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ADBs Cofinancing Tools Meeting the Changing Needs in the Region

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Title: ADBs Cofinancing Tools Meeting the Changing Needs in the Region


1
ADBs Cofinancing ToolsMeeting the Changing
Needs in the Region
  • Presented at the Bankers Association for
    Finance and Trade1st Asian Bank-to-Bank
    ForumMarch 9 - 10, 2006Bank of China, Shanghai

Martin Endelman Principal Cofinancing Specialist
Office of Cofinancing Operations Asian
Development Bank
2
Topics
  • Overview
  • Commercial Cofinancing Strategy
  • Credit Enhancement Products
  • Case Studies

3
What is ADB?
  • The regions multilateral development bank,
    established in 1966
  • A partnership for development, with
  • 64 members (46 regional, 18 non-regional)
  • 33 borrowing members
  • Receives two-thirds of its capital and staff from
    Asia-Pacific region
  • AAA Rated

4
Strategic Agenda
  • Vision
  • A region free of poverty
  • Mission
  • Help Developing Member Countries (DMCs) reduce
    poverty and improve living conditions and the
    quality of life

5
Windows of Operation
  • Public sector operations
  • support sovereign clients
  • non sovereign clients - with or with out counter
    guarantee
  • through loans, technical assistance, guarantees
    and other cofinancing
  • Represents about 95 of ADBs business

6
Windows of Operation
  • Private sector operations
  • direct assistance to private enterprises -
    without government guarantee
  • through loans, equity investments, guarantees,
    cofinancing
  • Represents about 5 of ADBs business, but growing

7
Operations 19662004
  • Loans
  • 1,879 projects, 110.29 billion
  • Technical assistance
  • 5,658 projects, 2.58 billion
  • Equity investments
  • 128 investments, 925 million

8
Lending Operations
  • Consist of
  • Ordinary Operations (non-concessional) financed
    from Ordinary Capital Resources (OCR)
  • Special Operations (concessional) financed from
    donor country contributions to the Asian
    Development Fund (ADF)

9
Loan Approvals in 2004
  • 5.3 billion for 80 loans, 64 projects
  • Consisting of
  • 4.0 billion OCR,
  • 1.3 billion ADF
  • Major borrowers PRC (1.26 billion), India
    (1.25 billion), Pakistan (709 million),
    Philippines (446 million), Vietnam (296 million)

10
Loan Approvals in 2004
  • Transport communications 38
  • Energy 14
  • Multisector 12
  • Law, Economic Management, Public Policy 11
  • Finance 6
  • Education 5
  • Health 5
  • Agriculture Natural Resources 4

11
Technical Assistance
  • Grant funds used for
  • preparing and implementing projects
  • providing advice
  • supporting regional activities
  • In 2004, 323 TA grants were approved for about
    197 million

12
Cofinancing
  • Defined as
  • Financing from official or private sources
  • external to the borrowing entity and the project
    sponsors,
  • arranged to support ADB-assisted projects
    together with ADBs own funds

13
Sources of Cofinance
  • Official
  • Multilateral
  • Bilateral
  • Commercial
  • international local banks
  • capital markets
  • public and private sector political risk
    insurers
  • export credit agencies export import banks

14
Cofinanced Projects 2000-4
36.2 billion
15
Sources of Cofinance 2000-4
12.0 billion
16
Benefits of Cofinancing
  • For Borrower
  • Additional resources
  • Access to market-based financing
  • Coordination of external assistance
  • Ability to undertake large projects

17
Benefits of Cofinancing
  • For Cofinancier
  • Increasing the impact of ODA
  • Donor Coordination
  • Availability of ADBs feasibility/appraisal
    information
  • Availability of administration services (for
    untied cofinancing

18
Joint Cofinancing
  • ADB and Cofinanciers generally pool their funds
    to finance a common list of goods and services
    for the projects.
  • Cofinanciers do not tie their assistance
  • Follow Bank procurement guidelines
  • ADB provides administration services (for a fee)
  • Project specific cofinancing agreement

