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Private Sector (Nonsovereign) Financing

ADB focuses on projects that help promote private investments in the region that will have significant development impact and will lead to accelerated, sustainable, and inclusive growth.

Guarantees

ADB Guarantees Diagram

Our Objective

To catalyze capital flows into and within its developing member countries for eligible projects, ADB extends guarantees for eligible projects which enable financing partners to transfer certain risks that they cannot easily absorb or manage on their own to ADB. ADB’s guarantees support infrastructure projects, financial institutions, capital market investors and trade financiers, and cover a wide variety of debt instruments. Guarantees can be provided when ADB has a direct or indirect participation in a project or related sector, through a loan, equity investment or technical assistance.

ADB extends partial credit guarantees (PCG) which provide lenders and investors with comprehensive credit cover on the portion of the loan or bond guaranteed by ADB; and partial risk guarantees (PRG) which cover lenders against nonpayment by the borrower caused by political risk events only.

See also

Benefits

Guarantees have many benefits for ADB and its clients, as well as for debt financiers, particularly commercial banks. The main benefits for ADB and its developing member countries (DMCs) are:

  • Improved access to finance
  • Deploy ADB’s risk-taking capacity where it does not have funding capability
  • Better financing terms and conditions
  • Enhanced mobilization of resources by enabling debt financiers to get a risk transfer
  • Lower operational costs
  • Expand and enhance financial sector in developing countries

Types of guarantees

Partial Risk Guarantees

ADB’s partial risk guarantee is primarily designed to facilitate private sector development by providing financing partners with guarantees covering political risks. PRGs are well suited where commercial lenders are prepared to accept commercial (or credit) risks of a project, but not the political risks.

ADB provides PRGs to lenders of most forms of debt, including commercial bank loans, loans made by shareholders, loans guaranteed by shareholders or third parties, capital market debt instruments, bonds, financial leases, promissory notes, and bills of exchange. An example of a typical PRG is one that supports the obligations of an off-taker to an independent Power Project (IPP) under a Power Purchase Agreement (PPA).

ADB Partial Risk Guarantees Diagram

Type of Political Risks Guaranteed

ADB can guarantee various political risks, including the following:

  • Transfer Restriction—protects a lender against a borrower’s and/or a lender’s inability to convert local currency proceeds into foreign exchange, or from transferring the foreign exchange out of a DMC, to service the guaranteed debt.
  • Expropriation—protects a lender against expropriatory measures, including nationalization, deprivation, confiscation, that prevent a borrower from servicing guaranteed debt. The guarantee also protects a lender in the event of an inability to service debt arising from a series of measures that constitute a “creeping expropriation”.
  • Political Violence—protects a lender against a borrower’s inability to service guaranteed debt as a result of physical damage to a project’s assets, or an interruption in a borrower’s business activities, as a result of war, evolution, insurrection, terrorism, or other politically motivated acts.
  • Breach of Contract—protects a lender against a default by a borrower of a guaranteed loan as a result of a frustration of an arbitral process (“Denial of Justice”) and/or the inability to enforce an award against relevant governmental parties to a project agreement (“Arbitration Award Default”).

