RISK MITIGATION: What are Updates & Proposals on Risk Mitigation Products?

Product Name Political Risk Guarantee
Link to Product Website
Provider Name ADB (Asian Development Bank)
Product Definition ADB's Political Risk Guarantee (PRG) covers payment of all or part of the project's debt service against specific political or sovereign risks. PRG coverage can include any combination of:


1. currency inconvertibility and/or nontransfer (CI);

2. confiscation, expropriation, nationalization, or deprivation of project assets (CEND);

3. political violence, such as strikes or civil disturbances, including terrorism, sabotage, that negatively affects the project; and

4. breach of contract, such as nondelivery by state-owned entities of inputs (e.g. fuel supplies) or nonpayment for outputs (e.g. power or water).

PRGs are primarily designed to facilitate private sector development, either through public or private sector projects. PRGs are well suited to cases in which commercial lenders are prepared to take on the commercial risks of a project, but require assistance from a multilateral institution or private insurer in mitigating political risks.

Since the political risks covered by a PRG relate to events under the direct or indirect control of the host government, the government may provide a counter-guarantee or indemnity to ADB. This provides further assurance to co-financiers and ADB of the host government's commitment to the project.

The host government can also take comfort in having ADB involved in the project, to help ensure, among other things, the technical and financial viability of the project. Project lenders benefit from the increased political risk insurance (PRI) cover in more difficult and challenging markets, while enjoying the comfort of an ADB guarantee, coupled with ADB's direct participation in the project.

Amount:

If the PRG is counter-guaranteed by the host government, there is no limit on the amount of the PRG. For projects with PRG support for which there is no host government counter-guarantee, ADB's total assistance may be up to $150 million or 50 percent of project costs, whichever is less. Such assistance is calculated on a face value basis.

Instruments:

The PRG can be applied to debt instruments such as loans, bonds or floating rate notes. The usual denomination is in US dollars, Japanese Yen, or Euros.

Cooperation with Political Risk Insurers:

ADB's PRG can be structured to make it compatible with the Political Risk Insurance (PRI) products offered by other agencies, including the World Bank's Multilateral Investment Guarantee Agency, private sector PRI providers, and export credit agencies. Because of the size of some projects requiring PRI cover (particularly large infrastructure projects), and in recognition of the importance of risk sharing and collaboration, ADB can offer its PRG in parallel with other PRI providers.

Parallel Coverage:

Public and private PRI providers offer PRI to the same project alongside or in parallel with ADB, under their respective names, terms, and conditions. This arrangement benefits PRI providers that:

- do not need the benefits of ADB's preferential status or umbrella, and

- offer insurance, rather than guarantees, on terms that cannot be easily reconciled with those of ADB's PRG.

ADB as Guarantor-of-Record

ADB issues a guarantee for the entire amount of coverage requested by the borrower, but retains only a portion of the exposure under the guarantee for its own account.

Private sector PRI providers underwrite the remaining exposure. Recoveries, if any, are shared between ADB and the other PRI syndicate participants on a pro rata basis. To cover the administrative expenses incurred in structuring each transaction and to compensate ADB for fronting the other PRI syndicate participants, ADB will charge the participants an administration fee. This fee will be determined by ADB on a case-by-case basis.

Product Type Political Risk Insurance
Defined Risks Covered Political Risks: Breach of Contract
Political Risks: Expropriation
Political Risks: Currency Transfer and Convertibility
Political Risks: War and Civil Disturbance
More on Risks Covered
Eligible Form of Investments Bonds
Bank Loans
Eligible Currency of Underlying Investment Covered by this Product Both local and foreign currency
Eligible Countries & Regions n.a.
More on Eligible Countries
Eligible Applicants All
Eligible Sector No Specific Sector
Maximum Tenor 10+ to 15 years
Max. Absolute Amount (USD) 100+ to 250 MM
Max. % of Project Costs Covered Max./under 25%
Max. % of Export Content Covered Over 85+%
Fees Market-based
With Counter-guarantee from host government:

1. Front-end fee: Covers ADB processing costs (and depends on the fee for ADB's direct participation)
2. Standby fee: Applies to the amount covered by PRG but not yet disbursed
3. Guarantee fee: 40 basis points per annum of the present value of the guaranteed amount that has been disbursed

Without Counter-guarantee from host government:

1. Front-end fee: Same
2. Standby fee: Same
3. Guarantee fee: Market determined
More on Fees

Other Conditions Sovereign Counterguarantee: No
Anti-Corruption and Governance Standards: Yes
Environmental standards: Yes link
Social standards (incl. Human Rights Standards; Labor Rights Standards): Yes link
Others: Other ADB Operational Policies
More on Other Standards
Source(s) n.a.
For more information, contact Michael Barrow
Director, PSIF-1 (Infrastructure Finance Division 1), ADB
Phone: +632 632 6660

Christopher Thieme
Director, PSIF-2 (Infrastructure Finance Division 2), ADB
Phone: +632 632 6920
Attachments Chile - Costanera Norte - Humphrey's (2006).pdf
Chile - Costanera Norte - Ambac (2003).pdf
Chile - Costanera Norte - IADB (2004).ppt
Additional Links n.a.
Deals n.a.

Provider Name ADB (Asian Development Bank)
Institution Type PUBLIC: Multilateral Development Bank
Ownership Owned by 65 members (47 from Asia Pacific Region)
Head Office Headquarters: 6 ADB Avenue, Mandaluyong City 1550, Metro Manila, Philippines
Provider Home Country Philippines
Rating AAA
Main Risk Mitigation Products Partial Credit Guarantees
Loan Syndication
Risk Participations
Partial Risk Guarantee
Attachments n.a.
Additional Links www.adb.org/projects
www.adb.org/focus-areas
www.adb.org/news
Entered On: 04/04/2014 at 09:28 AM