Funding Organization: IFC Partial Credit Guarantees

PROFILE

Total Amount Project specific
Financing Mechanisms Co-financing , Debt , Loan , Risk management , Structured financing
Qualifying Projects Adaptation , Mitigation
Eligibility In accordance with IFC investment guidelines.

Funding Objectives

Partial Credit Guarantees allow IFC to use its international triple-A credit rating to help clients diversify their funding sources, extend maturities, and obtain financing in their currency of choice, including local currency. In securitization transactions, IFC participates as a structuring investor or guarantor. Partial loan and bond guarantees also help broaden clients’ access to international and local capital markets. Credit enhancement structures help clients attract new sources of financing in their currency of choice, reduce borrowing costs, and extend maturities beyond what private investors would otherwise provide.

Financing Mechanisms

A Partial Credit Guarantee (PCG) is a credit enhancement mechanism for debt instruments (bonds and loans). It is an irrevocable promise by IFC to pay principal and/or interest up to a pre-determined amount. Typically, the guarantee is structured to cover 100% of each debt service payment, subject to a maximum cumulative payout equal to the guarantee amount. The guarantee amount is usually expressed as a percentage of principal and amortizes in proportion to the bond or loan.In certain circumstances, this percentage can increase or decrease in the later years of the debt obligation, depending upon the needs of the borrower or creditors.

Partial guarantees can be denominated either in local currency (typically for domestic transactions) or foreign currency (typically for cross-border transactions). Local currency guarantees are most appropriate for a borrower that has local currency revenues, but lacks access to local currency financing of the desired tenor. By helping to mobilize this longer-term local currency funding, the IFC local currency guarantee permits borrowers to match more effectively their assets and liabilities and to reduce foreign exchange risk.

Foreign currency guarantees work best for a borrower that cannot access international markets on its own because of the high-risk premium associated with the country in which it is domiciled. Although all IFC guarantees are structured to provide credit enhancement, for cross-border issues IFC is able to offer a structure that mitigates transfer and convertibility (T&C) risk as well. By providing a guarantee sized to cover only the debt service due during the estimated duration of a T&C event, the IFC PCG allows a borrower to obtain in a cost effective manner the rating elevation possible through mitigation of T&C risk, thus negating the need for political risk insurance. It is particularly useful for borrowers possessing a non-investment grade international foreign currency rating, but an investment grade international local currency rating. In this situation, the IFC PCG may allow borrowers to achieve an investment grade rating for their cross-border debt issue with relatively low levels of credit enhancement.

Application Procedures

Depends on the transaction. In general according to IFC procedures.

Project Types

IFC partial credit guarantees can be used for different kind of projects (see Project Examples).

IFC tailors guarantees to meet the needs of both borrower and creditors. They are structured to reduce the probability of default of the debt instrument and increase the recovery if default occurs. In general, IFC’s objective is to offer the minimum amount of guarantee necessary to facilitate a successful transaction. This approach has several advantages by allowing:

  • the borrower in most cases to achieve a lower all-in cost of funds;
  • the investors to maximize their return given their risk tolerance; and,
  • IFC to mobilize the maximum amount of financing for its clients for a given level of credit exposure.
Decision-making structure

According to IFC investment criteria and Mission http://www.ifc.org/proserv.