Other details

Eligible Sectors
  • Primarily infrastructure (e.g., power, transportation, water supply and waste treatment, and telecommunications) and capital markets (e.g., banking, leasing, insurance, and funds)
  • Other sectors on a case-by-case basis
Participation Requirement
  • ADB may provide a guarantee provided it has “participated” in the project or the sector
  • Any ADB financing instrument can satisfy the participation requirement, provided that both it and the guarantee share the same development objective and relate to the same sector or project
Guarantee Holders
  • Typically, a private financial institution or an investor providing debt financing to a project that is eligible for ADB financing
  • Public institutions may on a case by case basis also benefit provided they operate on a commercial basis
Developing Member Countries (DMC) Guarantees may be issued in support of projects located in any ADB Developing Member Country
Amount of Guarantee
  • Depends on wide variety of factors, including ADB’s assessment of risk and applicable country exposure limitations
  • 40% of the total project cost (in case of project finance transactions) subject to a cap of $400 million
  • These caps will not apply if ADB is protected by a counter-guarantee given by the sovereign of the relevant DMC, or where ADB can partially reinsure its exposure
Guaranteed Percentage
  • ADB will set the guaranteed percentage at the lowest level required to mobilize the necessary financing
  • Up to 99.5% in exceptional cases
Term of the Guarantee Usually match the term of the guaranteed debt instrument
Guarantee Currency May be issued in any currency in which ADB can efficiently intermediate, including the currencies of some of its DMCs
Fees The cost of a guarantee typically consists of three components: a front-end fee, a guarantee fee, and a standby fee
  • The front-end fee is a one-time payment that covers due diligence, processing of the guarantee, and other up‑front costs
  • The guarantee fee covers ADB’s exposure risks in relation to the outstanding principal and interest of the guaranteed loan, and is charged on the sum of the guaranteed percentage of the principal outstanding and the amount of interest to be paid for an agreed interest period
  • The commitment fee is applied to the amount of any guaranteed principal that has not yet been disbursed
  • Guarantees are priced at market, and take into consideration the project, sector, and country risks, as well as the specific terms of the contract of guarantee
  • However, for guarantees that benefit from a sovereign counterindemnity, ADB’s policy-based pricing will apply
Syndication of Guarantees
  • ADB will, if possible, mobilize additional amounts of guarantee through partnership arrangements with private and public political risk guarantors and insurers
  • Arrangements can take the form of reinsurance participations, where ADB assumes responsibility for the entire amount of the guarantee, and syndicates a portion of the risk to a guarantor or reinsurer; or a “guarantee-of-record” structure, where the guarantee is in ADB’s name, but where the guarantee holder assumes the credit risk of the third-party guarantor or insurer
Due Diligence ADB will carry out due diligence on the financial, technical, and economic viability of the project as well as the project sponsor(s) and prospective guarantee holder(s)
Compliance with ADB Safeguard Policies and Procurement Guidelines The guaranteed lender must ensure, to the extent reasonably possible, that the borrower of the guaranteed loan complies with ADB’s policies, including those related to environment and social safeguards; procurement; the prevention of corruption, money laundering, and the financing of terrorism

Case Study: Riau Natural Gas Power Project

Riau Natural Gas Power Project

Closed in 2019

Riau Natural Gas Power Project chart

Project: Construction of a 275 MW combined-cycle gas turbine power plant in Riau province in central Sumatra

ADB PRG Cover

  • $150 million (covering principal plus interest and PRG fees)
  • 20 years
  • 4-point cover (no sovereign guarantee of off-taker)

Partial Credit Guarantees

ADB provides partial credit guarantees to lenders of most forms of debt. These include commercial bank loans, loans guaranteed by shareholders or third parties, capital market debt instruments, bonds, financial leases, letters of credit, promissory notes, and bills of exchange.

Under ADB's Microfinance Risk Participation and Guarantee Program, ADB partners with lenders to microfinance institutions, increase their access to local currency funding, and address the financial needs those at the base of the pyramid across the region.

ADB Partial Credit Guarantees Diagram Update

Type of Risks Guaranteed

ADB’s partial credit guarantee covers nonpayment by the borrower or issuer (for any reason) on the guaranteed portion of the principal and interest due.

Other details (nonsovereign)

