources • develop capital markets

  3. Guarantees can help extend tenors 18 16 16.5 16 16 15 15 15 15 14 14 12 12 10 10 10 10 10 Maturity (years) 7 7 7 8 6 5 5 5 5 4 3 2 1 1 2 0 0 0 Laos Uganda Lebanon Morocco Thailand Colombia Vietnam China Bangladesh Pakistan Russia/Ukraine Cote d'Ivoire Philippines without Guarantee with Guarantee

  4. Guarantees also help reduce borrowing costs 9% 8.5% 8% 7% 6.5% 6% 5.0% 5.0% 5% 4.5% Interest Spreads over UST/Libor 3.0% 4% 3.4% 3.0% 3.0% 3.0% 2.9% 2.8% 3% 2.25% 2.5% 2.25% 2.0% 2.0% 2.0% 2.0% 2% 0.75% 0.6% 1% 0% Laos Uganda Morocco Vietnam Thailand China Philippines Colombia Pakistan Cote d'Ivoire Bangladesh without Guarantee with Guarantee

  5. Opportunities for Guarantees A sovereign might be approaching the capital markets for the first time, or re-entering the market after a disruption A government might want to attract private sector finance to support PPP programs A government may be interested in mobilizing private finance in support of developing its infrastructure

  6. Two main types of Bank guarantees Partial Risk Guarantees Partial Credit Guarantees

  7. Partial Risk Guarantees (PRG) • Covers debt service default resulting from a government’s non performance of contractual obligations • Covered risks may include: • Government payment obligations • Contractual performance of public counterparties • Availability or convertibility of foreign exchange • Changes in law, regulatory risk • Expropriation and nationalization • War and civil disturbance • Political force majeure

  8. Romania used a PRG to support the privatization of electricity distribution companies Indemnity Agreement Government of Romania/MPF Government Support Agreement L/C Reimbursement & Credit Agreement Regulator Privatization Agreement License Agreement / Regulatory Contract L/C Guarantee Agreement Citibank Romania Electricity Distribution Companies ENEL 51% Electrica 49% L/C* Equity ? Project Agreement

  9. Partial Credit Guarantees IBRD Partial Credit Guarantees cover debt service obligations IBRD PCG • Cover part of principal and/or interest payments of bond or loan against all risks • Support public investment projects and development policy operations • Can be structured to fit to specific instruments or market conditions IBRD PBG IBRD Enclave • Principal cover for bullet maturity • Amortizing syndicated loan with cover for later maturities • Rolling coupon

  10. Botswana Morupule B Power Project used a PCG to gain access to longer term funds Loan Amount: $825m Principal Guarantee Amount: $243m PCG’s PV: $121m Leverage of 1:7 1-15 years 15-20 years IBRD guaranteed

  11. New policy for counting against IBRD exposure limits • Guarantee exposure now counts just 25% against country exposure limit • Remainder charged against USD 1.5 billion pool of capital set aside for guarantees

  12. WBG Guarantee and Insurance Products

  13. Who does guarantees? • YOU DO. Task team leaders lead projects. • In house expertise: guarantees specialists assist project task team leaders in project structuring • Contact your Treasury (BDM) banker to mobilize specialized experts to help you analyze the potential for a guarantee and move through the implementation process bdm@worldbank.org

  14. Summary • Guarantees • Attract additional private investment • Leverage Bank credit lines • Lower costs of private financing and lengthen financing terms • PCGs support governments’ debt payment obligations • PRGs provide financial compensation if a government fails to perform contractual obligations in a project • Front-line staff are expected to recognize opportunities for clients to benefit from guarantees • Contact BDM in Treasury to help mobilize the right resources if your client has interest in a guarantee

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