Asian Development Bank

Commercial cofinancing of private sector projects

We can mobilize commercial cofinancing of ADB-assisted private sector projects, using the following methods:

Uncovered Parallel loans

Complementary Financing Schemes

Guarantees

Partial Credit Guarantees

Political Risk Guarantees

Export Credit Agency cofinancing

Uncovered Parallel loans

These are typically sourced from international commercial lenders or bilateral institutions.

Complementary Financing Schemes (CFS)

CFS loans are available for private sector projects in which we are a direct participant. We act as "lender of record" and provide loan administration services.

CFS loans are funded by commercial lenders, such as banks and insurance companies.

With CFS loans, cofinanciers are not provided with recourse to ADB for debt service. Otherwise, such loans enjoy the same privileges and immunities given to our direct loans:

• CFS loans are exempt from withholding taxes and from restrictions on remittance of principal and interest.
• CFS loans share ADB's preferred creditor status, with enhanced cover against sovereign risk.
• Commercial cofinanciers of a CFS loan have access to ADB's project appraisal and loan documentation. This facilitates their credit analysis and due diligence.
• In most cases, bank regulatory authorities in the cofinancier's home country reduce the provisioning requirements on "lender of record" loans.

All these benefits allow us to arrange CFS cofinancing on better terms than usual.

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CFS Documentation:

A single loan agreement may be used, covering both the main loan from ADB and the complementary (CFS) loan. We believe all senior lenders to a project, including cofinanciers, should receive debt service on an equal basis.

Cofinanciers of a CFS loan are allowed to accelerate the loan, if it is in default due to nonpayment of principal or interest. We reserve the right to accelerate our direct loan, based on an optional cross-default clause (a standard feature of our CFS loan documents).

Arrangement Fee:

• payable on arrangement
• 75 to 100 basis points of the CFS loan amount
• minimum of US$20,000

Administration Fee:

• US$5,000 per participating CFS lender per annum.
• maximum of US$20,000 per annum.

Guarantees

Our guarantees for private sector projects are designed to cover those risks that the private sector cannot easily absorb or manage on its own. Mitigating these risks can make a crucial difference to funding. We offer two guarantee products: the Partial Credit Guarantee, and the Political Risk Guarantee.

Our guarantee fees for private sector transactions are market determined. Guarantee fees can be charged either to the borrower or to the lender.

Partial Credit Guarantees (PCG)

These cover both commercial and political risks.

PCGs cover that portion of the debt service that falls due beyond the normal tenure of loans available from commercial lenders. PCGs are generally used for projects needing long-term funds to be financially viable. PCGs suit certain developing member countries: those with restricted access to financial markets, and which we consider creditworthy.

PCGs cover all events of nonpayment of the guaranteed obligation. In that sense, PCGs are comprehensive guarantees of principal and/or interest for those maturities that cannot be obtained from commercial lenders without credit enhancement.

Since the Asian financial crisis, host governments, project sponsors, and cofinanciers aim to use matched currencies for both project revenue and debt service cash flows. Our PCGs can cover local currency debt, including domestic bond issues or long-term loans from local financial institutions.

Political Risk Guarantees (PRG)

PRGs cover specified sovereign (or political) risks--leaving commercial risks with the private sector sponsors or lenders. Sovereign risks may include any combination of the following:

• breach of contract (losses arising when a host government breaks or repudiates a contract with an insured project)
• expropriation and nationalization
• currency inconvertibility and nontransfer
• political violence.

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Export Credit Agency Cofinancing

Since the Asian financial crisis, financing for private sector projects has become more expensive, shorter in term, or simply not available. Support from Export Credit Agencies (ECAs) can provide a significant extra source of cover to commercial cofinanciers.

Export credit is usually provided by one of the following:

• commercial bank loans that are insured or guaranteed by ECAs
• direct loans from ECAs.

Export credit is often part of an export credit package put together by a structured trade or project finance unit of a commercial bank. The mandate of most ECAs is to fill a "gap" and cover the risks that the commercial market will not.

To tap this very important source of cover, and to help borrowers to get affordable commercial cofinancing, we intensify our communication with ECAs. We also act as coordinator between all parties: the project sponsor or arranging bank, and the participating ECAs and international financial institutions.

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