Eligible Sectors and Borrowers or Issuers
  • Principally applied to financial services and capital markets (e.g., banking, leasing, insurance, and funds); and infrastructure (e.g., power, transportation, water supply and waste treatment, and telecommunications)
  • May consider other sectors on a case-by-case basis
  • Can be applied to loans or other debt instruments issued by private and public sector projects (limited recourse financings), public–private partnerships, corporates, as well as (sub)sovereign entities
  • For projects and borrowers/issuers located in any developing member country of ADB
ADB’s Participation Requirement
  • ADB may provide a guarantee provided it has “participated” in the project / borrower or the sector, either through a loan or through a Technical Assistance (TA)
  • Any ADB financing instrument can satisfy the participation requirement, provided that both it and the guarantee share the same development objective and relate to the same sector or project
Guaranteed Party
  • Typically, a private financial institution or an investor providing debt financing to a project that is eligible for ADB financing
  • Public institutions may also benefit provided they operate on a commercial basis
Guaranteed event Non-payment of a scheduled amount of principal and/or interest
Amount of Guarantee
  • Depends on a variety of factors, including ADB’s assessment of risk and applicable country, sector and obligor exposure limitations
  • For the maximum limit, ADB’s exposure to the project will not exceed the lesser of:
    • 25% of the total project cost (in project finance transactions);
    • 25% of total assets (in corporate transactions);
    • 50% of net worth (in bank transactions); and
    • $250 million
  • The amount of guarantee may be constrained below the maximum limit where ADB has exposure to the project, obligor, or transaction through direct financing instruments (e.g., loan or equity), or where country, sector or other risk limits apply
  • Maximum limits may be increased where ADB’s risk is subject to risk sharing arrangements with participants with a credit rating of A- or better assigned by an acceptable credit rating agency
Guaranteed Percentage
  • ADB will set the guaranteed percentage at the lowest level required to mobilize financing
  • 100% only in exceptional cases
  • Different policies apply to partial credit guarantees issued on bonds
Term of the Guarantee
  • Long-term debt obligations of up to 15 years or longer, provided that the tenor is justified and in line with ADB’s risk policies
  • The guarantee period could match the full term of the guaranteed debt instrument, or a portion, such as the back-end maturities
Guarantee Currency May be issued in any currency in which ADB can efficiently intermediate, including the currencies of its developing member countries
Fees The cost of a guarantee typically consists of three components: a front-end fee, a guarantee fee, and a commitment fee
  • The front-end fee is a one-time payment that covers due diligence, processing of the guarantee, and other up-front costs
  • The annual guarantee fee covers ADB’s exposure to the project and is charged on the guaranteed portion of principal outstanding and the guaranteed amount of interest in an applicable interest period
  • The commitment fee is applied to the amount of any guaranteed principal that has not yet been disbursed
  • Guarantees are priced at market and take into consideration, among other things, the project, sector, and country risks, as well as the specific terms of the contract of guarantee
Syndication of Guarantees
  • ADB will, if possible, mobilize additional amounts of guarantee capacity through partnership arrangements with private and public guarantors and insurers
  • Arrangements can take the form of risk participations, where ADB assumes responsibility for the entire amount of the guarantee and distributes a portion of the risk to a guarantor or insurer
  • Another method is a “guarantee-of-record” structure, where the guarantee is in ADB’s name, but the guaranteed party assumes the credit risk of the third-party guarantor or insurer
Compliance with ADB Safeguard Policies and Procurement Guidelines The guaranteed lender must ensure, to the extent reasonably possible, that the borrower of the guaranteed loan complies with ADB’s policies, including those related to environmental and social safeguards; procurement; and the prevention of corruption, money laundering, and financing of terrorist activities
Timing of pay-out under Guarantee At the end of
  • Waiting period
  • Claims Determination period and
  • Claims Settlement period
Governing law English law (as a default choice)

Other details (sovereign)

