Title: ADBs Cofinancing Tools Meeting the Changing Needs in the Region
1ADBs 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
2Topics
- Overview
- Commercial Cofinancing Strategy
- Credit Enhancement Products
- Case Studies
3What 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
4Strategic Agenda
- Vision
- A region free of poverty
- Mission
- Help Developing Member Countries (DMCs) reduce
poverty and improve living conditions and the
quality of life
5Windows 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
6Windows 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
7Operations 19662004
- Loans
- 1,879 projects, 110.29 billion
- Technical assistance
- 5,658 projects, 2.58 billion
- Equity investments
- 128 investments, 925 million
8Lending 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)
9Loan 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)
10Loan 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
11Technical 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
12Cofinancing
- 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
13Sources of Cofinance
- Official
- Multilateral
- Bilateral
- Commercial
- international local banks
- capital markets
- public and private sector political risk
insurers
- export credit agencies export import banks
14Cofinanced Projects 2000-4
36.2 billion
15Sources of Cofinance 2000-4
12.0 billion
16Benefits of Cofinancing
- For Borrower
- Additional resources
- Access to market-based financing
- Coordination of external assistance
- Ability to undertake large projects
17Benefits of Cofinancing
- For Cofinancier
- Increasing the impact of ODA
- Donor Coordination
- Availability of ADBs feasibility/appraisal
information
- Availability of administration services (for
untied cofinancing
18Joint 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
19Parallel 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
21Commercial Cofinancing Strategy Credit
Enhancement Products
22Cofinancing 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
23Cofinancing 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
24Cofinancing 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
25Credit Enhancement Products
- Complementary Financing Scheme (CFS)
- Political Risk Guarantee (PRG)
- Partial Credit Guarantee (PCG)
- and indirectly through anchor
- Direct Loans
- Equity
26CFS
- 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
27Of 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
28Debt service passes through ADB
International banks investors
CFS Loan
Direct Loan (Anchor)
Take nearly all risks
Private Sector Borrower
29Political 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
30Political 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
31International banks investors
ADB
PRG
takes political risk(s)
retain commercial risks
Commercial Loan
Private Sector Borrower
32Private 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
33Private 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
34Partial 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
35Partial 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
36Int. 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
37Credit Enhancement Products
CFS
PRG
PCG
Loan
Equity
PV
CEN
Commercial
Breach
CI
Indemnity Spectrum
38Case Studies
- Trade Finance Facilitation Program
- BOT Power Projects
39TFFP 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
40TFFP 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
41TFFP 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
42Objective 1
- Help new and less well known local banks, in
developing member countries (DMCs),
- establish track records with international banks
43Objective 2
- Encourage international and regional banks to
- expand their existing business with local banks
- support their exporters to do more business in
DMCs
44Objective 3
- Provide liquidity to the international trade
finance system
- especially during periods of crisis
- to support and develop intra and inter regional
trade
45Lessons 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
46Lessons 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
47Component 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
48Component 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
49Component 3
- Revolving Credit (RC) facility
- which provides short-term hard currency loans
directly to Issuing Banks
50PCG 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
51and 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
52Confirming Banks
- All reputable commercial banks may participate
- international
- regional
- Local
- Currently there are 67 participating Confirming
Banks
53Issuing 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
54Issuing 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
55Issuing Banks
- Currently there are
- 7 fully accredited Issuing Banks,
- 10 Issuing Banks approved, but with final
documentation pending, and
- 7 Issuing Banks being approved
56Eligible 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
57PCG 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
58PCG 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
59PCG 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
60PCG claims
- Claim notice period 15 days
- Claim determination period 15 days
61Documentation
- 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
62Issuing Banks Accredited
- Afghanistan
- Afghanistan International Bank
- Bangladesh
- Southeast Bank
- Eastern Bank
- Cambodia
- Canadia Bank
- Mongolia
- Trade Development Bank
- Credit approved but pending documentation
63Issuing 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
64Issuing Banks Accredited
- Uzbekistan
- Asaka Bank
- Uzjilsberbank
- Viet Nam
- Techcombank
- Asia Commercial Bank
- Eastern Asia Commercial Bank
- Sacombank
- Credit approved but pending documentation
65Issuing Banks pending approval
- are in
- Azerbaijan
- Kazakhstan
- Mongolia
- Philippines
- Tajikistan
66Participating 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
67Participating 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
68Participating 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
69Participating 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
70Participating 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
71BOT 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
72Sponsor 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
73Sponsor 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
74Sponsor Group
350m equity
45m Direct Loan
ADB (Anchor)
NTPC Nam Theun 2 Hydro Total Project cost 1250m
75EDFI
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
76BOT 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?
77BOT Power Projects w/ PRG
- Lessons learned
- Local Currency Finance
- Available and cost effective
-
- Political Violence
- Who takes 1st loss on terrorism/sabotage risk?
78For 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/