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

Product Name Partial Credit Guarantee
Link to Product Website
Provider Name USAID (United States Agency for International Development): DCA (Development Credit Authority)
Product Definition USAID’s partial credit guarantees allow the Agency to use credit to pursue any of the development purposes specified under the Foreign Assistance Act (FAA) of 1961, as amended. The Development Credit Authority (DCA) is the tool that provides USAID Missions the authority to issue loan guarantees to private lenders, particularly for local currency loans. These guarantees cover up to 50% of the risk in lending to projects that advance USAID’s development objectives.

Private sector resources can be mobilized in many ways through a number of appropriate financial instruments available under DCA. The four DCA credit tools available to Missions are described below. The use of these instruments can be modified and tailored to address a particular project’s financing needs.

Loan Guarantee
The typical Loan Guarantee (LG), also referred to as a project-specific guarantee, allows USAID to use DCA for specific credit enhancement purposes in cases where the borrower, lender, and uses of loan proceeds are known.

Loan Portfolio Guarantee
A Loan Portfolio Guarantee (LPG) provides financial institutions with partial coverage on a portfolio of loans that they provide to their customers. In the case of the LPG, USAID agrees to share in the risk of a broadly defined category of bank loans with a view toward inducing local banks to extend credit toward an underserved sector. The individual borrowers under a LPG are not predetermined at the time the Guarantee Agreement is signed, but the borrowers must fall within a pre-agreed definition of “Eligible Borrowers,” such as borrowers that are small businesses operating in a specific geographic area.

Bond Guarantee
Bond Guarantees (BG) support the issuance of bonds by financial institutions, private sector corporations, or sub-national entities. The funds generated from the bond issuance can, for example, assist in raising local funds to initiate municipal infrastructure or utility projects, which require substantial upfront capital investments. The Bond Guarantee or guarantees for other types of debt instruments are typically an option for DCA credit assistance if the capital and financial markets are fairly well advanced in a particular country to support a bond issuance. However, the DCA guarantee can also be used to encourage the development of bond issuances in less sophisticated markets.

Portable Guarantee
Slightly different than the Loan Guarantee, the Portable Guarantee (PG) provides an identified potential borrower with a letter of guarantee commitment through which the borrower may seek the most advantageous terms from the local financial market. Portable Guarantees are appropriate for specific credit enhancement purposes when the borrower is known, but the lender is not yet known. In these cases, a minimum credit rating (e.g., from rating agencies such as Standard & Poor’s and Moody’s) is established, and the risk calculation and subsidy cost are based on the assumption that the eventual lender will have a rating equal to or above this minimum rating.

Product Type Partial Credit Guarantee
Defined Risks Covered Comprehensive Risk
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Eligible Form of Investments Bonds
Bank Loans
Non-Bank Loans
Shareholder Loans
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Eligible Currency of Underlying Investment Covered by this Product Both local and foreign currency
Eligible Countries & Regions n.a.
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Eligible Applicants PRIVATE: International Banks
PRIVATE: Host Country Corporates
PRIVATE: Host Country Banks
PRIVATE: Companies investing in a project furthering a development goal in Host Development Country
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Eligible Sector No Specific Sector
Wireline (Local Networks & Long Distance)
Airports
Railroads (Intercity Freight & Passenger)
Electricity Generation: Conventional Thermal (coal, gas, oil-fired)
Wireless
Electricity: Transmission
Electricity: Distribution
Natural Gas & Oil: Transmission
Roads (Bridges & Toll Roads)
Seaports
Natural Gas & Oil: Distribution
Maximum Tenor 15+ to 20 years
Max. Absolute Amount (USD) 50+ to 100 MM
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Max. % of Project Costs Covered 25+% to 50%
More on Maximum Project Costs Covered
Max. % of Export Content Covered Max./under 50%
Fees Market-based
Under the Truth-In-Budgeting Act, the cost of a USAID loan guarantee is the estimated net cost of the assistance to taxpayers over the life of the guarantee, as expressed in present discounted value terms. For example, if a Mission makes a $10 million loan guarantee, the true cost will be determined for the most part by the risk of default. To over simplify, if the risk of default is estimated to be 10%, the cost to USAID's budget of a $10 million loan guarantee would be approximately $1 million. This cost would be approximately the same on a direct USAID $10 million loan made at interest rates similar to Treasury's cost of borrowing, assuming again a 10% estimated risk of default.
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Other Conditions Sovereign Counterguarantee: No
Anti-Corruption and Governance Standards: No
Environmental standards: No
Social standards (incl. Human Rights Standards; Labor Rights Standards): No
Others: Guarantee Guiding Principles
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Source(s) n.a.
For more information, contact n.a.
Attachments n.a.
Additional Links www.usaid.gov/our_work/economic_growth_and_trade/development_credit/products.htm
Deals Municipal Infrastructure Investment Unit (MIIU), South Africa
Karnataka - Water & Sanitation Pooled Fund, India
Tamil Nadu - Water & Sanitation Pooled Fund, India
Local Government Unit Guarantee Corporation (LGUGC), Philippines
Volksbank BH d.d., Bosnia and Herzegovina
Banco De Occidente, S.A, Honduras
Commercial International Bank, Egypt

Provider Name USAID (United States Agency for International Development): DCA (Development Credit Authority)
Institution Type PUBLIC: Multilateral Development Bank
Ownership Government of the United States of America
Head Office Ronald Reagan Building, 1300 Pennsylvania Avenue, NW, Washington, DC 20523
Provider Home Country United States
Rating Aaa/AAA/AAA
Main Risk Mitigation Products Partial Credit Guarantee (USAID)
Attachments n.a.
Additional Links www.usaid.gov/our_work/economic_growth_and_trade/development_credit/index.html
www.usaid.gov/press/releases/
Entered On: 06/29/2007 at 01:06 PM
Updated On: 04/08/2009 at 08:18 AM