19
Parallel Cofinancing
  • Project components are financed separately
  • Both tied and untied funds can be used
  • ADBs or Cofinanciers procurement procedures may
    apply
  • Untied parallel cofinancing can be administered
    by ADB
  • Cofinancing agreement is not mandatory unless
    administered by ADB

20
President
Vice President for Knowledge Management
Sustainable Development
Office of Cofinancing Operations
Principal Director
Director
Official Loan Cofinancing Group
Grant Cofinancing Group
Commercial Cofinancing Group
10 Professional Staff 18 Supporting Staff
21
Commercial Cofinancing Strategy Credit
Enhancement Products
22
Cofinancing Strategy
  • Forge partnerships with commercial cofinanciers,

  • international local banks
  • capital markets
  • public and private sector political risk
    insurers
  • export credit agencies export import banks
  • to mobilize additional short, medium long-term
    credit or risk taking capacity
  • for public private sector projects

23
Cofinancing Strategy
  • Focus on our comparative advantages
  • Long-term political commercial risks
  • While letting cofinanciers focus on their
    comparative advantages
  • Short/medium-term commercial, funding, FX and
    interest rate risks

24
Cofinancing Strategy
  • Concentrate on the gap
  • Taking only those risks the market cannot
    effectively keep
  • Provide different levels cover or support to
    private sector investors
  • To meet the unique needs of each project

25
Credit Enhancement Products
  • Complementary Financing Scheme (CFS)
  • Political Risk Guarantee (PRG)
  • Partial Credit Guarantee (PCG)
  • and indirectly through anchor
  • Direct Loans
  • Equity

26
CFS
  • Through our B loans or lender of record
    cofinancing, commercial lenders get cover from
    ADBs
  • Privileges and Immunities
  • Currency conversion/transfer
  • Expropriation
  • Withholding taxes
  • Preferred Creditor Status
  • Least chance of debt-rescheduling

27
Of Record Schemes
  • Similar cover is also available through
  • Guarantor-of-Record Scheme
  • Helps public/private sector PRI providers, ECAs
    and others to participate in PCG/ PRG deals
  • Investor-of-Record Scheme
  • Helps sponsors to invest more interest bearing
    capital into projects

28
Debt service passes through ADB
International banks investors
CFS Loan
Direct Loan (Anchor)
Take nearly all risks
Private Sector Borrower
29
Political Risk Guarantees
  • Up to 100 coverage for loss due to
  • Currency inconvertibility/non-transfer (CI/NT)
  • Expropriation/discriminatory government action
    (Expropriation)
  • Adverse change in agreed regulatory environment
    or tax regime
  • Political Violence (PV)
  • Can include terrorism/sabotage

30
Political Risk Guarantees
  • And / or
  • Arbitration Award Default/Denial of Justice
  • Supply contracts/Off-take agreements
  • or other government undertakings
  • also called Extended Cover and
  • an area that ADB is particularly interested in

31
International banks investors
ADB
PRG

takes political risk(s)
retain commercial risks
Commercial Loan
Private Sector Borrower
32
Private Sector PRI reinsurer
ADB w/ co- guarantor/ reinsurer(s)
International banks investors
PRG

ADB
takes political risk(s)
retain commercial risks
Direct Loan/ Equity (Anchor)
Commercial Loan
Private Sector Borrower
33
Private Sector PRI reinsurer(s)
Government counter guarantee
0r when used to support a Facility
ADB w/ co- guarantor/ reinsurer(s)
International banks investors
PRG
International banks investors

ADB
takes political risk(s)
retain commercial risks
Public Sector Loan (Anchor)
Commercial Loan
Private Sector Borrower
Private Sector Borrower
Private Sector Borrower
Government
34
Partial Credit Guarantees
  • Provides comprehensive cover
  • Political risks, and
  • Commercial (or credit) risks
  • For part of debt owed by
  • Governments, SOEs or commercial borrowers under
  • term loans, notes, bonds
  • SMEs and other targeted borrowers in a portfolio
    under a Facility

35
Partial Credit Guarantees
  • Denominated in major convertible currencies
  • But more importantly, can also cover local
    currency debt to
  • Mitigate FX risk
  • Help develop local capital markets

