Best Practices in PPP Financing Latin America - e-Institute - World ...

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Best practices in Public-Private Partnerships financing in Latin America Fourth Session: The role of guarantee funds and subsidy funds in PPP financing Headed by AURELIO MENENDEZ, Sector Manager, Latin America and Caribbean Region, Sustainable Development Department, World Bank DAY 1 Lecturers SERGIO HINOJOSA, Consultant, World Bank Institute ALFONSO GUZMÁN, Managing Director, Castalia Panel Members ISAAC AVERBUCH, Head of PPP Unit, Ministry of Planning, Brazil RICARDO DE VECCHI, Senior Advisor for FONADIN, Inter- American Development Bank, Mexico CLAUDIA STEVENSON, Financial Specialist, Inter- American Development Bank LINCOLN FLOR, Senior Public-Private Partnerships Specialist, World Bank Institute The main objective of guarantees in PPPs is to enable project bankability, which allows for long-term financing. Hinojosa pointed out that guarantees can be financial (Mexico and Brazil) or non-financial (Chile, Colombia and Peru). Both types aim to mitigate risks derived from non-compliance with Government payments or claims. Financial Guarantees Sergio Hinojosa defined financial guarantees as insurance that secures the timely payment of interests and repayment of principal to debt holders. Guarantees give investors confidence and reduce financial costs. There are two types of guarantees: Full Wrap and Partial Guarantees. The former covers 100% of the debt obligation while the latter covers a specific - 48 -
Day 1 - FOURTH SESSION Table Nº 5 Full Wrap vs Partial Credit Guarantees Comparison Characteristic Full Wrap Guarantee Partial Credit Guarantee Guarantee of Principal and Interest Yes. Yes. in a timely manner Irrevocable Yes. Yes. Unconditional Yes. Yes, subject to the maximum limit amount of the guarantee. Limit to the coverage of the Guarantee Credit Enhancement Complexity Versatility of Application Maximum Credit Enhancement Cost Scope of Work of the Rating Agencies Guarantors No limit. Covers 100% of every coupon of principal and interest. Increases the rating of the guaranteed obligation to the rating level of the guarantor. Simple and standardized. Investors need to understand the underlying risk but derive comfort from the 100% guarantee. Limited. Applicable only to projects that can achieve an investment grade underlying rating in the global scale. To the rating of the guarantor. If the guarantor is rated “AAA”, and the underlying rating is “BBB-” (minimum investment grade), and the credit enhancement achieved is equivalent to 10 notches. Normally less than 1%,applicable to the full amount of the guaranteed obligation. Underlying rating (without considering the guarantee) and public rating (with the guarantee). All work is done by the Infrastructure / Project Finance Group. Monoline insurance companies and banks in the form of Stand By Letters of Credit. Limit determined according to the number of notches of credit enhancement required. Increases the rating of the guaranteed obligation to a specific number of notches according to the size of the limit amount of the guarantee. More complex. Investors need to understand the characteristics of each PCG, the underlying risk, the credit enhancement provided and its sufficiency. Can be applicable to non-investment grade projects. Normally not more than 5 notches. Normally above 2% applicable to the guaranteed amount. Underlying rating done by the Infrastructure / Project Finance Group; sizing of the PCG and public rating done by the Structured Finance Group. Multilateral agencies. Source: Author, own Information. - 49 -
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