World Bank Guarantee Products: The Basics

June 29-30, 2005June 29-30, 2005

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What are the guarantee products designed to do?

• A risk mitigation tool:A risk mitigation tool:– Helps reduce fiscal burden Helps reduce fiscal burden – Catalyzes private sector finance in support Catalyzes private sector finance in support

of developmental objectivesof developmental objectives– Facilitates access to the international debt Facilitates access to the international debt

and capital markets on more favorable and capital markets on more favorable termsterms

– Leverages Bank resourcesLeverages Bank resources

But guarantees can only help if there is credible movement But guarantees can only help if there is credible movement towards reform (e.g. collection, losses, tariff, prospect of towards reform (e.g. collection, losses, tariff, prospect of financial viabilityfinancial viability

33

The relevance in today’s investment climate

• Increased investor risk aversion continuesIncreased investor risk aversion continues– Reduced number of strategic investorsReduced number of strategic investors– Rating downgradesRating downgrades– Reduced availability of private PRI Reduced availability of private PRI

• Requires Government demonstration ofRequires Government demonstration of– A track record which reducesA track record which reduces

• Uncertainty in its market structures• Uncertainty in its tariff framework

– With dominant public sector presenceWith dominant public sector presence• Honoring of policy & contractual commitments • Governance issues

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Principal types of guarantees

• Partial Risk (PRG)Partial Risk (PRG)– Generally for private sector projectsGenerally for private sector projects– Covers debt against specific sovereign obligations Covers debt against specific sovereign obligations

committed to projectcommitted to project– Structured to provide minimum coverage necessary to Structured to provide minimum coverage necessary to

mobilize private financingmobilize private financing– Available in both IBRD and IDA countriesAvailable in both IBRD and IDA countries

• Partial Credit (PCG)Partial Credit (PCG)– Generally for public sector projects and/or entitiesGenerally for public sector projects and/or entities– Covers debt service default for specified paymentsCovers debt service default for specified payments– Alternative structures developed for different credits and Alternative structures developed for different credits and

market conditionsmarket conditions

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Partial Risk Guarantees • Rationale:Rationale: Catalyzes private sector interest through Catalyzes private sector interest through

political risk mitigationpolitical risk mitigation

• Purpose:Purpose: Supports debt financing in the form of Supports debt financing in the form of commercial debt or shareholder loans or provides cash commercial debt or shareholder loans or provides cash flow supportflow support

• Guarantee coverage:Guarantee coverage: Critical sovereign risks related Critical sovereign risks related to Government commitments under the relevant to Government commitments under the relevant contractual agreementscontractual agreements

• Modality:Modality: Greenfield projects, Privatizations, Greenfield projects, Privatizations, Concessions or other PPP structuresConcessions or other PPP structures

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Partial Risk Guarantees mitigate concerns related to government

performance

• A Partial Risk Guarantee (PRG) can A Partial Risk Guarantee (PRG) can cover lenders in case the Government cover lenders in case the Government does not meet its commitmentsdoes not meet its commitments

Commercial Lenders

Project Company

Government

Guarantee

Indemnity Agreement

Government Undertakings

Loans

World Bank

77

PRGs offer flexibility in the guarantee coverage that it can

offer• Regulatory/ tariff frameworkRegulatory/ tariff framework• Changes in law, decrees, or regulationsChanges in law, decrees, or regulations• Changes in licensing arrangements or Changes in licensing arrangements or

disconnection policies disconnection policies • Political force majeure, including expropriation Political force majeure, including expropriation • Government agencies paymentsGovernment agencies payments• Transferability & convertibility of foreign Transferability & convertibility of foreign

exchangeexchange• Frustration of ArbitrationFrustration of Arbitration

•But PRGs do not cover commercial risks.

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Preferred guarantee modality

• Early involvement of the Bank may help Early involvement of the Bank may help to enhance investor interest to enhance investor interest

• Guarantee structure to be incorporated Guarantee structure to be incorporated in the bid documents as an optionin the bid documents as an option

• Bids should demonstrate value added of Bids should demonstrate value added of the Guaranteethe Guarantee

• Value added of the guarantee to be a Value added of the guarantee to be a part of the bid evaluationpart of the bid evaluation

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Partial Credit Guaranteescan help in the following

situations• Government or State Owned Enterprise (SOEs) Government or State Owned Enterprise (SOEs)

access to capital markets access to capital markets

• Mobilize government share in PPPsMobilize government share in PPPs

• Bond issues by public intermediaries, or public Bond issues by public intermediaries, or public entities, such as SOEsentities, such as SOEs