Eligible Sectors and Borrowers or Issuers
  • Principally applied to infrastructure (e.g., power, transportation, water supply and waste treatment, and telecommunications) and/or general sovereign borrowing (See Policy Based Guarantees)
  • May consider other sectors on a case-by-case basis
  • Can be applied to loans or other debt instruments issued by private and public sector projects (limited recourse financings), public–private partnerships, corporates, as well as (sub)sovereign entities
  • For projects and borrowers/issuers located in any developing member country of ADB
ADB’s Participation Requirement
  • ADB may provide a guarantee provided it has “participated” in the project / borrower or the sector, either through a loan or through a Technical Assistance (TA)
  • Any ADB financing instrument can satisfy the participation requirement, provided that both it and the guarantee share the same development objective and relate to the same sector or project
Guaranteed Party
  • Typically, a private financial institution or an investor providing debt financing to a project that is eligible for ADB financing
  • Public institutions may also benefit provided they operate on a commercial basis
Guaranteed event Non Honoring of a Sovereign Obligation to pay a scheduled amount of principal and/or interest and/or guarantee fees
Amount of Guarantee
  • No caps will not apply if ADB is protected by a counterindemnity given to ADB by the sovereign of the applicable developing member country
  • The amount of guarantee may be constrained below the maximum limit where where country, sector or other risk limits apply
Guaranteed Percentage
  • ADB will set the guaranteed percentage at the lowest level required to mobilize financing
  • 100% only in exceptional cases (except for Guaranteed Letters of Credit)
  • Different policies apply to partial credit guarantees issued on bonds
Term of the Guarantee
  • Long-term debt obligations of up to 15 years or longer, provided that the tenor is justified and in line with ADB’s risk policies
  • The guarantee period could match the full term of the guaranteed debt instrument, or a portion, such as the back-end maturities
Guarantee Currency May be issued in any currency in which ADB can efficiently intermediate, including the currencies of its developing member countries
Fees The cost of a guarantee typically consists of three components: a front-end fee, a guarantee fee, and a commitment fee
  • The front-end fee is a one-time payment that covers due diligence, processing of the guarantee, and other up-front costs
  • The annual guarantee fee covers ADB’s exposure to the project and is charged on the guaranteed portion of principal outstanding and the guaranteed amount of interest in an applicable interest period
  • The commitment fee is applied to the amount of any guaranteed principal that has not yet been disbursed
  • Guarantees that benefit from a sovereign counterindemnity, will apply policy-based pricing.
  • Policy based fees start at 50 bps but, depending on the country categorization and the tenor of the underlying debt, a maturity premium may apply. These premiums will be charged in the same manner as they are applied to LIBOR based sovereign loans. For more information see Public Sector (Sovereign) Financing: Lending Polices and Rates
Compliance with ADB Safeguard Policies and Procurement Guidelines The guaranteed lender must ensure, to the extent reasonably possible, that the borrower of the guaranteed loan complies with ADB’s policies, including those related to environmental and social safeguards; procurement; and the prevention of corruption, money laundering, and financing of terrorist activities.
Timing of pay-out under Guarantee At the end of
  • Waiting period
  • Claims Determination period and
  • Claims Settlement period
Governing law English law (as a default choice)

Case Study: Tiwi-Makban Geothermal Green Bonds Project

Tiwi-Makban Geothermal Green Bonds Project

Closed in 2016

Tiwi Makban Green Bonds Project diagram

The Assets:

  • Two plants: Tiwi and Makban, 1970s-era
  • Tiwi (289 MW), 7th largest geothermal world wide; Makban (458 MW), 4th largest
  • 2009 privatization sale to Aboitiz Power ($450m), 2009-2013 refurbished ($150+m)
  • Represents 14% of Luzon grid capacity, supplies 96% of ADB HQ’s power supply

Deal Background:

  • Sponsor funded its acquisition/rehabilitation investments entirely with equit and now needs to free up capital for new projects, including renewables
  • Refinancing via banks is a challenge: local banks are now approaching “single borrower limits” on Aboitiz Power
  • Philippine bond market developing, interest building from institutional investors

Case Study: Sovereign PCG - Southern Gas Corridor

Sovereign PCG - Southern Gas Corridor (Azerbaijan, 2017)

Southern Gas Corridor diagram

  • ADB’s PCG supported a $525 million loan facility to Southern Gas Corridor CJSC backed by a counter-guarantee and indemnity agreement between the Republic of Azerbaijan (ROA) and ADB. The loan facility supported an increase in the Shah Deniz gas field’s annual production capacity.
  • Objective of the PCG was to attract commercial funding to the project and improve the financing terms thereof to the borrower, the Southern Gas Corridor Closed Joint-Stock Company (“SGC” or “the Borrower”).
  • Covered Risk: ADB’s PCG covered the risk that the Ministry of Finance, acting on behalf of ROA, would not honor its sovereign obligation to repay the lenders in case of a missed payment of principal, interest or guarantee fees.
  • Benefits:
    • All-in costs of the commercial bank loans were be reduced (as compared to funding that is not guaranteed), and
    • Tenor was increased thereby improving the viability of the project

Policy-Based Guarantees

Policy-Based Guarantees

While a standard guarantee supports the funding of a specific project, a policy-based guarantee supports the general government budget. Like a policy-based loan, a policy-based guarantee is anchored with policy conditions but provides a guarantee over government borrowing from private financiers in lieu of a direct loan. ADB’s guarantee helps give the government access to commercial borrowing and improves the terms of such borrowing. The policy-based guarantee is provided with a sovereign counter-indemnity and the guarantee fee is equal to the sovereign loan spread.