36
Int. Local Banks Investors
ADB
PCG
Takes a share of the risk
Must keep some risk
Loan in major or local currency
Private or Public Sector Borrower
37
Credit Enhancement Products
CFS
PRG
PCG
Loan
Equity
PV
CEN
Commercial
Breach
CI
Indemnity Spectrum
38
Case Studies
  • Trade Finance Facilitation Program
  • BOT Power Projects

39
TFFP in perspective
  • In the wake of the Asian financial crisis and
    other recent events, we saw international banks
    that provide trade finance
  • Force up confirmation fees or loan margins
  • Reduce or cancel bank limits or
  • Reduce or cancel country limits

40
TFFP in perspective
  • For example,
  • In Pakistan, confirmation fees jumped from 2 to
    6, or more, and then fell back
  • being an additional cost ultimately to the
    account of the Pakistan importer
  • In Indonesia, the total value of trade finance
    bank limits fell from 6 b, from 400 int. banks
  • to some 1.6 b, from 50 banks of which 10 are
    active

41
TFFP in perspective
  • Without these limits
  • local banks in many of ADBs developing member
    countries (DMCs) find it difficult to provide
    trade finance to their exporters and importers
  • inhibiting trade and economic expansion
  • WTO and IMF meetings confirmed this concern

42
Objective 1
  • Help new and less well known local banks, in
    developing member countries (DMCs),
  • establish track records with international banks

43
Objective 2
  • Encourage international and regional banks to
  • expand their existing business with local banks
  • support their exporters to do more business in
    DMCs

44
Objective 3
  • Provide liquidity to the international trade
    finance system
  • especially during periods of crisis
  • to support and develop intra and inter regional
    trade

45
Lessons learned
  • Trade finance programs implemented by some MDBs
    had a narrow focus
  • IFC appointed an agent bank in each country
  • inhibiting other banks from participating as they
    see the agent bank as a competitor
  • ADB, in Pakistan, covered only political risk and
    certain imports
  • but not local issuing bank risk

46
Lessons learned
  • EBRDs TFP has an open architecture
  • with many confirming banks
  • supporting many DMCs
  • covering nearly all risk
  • making it the ideal model for ADBs TFFP

47
Component 1
  • Revolving partial credit guarantee (PCG)
    facility, which
  • guarantees payment to participating regional and
    international Confirming Banks
  • if an Issuing Bank fails to pay under a letter of
    credit (L/C) or other trade finance instrument

48
Component 2
  • Risk Sharing Agreements (RSAs), which allow
  • ADB to participate in EBRDs Trade Facilitation
    Programme, in countries where we overlap
  • Public and private sector agencies to participate
    in ADBs TFFP in certain markets

49
Component 3
  • Revolving Credit (RC) facility
  • which provides short-term hard currency loans
    directly to Issuing Banks

50
PCG Support for Imports
Reinsurers
ADB through the TFFP Team
Can also request PCG under TFFP Limit
Share of some or all risk
PCG usually for 80 of agreed Guaranteed Risk
Local Issuing Bank
Takes political, commercial documentation risks
Confirming Bank
Issues sight or term L/C
Request opening of L/C
Confirms Approved L/C
Takes Importer risk
Ships goods
Importer Applicant
Overseas Supplier
Negotiates purchase of goods on best longest
terms possible w/ benefit of ADB PCG
51
and possibly for Exports
Reinsurers
ADB through the TFFP Team
Request PCG under TFFP Limit
Share of some or all risk
PCG usually for 80 of agreed Guaranteed Risk
Local Issuing Bank
Takes all risks, and transfers Advance Payment
Confirming Bank
Issues term L/C as guarantee for Advance payment
Request opening of L/C
Makes Advance Payment
Receives Advance Payment
Confirms Approved L/C
Exporter Applicant
Overseas Importer
Negotiates sale of goods on best terms possible
w/ benefit of ADB PCG
52
Confirming Banks
  • All reputable commercial banks may participate
  • international
  • regional
  • Local
  • Currently there are 67 participating Confirming
    Banks

