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

Product Name Loan Syndications
Link to Product Website
Provider Name EBRD (European Bank for Reconstruction and Development)
Product Definition Co-financing objectives

A prime objective for the EBRD is, as stated in its founding Agreement, "to mobilise domestic and foreign capital" in its countries of operations. To achieve this objective, Loan Syndications has chosen a flexible and market-oriented approach. Its goal is to broaden the EBRD's co-financing base by increasing the number of commercial lenders with which it works, by continuing to introduce new co-financing structures and methods, and by introducing new countries to the market. The critical factor in the success of these activities is the extent to which commercial sources of finance are willing to commit funds.

Requirements and benefits

For private sector projects, the EBRD is normally prepared to provide, in the form of debt or equity, up to 35 per cent of the long-term capital requirements of a single project or company. Pricing of debt will reflect primarily country and commercial risks and will conform to prevailing conditions in the syndicated loan market. The EBRD's standing as an international institution and, particularly, its preferred creditor status are taken into account in assessing the risks. Loans by international institutions such as the EBRD are, by tradition, excluded from sovereign debt reschedulings. Banks participating in loans for which the EBRD remains the lender of record share the benefits of this preferred creditor status.

The EBRD may help borrowers to gain access to the financial market through the provision of guarantees. Various types are available, ranging from all-risk to risk-specific contingent guarantees, but in all cases the maximum exposure must be quantifiable and the credit risk acceptable.

Banking supervisors in many countries allow, either expressly in regulations or in less formal guidance, co-financing through the participation technique used by the EBRD to be given preferential treatment in the application of country risk provisioning requirements. As a result, participations in such jurisdictions may be exempted from the normal country risk provisioning requirements.

Forms of co-financing

Loan Syndications techniques most frequently used to date by the EBRD are:

1. the A/B loan syndication structure, where the EBRD remains the lender of record for the entire loan and the commercial banks derive benefit from the EBRD's preferred creditor status
2. assignments of part of EBRD loans to domestic commercial banks in its countries of operations to promote their cooperation in medium-term lending
3. co-financing with other international financial institutions
4. parallel or joint financing with commercial banks supported by ECAs or with direct lending ECAs
5. parallel loans with commercial banks
6. parallel loans with official government agencies
7. various guarantee facilities
8. private placements of equity
9. debt co-financing with institutional investors

A/B loan structure and preferred creditor status

For private sector projects, the EBRD is normally prepared to provide, in the form of debt or equity, up to 35% of the long-term capital of a single project or company. Pricing of debt will primarily reflect the commercial risk and will be set to conform to prevailing conditions in the syndicated loan market.

In most emerging markets or economies, commercial banks can be expected to have initial concerns relating to country risk. This risk might embrace, among other things, risks such as debt rescheduling, nationalisation of assets, currency convertibility and hard currency transfer.

The country risk, while taken into account in the pricing, is to a degree mitigated by the EBRD's status as a preferred creditor. The EBRD's status as a preferred creditor does not mean that the EBRD guarantees against country risks.

Articles 21 and 49 of the Agreement Establishing the Bank, strengthen the case for preferred creditor status of loans made by the EBRD. All of the EBRD's shareholders are signatories to this Agreement, including the countries of operations.

A/B loan structure

The principal form of mobilising external financing is to provide for the participation by commercial banks in EBRD loans. Through this technique, the commercial banks can share with the EBRD the benefit of its status as an International Financial Institution (IFI). Other IFIs include the World Bank, International Finance Corporation, Asian Development Bank, European Investment Bank.

The EBRD, as lender of record, extends a loan to a borrower on terms pre-arranged with, and to be funded by, bank lenders and the EBRD. Structurally the EBRD sells participations, without recourse to itself, in such loans to the banks. The portion which the EBRD lends is often referred to as the A Loan, with the commercial bank portion being referred to as the B Loan. This terminology is also used by the International Finance Corporation. Through the participation mechanism, each bank may benefit from the EBRD's preferred creditor status.

