Private Sector 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.
Cofinancing amplifies the impact of ADB’s private sector operations by attracting financing from other parties, facilitating investment, trade, and capital flows into developing member countries (DMCs). Both private and public institutions provide commercial cofinancing to ADB’s nonsovereign projects – funds are usually sourced from financial markets and priced at commercial terms. Such arrangements are particularly effective for projects and programs that would be considered risky without ADB involvement.
In 2022, total cofinancing for ADB’s nonsovereign projects amounted to $7.0 billion1 – $6.89 billion (99%) came from commercial cofinancing partners, with the remainder from official sources. Of the 37 nonsovereign projects that closed in 2022, 19 had cofinancing from official and commercial partners.
ADB’s Strategy 2030 sets a cofinancing target ratio2 of $2.50 for every $1.00 of Ordinary Capital Resources (OCR) deployed for private sector operations. Steady progress toward this goal is underway as ADB continues to work on projects with the private sector. In 2022, the cofinancing ratio was 1.9; every $1.00 of ADB’s own funds for nonsovereign projects was matched by $1.9 in cofinancing.
1 This amount excludes amounts mobilized after an Office of Public–Private Partnership advisory mandate.
2 The cofinancing ratio is the ratio of long-term cofinancing to NSO borrowers divided by private sector operations ordinary capital resources (net of risk transfers). Long-term cofinancing to NSO borrowers includes concessional funding, B-loans, parallel cofinancing, bonds and equity, risk transfers of ADB exposure to independent counterparties, the uncovered portion of loans and bonds guaranteed by ADB, and financing by third parties of projects that are closed following a PPP advisory mandate.
ADB defines Direct Value Added (DVA) Cofinancing as cofinancing with active coordination and formal agreements among financing partners that bring about defined client benefits, including contractual commitments by ADB (such as for credit enhancement, syndication, or financial administration) to facilitate mobilization, administration or participation in cofinancing. Commercial Cofinancing is implemented from private or public sources on commercial and market-based principles, outside official development assistance (ODA) and without direct sovereign recourse in case of loss. Commercial cofinancing partners include banks, insurers, pension funds, suppliers, or bilateral and export finance institutions. Official Cofinancing is implemented with multilateral agencies, and bilateral agencies under ODA or sovereign recourse.
Net DVA Commercial Cofinancing includes only that portion of DVA Commercial Cofinancing that does not use ADB’s Ordinary Capital Resources (OCR), and the amount of OCR Allocation relief resulting from risk sharing arrangements. Net DVA Commercial Cofinancing excludes the portion of a loan that ADB guarantees, and consumes OCR.
Aside from reporting its own cofinancing activities, ADB contributes to consolidated reports on mobilization of private resources.
Multilateral Development Banks (MDBs) have developed a common methodology to measure and report private investment mobilized by participating MDB’s.
Private Direct Mobilization (PDM) consists of financing from a private entity on commercial terms due to the active and direct involvement of an MDB leading to commitment. Evidence of active and direct involvement includes mandate letters, fees linked to financial commitment or other validated or auditable evidence of a MDB’s active and direct role leading to commitment of other private financiers. PDM does not include sponsor (equity) financing.
Private Indirect Mobilization (PIM) consists of financing from private entities provided in connection with a specific activity for which an MDB is providing financing, where no MDB is playing an active or direct role that leads to the commitment of the private entity’s finance. PIM includes sponsor financing, if the sponsor qualifies as a private entity.
Total Private Mobilization (also called ‘Private Cofinancing’) is the sum of all PDM and PIM.
ADB plays an active role in identifying and arranging commercial and official cofinancing for its clients, including:
Benefits of ADB’s commercial cofinancing products to its nonsovereign clients include the provision of additional financial resources to close financing gaps, and improved terms of financing with ADB’s cofinancing products.
ADB’s cofinancing partners benefit from ADB’s due diligence, financial, technical, environmental and social safeguards, ADB’s relationships with host governments, and in some cases ADB’s Preferred Creditor Status (PCS).
ADB’s cofinancing products are, in general, used to support projects or sectors in which ADB has a direct participation. Any ADB financing instrument can be used to fulfill this requirement, including project loans, program loans, multi-tranche facilities, sector loans, sector development programs, equity investments (for private sector projects), project grants, and technical assistance grants. For ADB’s B Loan, a direct ADB loan is required in the project to fulfill ADB’s direct participation requirement.
ADB’s cofinancing activities for nonsovereign borrowers can be categorized as short- or long-term.
Short-term cofinancing has tenor of less than one year. Of the $7.0 billion nonsovereign cofinancing in 2022, about $5.12 billion came from short-term cofinancing (through the ADB’s Trade Finance Program and Supply Chain Finance Program and Microfinance Risk Participation and Guarantee Program) while $1.88 billion was long-term cofinancing through a range of financial products. The long-term cofinancing was against ADB’s own nonsovereign financing commitment of $977 million (net of risk transfers) in 2022.
A dollar-denominated loan product used in markets when lenders are not ready to lend on a fully uncovered basis.
Loans (or bonds) simultaneously provided by other lenders and investors on commercial terms for the same ADB-financed project.
In this arrangement, ADB often acts as the anchor lender to attract other lenders. ADB prioritizes cofinancing with commercial funding providers, such as commercial banks, but it also extensively cofinances with international public financial institution peers for transactions where commercial cofinancing is insufficient. In 2021, ADB generated parallel loans of $386 million.
ADB extends guarantees for eligible projects which enable financing partners to transfer certain risks to ADB that they cannot easily absorb or manage on their own.
ADB’s guarantees support infrastructure projects, financial institutions, capital market investors and trade financiers, and cover a wide variety of debt instruments.
