GuarantCo Will Benefit from Australia’s Investment

On Monday, GuarantCo (A1 stable) confirmed that it had received an AUD4 million capital investment from the Australian government’s (Aaa stable) Department of Foreign Affairs and Trade (DFAT).

Although the contribution is small relative to GuarantCo’s existing shareholder equity, the broadening of GuarantCo’s shareholder base is credit positive and supports its expansion into Asia. GuarantCo is a supranational organization that transfers risks by providing partial financial guarantees to lenders and investors in lowincome countries financing infrastructure projects in local currency.

GuarantCo’s four founding shareholders are European development agencies: the United Kingdom’s Department for International Development, the Netherlands’ Directorate-General for International Cooperation, Switzerland’s State Secretariat for Economic Affairs and the Swedish International Development Cooperation Agency. They act through private-sector financing companies under the Private Infrastructure Development Group and the Netherland’s Finance for Development. Although GuarantCo has benefitted from repeated increases in capital from these shareholders to support its growth, the relatively few shareholders and their geographic concentration in Europe is a vulnerability. Indeed, the UK government alone has provided around 72% of the company’s paid-in capital to date (see exhibit), including an additional $13 million injection earlier this year.

Although GuarantCo receives high scores in the capital adequacy and liquidity categories of our supranational scorecard, it rates low in the strength of member support category. GuarantCo’s lack of a callable capital structure common among most multilateral development banks results in a weaker assessment of the level of contractual support, despite the strong creditworthiness of GuarantCo’s shareholders. With the relatively high shareholder base concentration, the inclusion of Australia is credit positive for GuarantCo.

GuarantCo is likely to use the additional capital to accelerate its Singapore expansion plans, which will allow it to broaden its guaranty operations, supporting growth prospects for its relatively small, but growing, guarantee book. Although GuarantCo’s mandate will remain firmly Africa-focused, the expansion into Singapore will pave the way into new markets, providing a degree of geographic diversification to its portfolio and allowing for greater oversight and credit risk management of Asian opportunities. At least 50% of GuarantCo’s business comes from Africa, and the company particularly focuses on local-currency guarantees in less developed countries.

More broadly, the increase in capital underscores the support for GuarantCo’s mandate to contribute to infrastructure development in low-income countries through the provision of credit guarantees that in turn enable infrastructure projects to raise debt. It also points to the attractiveness of GuarantCo’s model, which relies on the mobilization of private-sector investment, to development agencies seeking capital-efficient routes to achieving their public-policy objectives.