• Pre-privatization support for public entities Pre-privatization support for public entities through convertible bondsthrough convertible bonds

1010

Partial Credit Guarantees can help financelong term public investments

00 1010 1515

$100 m$100 m

WB Support WB Support for Principal for Principal Bullet Bullet RepaymentRepayment

Pricing (250 bp* ) (250 bp* )Pricing (250 bp* ) (250 bp* )

* Above US Treasuries * Above US Treasuries

Philippines: Leyte-Luzon Philippines: Leyte-Luzon Power ProjectPower Project

Bond StructureBond Structure

Longest Term Available to the Philippines Longest Term Available to the Philippines without WB Supportwithout WB Support

Additional termAdditional term provided by WBprovided by WB SupportSupport

1111

$150 million

Average financing term forChina without

WB Guarantee

Additional uncoveredrisk taken by

commercial banks

WBGuaranteed

Total risk assumed by commercial banks

$50 million

0 3 6 9 12 15

China Ertan Power ProjectChina Ertan Power Project

Syndicated Loan Structure Syndicated Loan Structure

Partial Credit Guarantees can help finance long term public investments

1212

Guarantees help extend maturities ...

7 7

32

5 5

7

01

5

1

5

15 15 15

7

10

15

10 10

12

10

14

16

0

2

4

6

8

10

12

14

16

18

China

Philipp

ines

Pakist

an

Jord

an

Leban

on

Mor

occo

Russia

/Ukr

aine

Thaila

nd

Cote d'

Ivoir

e

Colombia

Bangla

desh

Vietna

m

Mat

uri

ty (

year

s)

without Guarantee with Guarantee

1313

… and at the same time reduce spreads

3.0%

4.5%

3.0% 3.0%3.4%

8.5%

6.5%

3.0%

5.0%

0.6%

2.0%

2.8%

0.75%

3.0%

2.0% 2.0%

2.9%

2.0%

1.1% 1.0%

2.5%

5.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

China

Philipp

ines

Pakist

an

Jord

an

Leba

non

Mor

occo

Thaila

nd

Cote

d'Ivo

ire

Colom

bia

Bangla

desh

Vietn

am

Inte

rest

Sp

read

s o

ver

US

T

without Guarantee with Guarantee

1414

…and have an important catalytic impact

Each dollar of guarantee catalyzed $4 of private finance.Each dollar of guarantee catalyzed $4 of private finance.

0 500 1000 1500 2000

China Yangzhou

Philippines Leyte

Pakistan Hub

China Zheijiang

Jordan Telecom

China Ertan

Pakistan Uch

Lebanon Power

Morocco Jorf Lasfar

Thailand EGAT

Cote d'Ivoire Power

Argentina PBG

Colombia PBG

Bangladesh Haripur

Vietnam Phu My 2-2

US$ Million

Guaranteed Amount

Private Capital Mobilized

1515

Guarantee benefits to the government:

Transaction Benefits• Catalyzes financing through market access, Catalyzes financing through market access,

longer tenors and lower financing costslonger tenors and lower financing costs• Facilitates privatization & PPPs by enhancing Facilitates privatization & PPPs by enhancing

investor interest investor interest • Accelerates pace of new investment for Accelerates pace of new investment for

expansion of relevant servicesexpansion of relevant services• Sustains more attractive retail tariff regimes Sustains more attractive retail tariff regimes

by materially improving the financing’s debt by materially improving the financing’s debt profileprofile

• Enhances the potential “sale” value of Enhances the potential “sale” value of existing assets or of the ‘business’ existing assets or of the ‘business’

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Guarantee benefits to the government:

Fiscal Perspective

• No additional contingent liabilityNo additional contingent liability• Can be additional to the IMF external debt Can be additional to the IMF external debt

ceilingceiling• Additional to the country lending programAdditional to the country lending program• Creates market confidence through Bank Creates market confidence through Bank

leverage and track recordleverage and track record• Provides for risk sharing with the private sectorProvides for risk sharing with the private sector• No associated costs for PRGs (guarantee fee No associated costs for PRGs (guarantee fee

would be payable by the investor as part of would be payable by the investor as part of project costs)project costs)

• Transitional - can be structured to fall awayTransitional - can be structured to fall away

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The WB Partial Risk Guarantee usually does not increase contingent liabilities

““The host government’s indemnity of The host government’s indemnity of the World Bank does not increase the the World Bank does not increase the government’s liabilities when the government’s liabilities when the government is already directly obligated government is already directly obligated to the private sector on the same to the private sector on the same liabilities.”liabilities.”