Guaranteed Letters of Credit

A guarantee on a letter of credit is a mechanism that can be used to backstop government payment obligations, typically in an investment project that relies on a steady stream of payments from a government agency or a state-owned enterprise, such as a public utility. ADB issues a partial credit guarantee to an L/C issuing bank and the bank, in turn, issues a letter of credit to the project company. The letter of credit will then disburse on demand (without arbitration) on any payments due by the government-owned off-taker that are not disputed. The relevant contract between the investor and the government (e.g. the Power Purchase Agreement or Concession Agreement) should be sufficiently clear on when payments are due and who is responsible for payment. Decisions by an independent expert or other qualified third party should be legally binding on both the government grantor (or State-Owned Enterprise) and the concessionaire of the project.

The government then has an opportunity to reimburse the L/C issuing bank within a specified period, generally from six to twelve months. If the government does not reimburse the L/C issuing bank within a specified period, then the L/C issuing bank can call on ADB’s partial credit guarantee for reimbursement. The guarantee is typically backed by a Sovereign Counterindemnity from the Host Government, which allows for policy-based pricing. This mechanism provides short term liquidity and gives comfort to investors that they will receive revenue in a timely manner. It also benefits governments by increasing investor appetite for investment projects tendered by the Host Government.

ADB Letters of Credit Structure Diagram

Case Study: Pacific Renewable Energy Program

Pacific Renewable Energy Program

Pacific developing member countries of the Asian Development Bank (ADB) share similar development challenges, including small populations, limited resources, remoteness, susceptibility to natural disasters, and vulnerability to external shocks. A structural transition is currently underway in power generation—from relying on fossil fuels to utilizing renewable energy sources—to lower costs, reduce greenhouse gas emissions, and improve energy security. This makes the involvement of the private sector crucial to the ownership and operation of renewable energy-generating facilities. Private sector participation can fill the investment gaps and supplement capacity in the power sector.

The private sector relies on sovereign guarantees to backstop the offtake obligations of power utilities. However, certain Pacific developing member countries are unable to provide guarantees because of sovereign debt ceilings or preference to utilize available headroom for direct borrowing.

The Pacific Renewable Energy Program (PREP) is designed to work within these constraints. It encourages private sector investment by using donor funds to backstop the power payment obligations of power utilities.

Program Overview for a Potential Renewable Energy Project

The design for each project under PREP includes one or more of the following forms of financing support:

  • Partial risk guarantee. A partial risk guarantee (PRG) covers standard political risks and breaches of contract under a power purchase agreement (PPA), which includes coverage of failure by the utility to make a termination payment in the event of full default by the power utility. Payment for breach of contract is made under the PRG upon arbitral award.
  • Direct loan. ADB provides a direct loan to support a private sector investor. If ADB cannot fund a loan in local currency, a partial credit guarantee benefiting one or more local lenders to the project may be made available.
  • Letter of credit. A letter of credit (LC) facility is intended to cover short-term liquidity risk, drawable by a project company in an amount covering payments due under a PPA for a specific period. ADB may arrange a maximum period of 24 months for the power payments to a project. The LC will cover the risk that a power utility as an offtaker fails to make payments to the project in accordance with the terms of the PPA. The LC will be reinstated once the power utility has restored the outstanding payments. If provided, the LC will be fully secured by donor funds.
  • Technical assistance. ADB may employ technical assistance for transaction advisory support and streamlined processes. This reduces high transaction costs associated with relatively small transaction sizes in the Pacific and assists with capacity building in environmental and social safeguards.