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GuarantCo. Enabling Long Term Infrastructure Finance in Local Currency. The GuarantCo Initiative. “ Guarantees of local currency loans and bonds to finance infrastructure in lower income countries”

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Enabling Long Term Infrastructure Finance in Local Currency

The guarantco initiative
The GuarantCo Initiative

“Guaranteesof local currency loans and bonds to financeinfrastructurein lower income countries”

An additional aim is to build sustainable financing capacity in domestic capital markets through partnering with local institutions and introducing new approaches to project risk evaluation and financing

Impact of currency fluctuation
Impact of currency fluctuation

  • Typical peak to trough FX movement over last decade > 50% - even more extreme during 1998 Asia / Russia crisis

  • Most moves are gentle but occasionally they are brutal

  • Spotting short / medium term trends possible but most major capital projects require long term finance

  • For exotic currencies long term hedging often not possible or very expensive

  • Impact on equity return and debt service capacity

  • No one can reliably predict currency movements

Why local currency finance
Why local currency finance?

Better solution at project level

  • Local currency finance matches currency of revenue to debt service

  • Even if a project has the right to pass on currency losses, prices / tariffs may be unaffordable - contractual agreements may fail

  • Involving local lenders can reduce the risk of discriminatory action

    ….. But also country level – responsible banking!

  • Local currency financing involves productive recycling of savings within a country rather than increasing the country’s external debt burden

  • Involving local lenders helps build capacity to finance future projects

Why are many projects in low income countries still financed in or
...why are many projects in low income countries still financed in $ or € ?

All participants are used to working in traditional ways……

  • International lenders dominate project finance – they find it easier to lend in $ or €

  • National utilities are used to accepting pass through of currency risks from debt finance

  • Domestic debt markets often cannot offer the tenors required and / or interest rates may appear comparatively high

  • Borrowers like low interest rates and conveniently forget potential FX risk

    But the vicious cycle can be broken…..

Capacity building in local markets through partnership
Capacity building in local marketsthrough partnership

  • Funding of projects by domestic banks / pension funds who take as much or as little risk as they wish

  • Partial risk or partial credit Guarantee from GuarantCo for remaining risks

  • There is empirical evidence that risk sharing builds confidence, competence and greater risk appetite of lenders over time

  • GuarantCo believes most transactions it guarantees will eventually be refinanced without need for credit enhancement

  • There may be legal, regulatory and policy constraints in certain countries which unnecessarily hinder the development of local capacity.

    • GuarantCo has access to quick disbursing technical assistance funds for Capital Markets capacity building (e.g. to pay for external consultants, assistance to governments or regulators)

Eligible clients
Eligible Clients

Greenfield projects or project expansions for:

  • Private sector companies

  • Municipalities / sub-nationals - if funded largely through user fees (or ring-fenced structures providing satisfactory security)

  • Parastatals if privatisation is planned (or case by case if operations are on a commercial basis)

    GuarantCo can also support:

  • Refinancing of existing projects if hard currency financing is substituted by local currency debt

  • Specialist Financial Institutions focused on infrastructure

Focus countries
Focus Countries

“Good projects in poor countries rather than poor projects in good countries”

Local currency finance is lower risk than hard currency finance (often rated 2 or 3 notches higher to reflect absence of devaluation / convertibility risk etc)

Although GuarantCo focuses on some of the least developed countries, projects there are usually more conservatively structured

We target the DAC list, the OECD defined “low and lower middle income countries” - per capita income up to $3,975 (in 2010)

  • Most of Sub-Saharan Africa

  • Parts of M.E. e.g.. Iraq, Egypt, Palestinian Territories, Yemen

  • Asia e.g. Indian Sub-Continent, Central Asia, Vietnam, Laos, Cambodia

  • Parts of South and Central America (in partnership with others)

Eligible sectors
Eligible Sectors

  • Power generation, transmission and distribution (incl. renewable and non renewable)

  • Water/waste management services

  • Transportation (mainly fixed installations)

  • Telecoms / IT Backbones etc.

  • Urban / social infrastructure (incl. affordable housing / mortgages)

  • Basic industries involved in infrastructure development (e.g. steel, cement, biofuels etc.)

  • Infrastructure component of agro-industry, mining and energy projects

    Ineligible: Upstream Oil & gas and mining


  • Current capital of $145m, $200m by end ’13, $300m by end ‘14

  • Additional backing from KfW / Barclays / others

  • Current single project exposures of $5m - 20m. Target $5 – 50m by end ‘14

  • Larger requirements can be syndicated to DFI’s

  • Technical Assistance Funds - grants up to $500k per initiative / project but most $50k – 250k

  • Transaction tenors up to 15 years

  • Guarantee pricing varies according to risk but floor of 3% pa (no wish to displace commercial risk takers)

  • Guarantee payments typically made in accordance with the original debt service profile of the loan or bond

Sample transactions
Sample Transactions

June 2007


KES 750 million (USD 9.7 million) partial credit guarantee made available to provide credit enhancement for a bond issue to finance the expansion of a steel plant in Kenya.

October 2007


XAF 3.5 billion (USD 8 million) partial credit guarantee for Afriland Bank to provide additional lending to the leading mobile telecommunications operator in Chad.

December 2005


KES 725 million (USD 12 million) partial credit guarantee to credit enhance a local bond issue to support network expansion programme of the second largest mobile operator in Kenya.

June 2007


TZS 6.5 billion (USD 5.1 million) partial credit guarantee made available to provide credit enhancement for a local bond issue to finance the expansion of a steel plant in Tanzania.