ADB extends both Partial Credit Guarantees (PCGs) and Partial Risk Guarantees (PRGs) and can offer these products from its private sector and public sector windows. ADB’s PCGs provide lenders and investors with comprehensive credit cover on the portion of the loan or bond guaranteed by ADB. PRGs cover lenders against nonpayment by the borrower caused by political risk events only. From 2015 to 2021, ADB issued $1,656 million in PCGs and PRGs. In 2019, ADB closed two PRGs in support of ADB B-loan participants funding independent power projects in Indonesia and Myanmar.
Parallel equity consists of equity that is simultaneously provided by other investors to the same project or fund that ADB is investing in.
In this arrangement, ADB often acts as the anchor investor to attract other investors. ADB also participates in several initial public offerings (IPOs) as anchor and/or cornerstone investor for equity investments. This facilitates the book-building exercise and crowding in other direct equity investors. It similarly generates opportunities for fund managers and other limited partners to co-invest with ADB in target geographies and sectors. In 2021, ADB generated parallel equity investments of $675 million.
Contracts between ADB and third parties such as insurance companies and banks, where ADB’s counterparty agrees to assume a portion of the credit risk in a loan or guarantee provided by ADB in exchange for payment of a premium.
Risk transfers allow ADB to lend or guarantee amounts that are beyond ADB’s prudential limits or risk appetite, without the need for the borrower to interact with additional lenders or guarantors.
ADB was one of the pioneers of the unfunded risk transfer product among MDBs to cover its private sector loans. Insurance companies provide a flexible and important distribution channel of private sector exposure, often at attractive terms, or where commercial banks lack credit appetite or local currency capabilities. However, ADB will generally prioritize funded distribution options to banks and investors–where markets are available–over unfunded risk transfers because of counterparty and documentation risks that are inherent to risk transfers.
In 2021, ADB transferred $252 million of its credit exposure on loans and guarantees to independent counterparties. This translated into $198 million cofinancing (adjusted for counterparty risk on ADB’s counter parties, and effective cover of the risk transfer contracts).
Aside from financing on market-based terms, ADB also offers concessional finance to its nonsovereign borrowers.
Concessional finance refers to finance deployed on terms that are more favorable than those provided to market-based financing transactions. It may involve lower pricing, longer grace periods and/or tenors, subordination, sculpted repayment profiles, reduced security and/or collateral, and/or capped or collared returns. When combined with market-based financing, concessional financing is deployed as a “blended finance” product. By improving the commercial financiers’ risk and/or return profiles, blended finance transactions help crowd in private capital, de-risk investments, and bring projects to market that would not otherwise proceed in the absence of concessional financing.
In 2021, official cofinancing totaled $ 98.84 million.
The TFP fills market gaps for trade finance by providing guarantees and loans to banks to support trade, working with over 200 banks to provide companies with the financial support they need to engage in import and export activities with Asia. A substantial portion of TFP’s portfolio supports small- and medium-sized enterprises (SMEs), and many transactions occur either intra-regionally or between ADB’s DMCs. The program supports a wide range of transactions, from commodities and capital goods to medical supplies and consumer goods.
The SCFP works with corporate and partner financial institutions to enhance access of SMEs to working capital. It provides supply chain finance by leveraging the strength of a larger corporate entity and incorporating the history of performance and interdependence of relationships with SMEs in a supply chain. Like the TFP, it relies on funding support to accomplish its goals and those of its donors.
A core component of ADB's mission is to mobilize capital from a range of sources to our markets and our clients. We actively partner with commercial banks, impact investors, institutional investors, and development finance institutions to cofinance ADB projects. To achieve the objective of broadening the cofinancing base, ADB adopts several different arrangements.
The A/B Loan product allows commercial lenders to partner with ADB in its lending operations and broader development mission. Through this program ADB, as lender of record, extends a loan to a borrower funded by commercial participants and ADB. The portion funded by ADB is referred to as the A Loan and the portion funded by commercial lenders referred to as the B Loan. Commercial lenders enter the transaction via a participation agreement to become participants, and through this mechanism each commercial participant may benefit from ADB's Charter-based privileges and immunities as well as ADB’s preferred creditor status.
The A/B Loan allows ADB to introduce new financing sources to its clients, mobilizing more funds for development projects. ADB partners with reputable commercial financial institutions that can act as B Loan participants – international and regional commercial banks, institutional and impact investors – provided they are not incorporated or residing in the country of the borrower or project. Through this diverse and growing investor base, ADB can assist borrowers by assembling syndicates to help finance their transactions.
ADB has developed a Complementary Financing Scheme to partner with commercial banks and other eligible financiers in transactions where the project or company cashflows are predominately in local currency. The mechanics are similar to the B Loan program – commercial lenders participate in the transaction using an onshore entity via a Participation Agreement and ADB acts as a lender of record for both the A Loan and the Complementary Loan (C Loans).
ADB also delivers financing solutions to its clients by acting as an arranger and structuring financings in coordination with other lenders. This is known as a Parallel Loan structure where each lender has a direct claim on the borrower. In most cases, all co-lenders sign a common terms agreement (CTA) with and the borrower which defines the overall terms of the transaction. Under the CTA, each co-lender may enter into a supplemental loan agreement with the borrower to address any terms specific to the lender.
Under this financing structure, co-lenders do not benefit from ADB’s preferred creditor status and its privileges and immunities.
Green bonds and climate bonds deepen local currency–denominated capital markets by attracting new institutional and financial investors. Green bonds lessen the reliance on banks as the primary source of financing, provide new investment and savings products, and enhance transparency and corporate governance. ADB’s value addition consists of its expertise in climate and environmental issues, the support ADB can provide to the issuer to obtain formal green bond certification, and the confidence that ADB creates in investors by acting as an anchor investor.
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