Partnering with financiers to help close the infrastructure financing gap

GuarantCo, part of the Private Infrastructure Development Group (PIDG), provides local currency credit solution to mobilise funding for essential infrastructure projects and develop local capital markets in lower income countries across Asia and Africa. The beneficiaries of our guarantees and loans are usually banks and bond investors, who are fundamental to our ability to support new infrastructure projects and create lasting, sustainable impact in the markets we operate in.

The 2030 PIDG strategy recognises that we must scale our partnerships to manage the urgent need for sustainable infrastructure development in emerging markets and developing countries. The scale of the infrastructure funding required to meet demands is huge. In 2020, it was estimated that the annual infrastructure funding gap was in the range of USD 67.6 billion to USD 107.5 billion in Africa and at USD 136 billion in Asia (excluding India)^[1]. Many infrastructure projects are held back by access to suitable capital, which banks and bond investors may be unable to provide for a range of reasons, including limitations in local financial markets. As a result, these critical projects may never be realised to the detriment of local communities and people.

GuarantCo has a strong track record of partnering with banks and bond investors to overcome market challenges using innovative products that enable more infrastructure projects.

For instance, our partnership with Société Générale, a French-based multinational financial services company, showcases the variety of solutions we can bring to de-risk projects for beneficiaries. In Madagascar, we helped Société Générale, Banque de Malgache de l’Océan Indien and Banque Nationale d’Investissement, finance a 20MW grid connected solar plant. Our partial credit guarantee enabled these beneficiaries to mitigate their credit risk, including exposure to the state owned off-taker, and ultimately unlocked years of local currency financing for the project. A second transaction to add a further 20MW of capacity to the project reached financial close under a similar structure in 2022. It reinforced the benefits to all involved aligned with GuarantCo’s strategy to replicate transactions and create maximum local sustainable development impact faster, see our Blended Knowledge Bulletin on Replicability.

Société Générale and GuarantCo have also partnered to finance nascent sectors such as the e-mobility space that are critical to decarbonise transport systems. In 2023, GuarantCo provided a 70 percent guarantee to Société Générale to enable the financing of a fleet of electric motorbikes, as well as the associated batteries and swap stations in Benin and Togo. In this example, the guarantee offered a full risk transfer from the borrower to guarantor.

Banks in developing and emerging markets often face limitations on the tenor of financing, leading sponsors to either abandon the project or rely on hard currency financing that brings its own set of risks. GuarantCo’s liquidity extension guarantee helped Orabank Togo, NSIA Banque Benin, Banque Atlantique du Togo and BIA Togo overcome their tenor limits of seven years and support a 14-year facility for a thermal power plant in Togo to address the country’s power deficit. At the end of year six, the beneficiaries of the guarantee have the option to continue lending or exit by transferring their participation to another lender or GuarantCo. In this way, the banks can provide the project with a more manageable debt structure that amortises over 14 years.

GuarantCo prides itself on building long standing relationships with its beneficiaries. In our experience, once common areas of interest are established, GuarantCo and the beneficiary can jointly work on pipeline opportunities.

One such valued partner is AIA Life Insurance in Vietnam, which we have supported as a bond investor on several large infrastructure projects in Vietnam and continue to engage with regularly on prospective transactions.  For insurance companies, infrastructure projects offer an attractive proposition of long term, stable returns that allow effective balance sheet management. However, long term bonds issued by projects in new markets often fail to meet the minimum rating criteria required by some investors. GuarantCo’s guarantees significantly enhance the risk profile of these bonds, replacing the Issuer rating with GuarantCo’s international A1 (Moody’s) /AA – (Fitch) rating. Thus providing access for institutional investors to long duration infrastructure investments.

Balance sheet management is also essential for banks with lending activity that can be constrained by the risk profile of their existing portfolio, impacting their ability to take on new exposures to infrastructure projects. GuarantCo has worked with regional banks to provide capital relief in the form of a portfolio guarantee. For example, we have partnered with CRDB Bank in Tanzania to provide up to 50 percent second loss cover on a portfolio of infrastructure linked loans for five years allowing the bank to free up capital to deploy into new projects.  These guarantees commonly cover specific exposures to corporates, projects or financial institutions involved in financing infrastructure, usually on a second loss basis.

Unlike an insurance provider, our guarantees are agreed upfront considering the requirements of all parties to the guarantee. Beneficiaries can be assured that our products are tried and tested, and GuarantCo has paid out on 100 percent of claims made under our guarantees.

In Nepal, beneficiaries of our guarantee were paid out when the project they were funding experienced construction delays, ultimately leading to a non-payment event under the guaranteed facility. As the situation unfolded, GuarantCo worked hand-in-hand with the guarantee beneficiaries and the borrower to anticipate issues and workshop various solutions. This ensured beneficiaries received full payment on all guaranteed principal and interest supporting the project to realise its full impact. We are an active partner in the financings we support, staffed with experienced professionals who are skilled at structuring and managing our guarantee exposures, as well as working with all stakeholders.

International rating agencies continue to reflect our strong financial position as an institution, evidenced by our A1 rating from Moody’s and AA- from Fitch. This is after considering our track record of paying out when our guarantees have been called. To date, GuarantCo has paid USD 135.1 million under guarantees calls, out of a total of USD 1,892 million commitments. Banks and bond investors can be confident that our guarantee is a reliable instrument that has the power to significantly enhance their capacity to finance infrastructure projects in Africa and Asia.

In summary, GuarantCo has a wide range of credit solutions to help banks and institutional investors support more infrastructure projects in lower income countries in Africa and Asia. Our internationally rated guarantees offer financiers the ability to mitigate credit risk at the project level, liquidity constraints at the capital market /regulatory level and capital constraints facing financial institutions, to allow more funding to flow into infrastructure projects in our focus markets. GuarantCo has a strong track record of partnering with beneficiaries, ranging from small local banks to global institutional investors, and paying out under our guarantees when required. We welcome the opportunity to explore how our credit solutions can support your organisation and your clients. Further details on our mandate can be found in the  PIDG investment policy.

^[1] Global Infrastructure Hub, https://outlook.gihub.org/