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Creating Opportunities with World Bank Guarantees

Banking and Debt Management (BDM)World Bank Treasury

January 7, 2010

Why use guarantees?

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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

7 7

3

5 5

7

01

5

1

5

15 15 15

10

15

10 10

12

10

14

16

0

2

4

6

8

10

12

14

16

18

China

Philip

pine

s

Pakist

an

Leban

on

Mor

occo

Russia

/Ukr

aine

Thaila

nd

Cote d

'Ivoi

re

Colom

bia

Bangl

ades

h

Vietna

m

Mat

uri

ty (

year

s)

without Guarantee with Guarantee

0

16.5

Laos

16

Ugand

a

2

Guarantees can help extend tenors

3.0%

4.5%

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%2.5%

5.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

China

Philipp

ines

Pakist

anUganda

Mor

occo

Thaila

nd

Cote d'

Ivoir

e

Colombia

Bangla

desh

Vietnam

Inte

rest

Sp

read

s ov

er U

ST

/Lib

or

without Guarantee with Guarantee

2.25%

Laos

2.25%

Guarantees also help reduce borrowing costs

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

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Two main types of Bank guarantees

Partial Risk Guarantees Partial Credit Guarantees

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•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

Partial Risk Guarantees (PRG)

Romania used a PRG to support the privatization of electricity distribution companies

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Government of Romania/MPF

Gov

ern

men

tS

uppo

rtA

gre

eme

nt

License Agreement /Regulatory Contract

Regulator

Indemnity Agreement

Project Agreement

L/C

Gu

aran

tee

Agr

eem

ent

CitibankRomaniaL/C*

L/C

Rei

mbu

rsem

ent

&C

redi

t A

gree

men

t

ENEL 51%Electrica 49%

Priv

atiz

atio

n A

gre

eme

nt

Electricity Distribution CompaniesEquity

?

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• 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 Partial Credit Guarantees cover debt service obligations

Principal cover for bullet maturity

Rolling coupon Amortizing syndicated loan with cover for later

maturities

IBRD PCG

IBRD PBG

IBRD Enclave

Partial Credit Guarantees

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PCG’s PV: $121m

Principal Guarantee Amount:$243m

Loan Amount:$825m

Botswana Morupule B Power Project used a PCG to gain access to longer term funds

1-15 years 15-20 years

IBRD guaranteedLeverage of

1:7

New policy for counting against IBRD exposure limits

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Guarantee exposure now counts just 25% against country exposure limit

Remainder charged against USD 1.5 billion pool of capital set aside for guarantees

WBG Guarantee and Insurance Products

Private investors are protected against risks of nonperformance by:

PCG Similar to IBRD’s PRG

Governments or public sector

IBRD, IBRD enclaves in IDA countries, (proposed for IDA)

IBRD, IDA, IBRD enclaves in IDA countries, MIGA political risk insurance

Private sector IFC

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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

Who does guarantees?

bdm@worldbank.org

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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