53
Issuing Banks
  • Are selected based on
  • stringent credit analysis and standardized due
    diligence process by ADB
  • Audited financial statements following
  • internationally accepted or
  • acceptable local accounting standards
  • trade finance activity and need for support

54
Issuing Banks
  • Privately owned, but may be public sector or
    state banks when
  • well-positioned to foster trade
  • only viable intermediary
  • Can be related to Confirming Bank
  • Must be domiciled in an ADB DMC

55
Issuing Banks
  • Currently there are
  • 7 fully accredited Issuing Banks,
  • 10 Issuing Banks approved, but with final
    documentation pending, and
  • 7 Issuing Banks being approved

56
Eligible goods
  • Unless excluded, TFFP will support a wide variety
    of imports and exports
  • Excluded goods are
  • arms, ammunition and other military materials
  • radioactive and associated materials
  • nuclear reactors and components
  • fuel elements for nuclear reactors
  • End-users of goods must be private sector
    entities

57
PCG coverage
  • Political
  • Currency inconvertibility and transfer blockage
    (CI)
  • Confiscation, Expropriation, Nationalisation
    (CEN)
  • Political Violence (PV)
  • and Commercial
  • Failure of the Issuing Bank to meet its
    contractual obligation under the L/C

58
PCG coverage
  • Level of indemnity up to 80,
  • but could be up to 100 in exceptional cases
  • On a case by case basis, the level of indemnity
    for political and commercial risk may be
    uncoupled

59
PCG issuance
  • Confirming or Issuing Bank contacts ADB
  • Transaction, tenor pricing agreed between
    parties
  • SWIFT application sent to ADB
  • Normally 1 to 2 day processing by ADB
  • ADB sends SWIFT PCG (guarantee) to Confirming
    Bank
  • For structured deal, non binding indications may
    be requested in advance

60
PCG claims
  • Claim notice period 15 days
  • Claim determination period 15 days

61
Documentation
  • Confirming Bank Agreement
  • includes general terms and conditions for all
    PCGs made from time to time
  • Issuing Bank Agreements
  • includes various undertakings and
    acknowledgements about ADBs subrogation rights
    under a PCG
  • may also include RC loan terms and conditions
  • ADB Supplemental Framework Agreement
  • With each DMC Government confirming ADB Charter
    privileges and immunities, specifically for PCGs

62
Issuing Banks Accredited
  • Afghanistan
  • Afghanistan International Bank
  • Bangladesh
  • Southeast Bank
  • Eastern Bank
  • Cambodia
  • Canadia Bank
  • Mongolia
  • Trade Development Bank
  • Credit approved but pending documentation

63
Issuing Banks Accredited
  • Papua New Guinea
  • Bank of South Pacific
  • Sri Lanka
  • DFFC Vardhana Bank
  • Nations Trust Bank
  • Seylan Bank
  • Sampath Bank
  • Tajikistan
  • TSOB
  • Credit approved but pending documentation

64
Issuing Banks Accredited
  • Uzbekistan
  • Asaka Bank
  • Uzjilsberbank
  • Viet Nam
  • Techcombank
  • Asia Commercial Bank
  • Eastern Asia Commercial Bank
  • Sacombank
  • Credit approved but pending documentation

65
Issuing Banks pending approval
  • are in
  • Azerbaijan
  • Kazakhstan
  • Mongolia
  • Philippines
  • Tajikistan

66
Participating Confirming Banks
  • Australia
  • ANZ
  • Austria
  • Allgemeine Sparkasse
  • Bank of Austria Creditanstalt
  • Erste Bank
  • Oberbank AG
  • Raiffeisenlandesbank
  • Volksbanken
  • Belgium
  • KBC Bank
  • Canada
  • Bank of Nova Scotia
  • Canadian Imperial Bank of Commerce
  • PRC
  • Agricultural Bank of China
  • Bank of China Limited