““Involving the Private Sector in Forestalling and Involving the Private Sector in Forestalling and Resolving Financial Crises – Private Project Finance Resolving Financial Crises – Private Project Finance Flows to Developing Countries,” IMF Board Paper Flows to Developing Countries,” IMF Board Paper SM/99/211, August 20, 1999, page 21.SM/99/211, August 20, 1999, page 21.

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Guarantee benefits to the private sector

• Mitigates critical perceived political risks Mitigates critical perceived political risks

and regulatory risksand regulatory risks• Makes privatizations financeable by Makes privatizations financeable by

facilitating direct access to financial facilitating direct access to financial marketsmarkets

• Catalyzes long term “off balance sheet” Catalyzes long term “off balance sheet” debt financing; thereby reducing the debt financing; thereby reducing the risk profile of the investment and risk profile of the investment and overall capital costs overall capital costs

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Pre-Conditions for Use of Guarantees

• Subject to Bank appraisalSubject to Bank appraisal– Sector reform programs acceptable to the Sector reform programs acceptable to the

BankBank

• Counter-Guarantee from the Counter-Guarantee from the government government – Required from the governmentRequired from the government

2020

Guarantee Pricing and Loan EquivalencyLoan-Equivalency PrincipleLoan-Equivalency Principle

- The loss suffered by the Bank from a member country’s failure to make - The loss suffered by the Bank from a member country’s failure to make timely payment on a Bank-guaranteed loan obligation is equivalent to timely payment on a Bank-guaranteed loan obligation is equivalent to that suffered from the country’s failure to make timely payment on an that suffered from the country’s failure to make timely payment on an equivalent loan-service obligation to the Bank. equivalent loan-service obligation to the Bank.

- Charges on IBRD loans and guarantees are aligned.- Charges on IBRD loans and guarantees are aligned.

IBRD Guarantees Loans

Front-end fee Front-end feeStandby fee Commitment feeGuarantee fee Lending spread

IDA Guarantees Credits

Standby fee Commitment ChargeGuarantee fee Service Charge

- The pricing for IDA guarantees is consistent The pricing for IDA guarantees is consistent with IDA’s service charges on credits.with IDA’s service charges on credits.

2121

IBRD/IDA PRG Fees (Charges for FY05 in basis points)

1. Determined on a case by case basis. Exceptional projects can be charged over 50 bps of the guaranteed amount.

Fee Type Fee charged to the borrower/ retained by IBRD

Upfront charges

Front End Fee (on the maximum guaranteed amount)

50 bp

Initiation Fee 15 bp on the guaranteed amount or USD 100,000 (whichever is higher)

Processing Fee1 Up to 50 bp of the guaranteed amount

Recurring charges

Guarantee Fee (on the maximum guaranteed amount during an interest period)

55 bp per annum

Standby Fee (on the undisbursed amount of the guarantee)

25 bp per annum

Fee Type Fee charged to the borrower/ retained by IDA

Upfront charges

Initiation Fee 15 bp on the guaranteed amount or USD 100,000 (whichever is higher)

Processing Fee1 Up to 50 bp of the guaranteed amount

Recurring charges

Guarantee Fee (on the maximum guarantee amount during an interest period)

75 bp per annum

Standby Fee (charged on undisbursed amount of the guarantee)

25 bp per annum

IBRD PRG

IDA PRG

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Fee Type Fee charged to the borrower1

Upfront charges

Front End Fee(on the maximum guaranteed amount)

50 bp

Recurring charges

Guarantee Fee(on the present value of the guarantee exposure)

50 bp per annum

Standby Fee(charged on the undisbursed portion of the guarantee exposure)

25 bp per annum

IBRD PCG Fees (Charges for FY05 in basis points)

1. Fee charges net of applicable waiver.

IBRD PCG

2323

Guarantee support for government reform agenda can

be very flexible…

• Government Priority in Agreement with Government Priority in Agreement with the World Bankthe World Bank– Privatizations Privatizations – Investments & PPPsInvestments & PPPs– Municipal Funds and Guarantee facilitiesMunicipal Funds and Guarantee facilities