September 2009


INR 1,120 million (USD 25 million) partial credit guarantee of two Indian banks’ lending to a new cement plant in Assam, India.

November 2009


INR 940 million (USD 20 million) partial credit guarantee for lending to several slum redevelopment project in Mumbai, India.

January 2009


USD 10 million partial risk guarantee of two Palestinian banks lending to a start-up mobile telecommunications operator in the Palestinian Territories.

December 2008


INR 900 million (USD 19 million) partial credit guarantee of the mezzanine tranche of a truck finance receivables securitisation in India.

Sample transactions1
Sample Transactions

October 2010


USD 15 million performance bond guarantee facility for a local East African construction company.

September 2010


USD 5 million stop-loss insurance for Home Finance Guarantors Africa who will reinsure Collateral Replacement Indemnities for low and lower middle income households in Sub Saharan Africa.

September 2010


INR 916 million (USD 20 million) partial credit guarantee of Tier II capital raising by truck finance company in India.

September 2010


ZAR 139 million (USD 20 million) partial credit guarantee of the senior tranche of a loan programme for a minibus leasing company in South Africa.

December 2011



USD 1 million partial credit guarantee to help support construction of a hybrid solar plant and associated distribution and supply facilities on Kalangala Island, Uganda.

March 2011


INR 920 Million (USD 20 million) partial credit guarantee to support the financing of one of the largest slum redevelopment projects in Pune, India.

September 2011


Partial credit guarantees totalling NGN 2.21 Billion (USD 14.2 million) to credit enhance the maiden bond issue of the largest manufacturer of aluminium roofing in West Africa.

December 2011



USD 1.8 million partial credit guarantee to support a note issuance programme funding a range of infrastructure initiatives on Kalangala Island , Uganda.

Sample Transactions

(amounts quoted are the US$ equivalentof local currency)

Mandated transactions

  • $15m partial guarantee for a biogas company expanding from Thailand into neighbouring countries

  • Partial guarantee of $20m for a hospital PPP in Egypt

  • $15m guarantee for a bond issue in Kenya for expansion of a company’s housing components business

  • $15m partial guarantee for an integrated wood fuel manufacturing and power generation project in Liberia

  • $5m partial guarantee for a water project in Ghana

  • $20m partial guarantee for ICT backbone infrastructure in west Africa

  • $20m partial guarantee for a greenfield agro-energy project in Tanzania

  • $20m partial guarantee for a run of the river hydro project in Nepal

Potential transactions

  • Credit enhancement of Private placement bond issue for telecoms company in Madagascar

  • Partial guarantee for a new factory producing steel pipes for the water sector in Algeria

  • Credit enhancement of a bond issue for a municipality in Southern Africa

  • Partial guarantee for a cable based urban transportation project in Lagos, Nigeria

  • Credit enhancement of to assist a telecoms company access the bond market in Pakistan

  • Partial guarantee for a wind power project in Pakistan

Key stakeholders
Key Stakeholders

  • GuarantCo’s equity is provided by the donor agencies of four AAA-rated European governments.

  • The Governments have recently increased GuarantCo equity to US$ 145million and committed further amounts to secure total equity of $300m by end 2014

  • Management of GuarantCo is outsourced to Frontier Markets Fund Managers (“FMFM”), a private sector fund manager, which has a 10 year track-record of successfully managing debt investments in low-income countries.

Rating and counterparty risk
Rating and Counterparty Risk

  • GuarantCo signed an agreement in March 09 whereby all its guarantees are backed severally by KfW (AAA) and Barclays (Aa3/A/A+)

  • The agreement is currently being expanded to include further AAA counter-guarantors

  • The facility provides clients of GuarantCo the benefit of additional cover from highly rated entities while GuarantCo builds portfolio and track record

  • The counter-guarantee arrangement will remain in place until GuarantCo achieves an independent international rating of at least “A-”.

Funding tenor extension
FundingTenor Extension

  • Tenor of local bank lending often constrained due to absence of longer tenor deposits (asset / liability mismatch)

  • Either internal treasury or external regulator constraint

  • GuarantCo is prepared to offer “put” options to local lenders for certain projects:

    • guarantee can be called for liquidity reasons (as well as credit reasons)

    • Could cover funding risk beyond a certain date or during times of unusual volatility

    • Only offered in conjunction with partial risk or credit guarantees (ie not standalone)

Working with export credit agencies
Working with Export Credit Agencies

Complementary finance :

Borrowers often look for 100% finance. GuarantCo can enable additional finance to pay for non-eligible content or local costs

  • The main ECA facility can be in either local currency or hard currency

  • Availability of 100% financing may accelerate financial close

  • Comfort from sharing common due diligence and monitoring

  • Our support is untied

Risk Sharing:

GuarantCo can co-operate with ECA’s where they provide local currency guarantees or local currency loans:

  • We can risk share on a pari pasu basis or take different risks such as

    • longer tenors

    • construction risk

    • subordinated or first loss positions

  • We can co-guarantee, front or counter guarantee / reinsure


The approach has evolved:

  • In the first two transactions, GuarantCo had the right (if GuarantCo was subrogated into the loan) to redenominate into $...

  • ….but as an initiative promoting local currency, GuarantCo has now moved to crystallisation in local currency

  • More guarantors are also recognising the benefits of local currency crystallisation

  • In most cases redenomination into hard currency will adversely impact credit recoveries so any apparent advantage is largely illusory and might even result in lower eventual hard currency recovery

  • Opportunities are increasing for hedging post default exposures and potential recoveries (eg TCX)