Consistent with its status, EBRD policy is not to reschedule debt payments or participate in debt rescheduling agreements with respect to its loans to private sector borrowers where the borrower's inability to service its debt is due to a general foreign exchange shortage in the borrower's country.

Preferred creditor status

In practice, loans by IFIs similar to the EBRD, including loans extended and participations sold under the lender of record participation technique, have been excluded from sovereign debt reschedulings. Banks that participate in loans to private sector borrowers made by the EBRD, where the EBRD remains the lender of record, may share in the benefit of this preferred creditor status.

In addition, banking supervisors in many countries recognise, either expressly in regulations or in less formal guidance, that co-financing through the participation technique used by the EBRD should be given preferential treatment in applying country risk provisioning requirements. As a result, participations by banks regulated in these jurisdictions are exempt from country risk provisioning requirements.

Although preferred creditor status is intended to give a degree of comfort to commercial lenders against country risk, it is important to note that the EBRD is not able to represent as to its future efficacy, as the preferred status is largely a matter of agreement by governments and bank regulatory authorities, supported to a large extent by past experience.

The EBRD's preferred creditor status has been tested and found to be effective. In August 1998, when Russia declared a moratorium on hard currency debt servicing, all payments due under EBRD A loans and B loans came through in full and on time.

Product Type Co-financing
Defined Risks Covered n.a. More on Risks Covered
Eligible Form of Investments n.a.
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
More on Eligible Applicants
Eligible Sector No Specific Sector
Maximum Tenor 10+ to 15 years
More on Maximum Tenor
Max. Absolute Amount (USD) Over 350+ MM
More on Maximum Absolute Amount
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
A margin above the base rate is added to reflect country risk and project specific risk. This information is confidential to the client and the EBRD. In addition to the margin, the bank charges the following fees and commissions:

1. appraisal fee
2. front-end commission and structuring fee, paid up-front
3. syndication fee, where applicable
4. commitment fee, payable on the committed but undisbursed loan amount
5. loan conversion fee, paid at the time of interest rate, or currency conversion on the amount that is to be converted
6. prepayment, cancellation and late payment fees where applicable

In line with commercial practice, sponsors are obliged to reimburse the EBRD for out-of-pocket expenses, such as fees for technical consultants, outside legal counsel and travel expenses.
More on Fees

Other Conditions Sovereign Counterguarantee: No
Anti-Corruption and Governance Standards: Yes link
Environmental standards: Yes
Social standards (incl. Human Rights Standards; Labor Rights Standards): Yes
Others:
Source(s) n.a.
For more information, contact Jacqueline Bessems
Lead Manager, EBRD
Email: BessemsJ@ebrd.com
Phone: +44 207 338 6413

Robert White
Senior Manager, EBRD
Email: WhiteR@ebrd.com
Phone: +44 207 338 6819
Attachments n.a.
Additional Links www.ebrd.com/downloads/loans/sla.pdf
www.ebrd.com/downloads/loans/update.pdf
www.ebrd.com/downloads/research/factsheets/guidetofinancing.pdf
Deals n.a.

Provider Name EBRD (European Bank for Reconstruction and Development)
Institution Type PUBLIC: Multilateral Development Bank
Ownership Owned by 61 Member Countries and two Intergovernmental Institutions
Head Office One Exchange Square, London EC2A 2JN, United Kingdom
Provider Home Country United Kingdom
Rating n.a.
Main Risk Mitigation Products n.a.
Attachments n.a.
Additional Links www.ebrd.com/pages/research.shtml
www.ebrd.com/pages/news.shtml
www.ebrd.com/pages/workingwithus.shtml
www.ebrd.com/pages/project.shtml
www.ebrd.com/pages/sector.shtml
Entered On: 12/07/2007 at 01:19 PM
Updated On: 05/08/2013 at 04:48 PM