67
Participating Confirming Banks
  • Denmark
  • Danske Bank
  • England
  • Standard Chartered
  • Finland
  • Nordea Bank
  • OKO Bank
  • Sampo Bank
  • France
  • BNP Paribas
  • Calyon
  • Credit Industriel et Commercial
  • Natexis Banques Populaires
  • Societe Generale

68
Participating Confirming Banks
  • Germany
  • Bayerische Landesbank
  • BHF Bank AG
  • Commerzbank AG
  • Deutche Bank AG
  • Dresdner Bank
  • DZ Bank
  • HVB, Bayerische Hypo- und
  • Hong Kong, China
  • HSBC
  • India
  • State Bank of India
  • Italy
  • Banca Agricola Montovana
  • Banca Intesa
  • Banca delle Marche
  • Banca Popolare dell'Emilia
  • Banca Popolare di Sondrio
  • Banca Popolare di Vicenza
  • Banca Toscana
  • Sanpaolo Imi
  • UniCredito Italiano SpA

69
Participating Confirming Banks
  • Japan
  • Bank of Tokyo-Mitsubishi
  • Mizuho Corporate Bank
  • Mizuho Bank Ltd
  • Sumitomo Mitsui Banking
  • Netherlands
  • ABN AMRO
  • ING Bank
  • Rabobank
  • Norway
  • DnB NOR Bank ASA
  • Spain
  • Banco de Sabadell
  • Caixa d'estalvis de Catalunya
  • Banco Espanol de Credito
  • Caja Madrid
  • Banco Popular Espanol
  • La Caixa
  • BBVA

70
Participating Confirming Banks
  • Sweden
  • Svenska Handelsbanken AB
  • Swedbank
  • Taipei,China
  • Bank SinoPac
  • Chang Hwa Commercial Bank
  • First Commercial Bank Ltd
  • Hua Nan Commercial Bank
  • Macoto
  • Switzerland
  • Zürcher Kantonalbank, IBMA
  • UBS AG
  • United States
  • American Express Bank
  • Bank of America
  • Wachovia Bank National

71
BOT Power Projects w/PRG
  • 70m PRG in BAN 31m PRG Sri Lanka
  • With host government counter-guarantees
  • 25m PRG for Phu My 2.2 in Viet Nam
  • Reinsured by a private sector PRI provider under
    GOR Scheme
  • 40m PRG for Phu My 3 in Viet Nam
  • ADBs own account w/ MIGA as co-guarantor
  • 48m PRG Nam Theun 2 Hydro
  • Partial Indemnity only

72
Sponsor Group
Guarantees payment obligations under Project
Agreements
Host Government
80m equity
Power Generator Limited Total Project cost 300m
50m Direct Loan
20m CFS Loan
CFS Tranche
Syndicate
Development Finance Institution
80m Direct Loans
73
Sponsor Group
140m equity
ADB (Anchor)
50m Direct Loan
MECO Phu My .2.2 Total Project cost 480m
Bank Syndicate
Development Finance Institutions
190 Direct Loans
74
Sponsor Group
350m equity
45m Direct Loan
ADB (Anchor)
NTPC Nam Theun 2 Hydro Total Project cost 1250m

75
EDFI
EGCO
ITD
Government of Lao
Government of Lao (via LHSE)
35
15
25
25
350m equity
NTPC Nam Theun 2 Hydro Total Project cost 1250m

76
BOT Power Projects w/ PRG
  • Lessons learned
  • Host Government Counter-Guarantees
  • Some deals no longer need it
  • For other deals, they are a must
  • Breach of Contract
  • Deeming Provision often needed
  • Is denial of justice the real concern?

77
BOT Power Projects w/ PRG
  • Lessons learned
  • Local Currency Finance
  • Available and cost effective
  • Political Violence
  • Who takes 1st loss on terrorism/sabotage risk?

78
For further information, please contact
  • Principal Director, OFFICE OF COFINANCING
    OPERATIONS
  • Asian Development Bank
  • 6 ADB Avenue, Mandaluyong City, Philippines
  • Tel (632) 632 6314
  • Fax (632) 636 2456
  • Email cofinancing_at_adb.org
  • or visit our website at
  • www.adb.org/Cofinancing/
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