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USAID Credit Guarantees
Effective Catalystsfor
Private Investmentin
Municipal Finance
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Need for Private Financing
Financing needs are too large to be met solely by donor and host government funds– need for sustainable solutions
Critical to have a legal and regulatory environment that attracts private capital – banks will still be reluctant to undertake new projects in new sectors
Partial guarantees can serve as a catalyst for:– private financing in new sectors and new projects– development of capital markets.
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Premise of Credit Guarantees
Abundance of creditworthy but underserved sectors – bankable projects exist!
Huge reserves of dormant private capital in developing countries
Long-term private sector led growth depends on mobilization and use of private capital locally.
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USAID’s Partial Credit Guarantees
USAID offers loan, portable, portfolio and bond guarantees
Cover up to 50% of the loss to private lenders from local currency loans for development activities
Projects are primarily identified and designed by USAID Missions in the field with support from USAID/Washington
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Impact of Partial Guarantees
Mobilize local private capital; can increase tenors as well as reduce collateral requirements and interest rates,
Demonstrate economic viability of new investments to the local banking sector and private investors
Coupled with USAID technical assistance, can enhance capacity of risk-sharing partners to perform thorough due diligence and prudent risk management
Add depth to local capital markets
Sustainability – can produce new and continued lending without further need for donor guarantees or other credit support.
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Example - Bond Guarantee for Water
India
Amount: $6,400,000
Purpose: Provides a partial bond guarantee for a pooled funding vehicle for financing water and sewerage infrastructure projects in seven selected suburban municipalities in Tamil Nadu, India.
USAID
State Government
50% Guarantee
Escrow
Pooled Water &Sanitation Fund
InstitutionalInvestors
General ObligationRevenue Resources
Projects100% Guarantee
Municipalities
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(cont.) - features of the Bond Offering
Indian Rupee equivalent of $6.4 million U.S Dollars issued – Fitch rating of India AA, Bonds have 15-year term - very long for India.
Water & Sanitation Pooled Fund is special purpose-vehicle, independent from State of Tamil Nadu and privately managed.
Repayment of bonds supported by portfolio of loans on-lent to small municipalities and several credit enhancements: USAID’s partial guarantee and a State-financed Debt-Service Reserve Fund.
Pooled-financing reduces aggregate transaction costs and interest rates due to larger issuer size, higher credit rating and wider (larger) group of investors willing to purchase bonds.
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Additional Benefits of WSPF Bond Offering
Adds depth to capital markets – long tenor and new type of issuance
Encourages good governance and fiscal reform of municipalities
Easily replicated – WSPF is a Revolving Fund
Other Indian states are seeking similar revolving Funds for their water and sanitation projects
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Example - Municipal Energy Infrastructure
Bulgaria
Type: Loan Portfolio GuaranteeAmount: $6,250,000Purpose: Provides a guarantee to a bank that lends long-term funds to municipalities seeking to invest in energy efficient technologies.
USAID
UBB
50% Guarantee
Loans
Municipalities
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Example – Water Infrastructure
South Africa
Type: Loan GuaranteeAmount: $25,000,000Purpose: Provides a partial loan guarantee to a private sector bank for a loan made to the City of Johannesburg for the financing of water, sewerage, utilities, and other infrastructure projects in the metropolitan area.
USAID
ABSA
City of Johannesburg
50% Guarantee
Loan
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Example - Partner with Local Guarantor
Philippines
Type: Loan Guarantee
Amount: $28,500,000
Purpose: provides a 30% partial re-guarantee of municipal infrastructure guarantees made by a private guarantor of local government infrastructure projects.
USAID
Municipalities
30% Guarantee
Loans
100% Guarantee
Banks
LGUGC
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