Finance guarantees are directly aimed at the lenders to PPP projects. They typically take two main forms which are set out below.
- Loan guarantees - These are perhaps the most common forms of SGs. In substance, loan guarantees are instruments under which the Government guarantees the lenders that it will service their debt if the PPP company fails to do so. Three features of loan guarantees are worth stressing:
(i) They can be "acceleratable" or of an "instalment" (or "debt service") type. With acceleratable guarantees, the lenders have the right to require from the guarantor the immediate and full repayment of their debt upon payment default by the PPP company. With "instalment" guarantees, the Government would only pay debt service instalments as and when they are due under the original loan;
(ii) They can be "partial" or "full". With partial guarantees, the Government may only guarantee some of the lenders or a fraction of the debt of the PPP company. With full guarantees, the coverage would encompass all the lenders and/or all of their debt;
(iii) The ranking of the monies paid by the Government when the SG is called may vary: Government claims may become debt of the PPP company or be treated as non-reimbursable grants. When the claims are debt, they may be super-senior, pari passu or subordinated to the debt of other lenders.
The Loan Guarantee Instrument for Trans-European Transport Network Projects ("LGTT"), set up jointly by the EIB and the European Commission, is an example of a structured loan guarantee (see Box 2 for further details on the LGTT).
- Refinancing guarantees - These are used when lenders are unable to supply reasonably priced finance for a duration compatible with the profile of the PPP cash flows or the PPP contract life. These SGs, therefore, help address the concern that the financial crisis and the new banking regulatory requirements will make long- term commercial funding more expensive and scarce. With these instruments, the Government undertakes to repay the lenders if the PPP company cannot refinance its debt when it comes close to maturity. Equally, if the PPP company manages to refinance its debt, but on more onerous terms, the Government is committed to pay the difference. As with loan guarantees, the issues of fullness and ranking of the claims are important design features. Refinancing guarantees have become important as a result of the emergence of the so-called "mini-perm" financing during the financial crisis. In a "mini-perm", the tenor of the PPP project's senior debt is significantly less than the duration of the PPP contract. This means that refinancing will be necessary at a relatively early stage. The refinancing guarantee scheme introduced by the Flemish Government in 2009 is an example of such SGs (see Annex, paragraph 4).
| Box 2 - The Loan Guarantee Instrument for Trans-European Transport Network Projects The LGTT was set up in 2008 with the aim of attracting greater private sector participation in the financing of revenue-risk TEN-T projects. The instrument enables the transfer of some important elements of demand risk inherent in a concession-based PPP project during the early years of operation. The LGTT improves the ability of the PPP company to service senior debt during the initial operating period or "ramp-up" phase of the project. Its design substantially enhances the credit quality of the senior credit facilities, thereby encouraging a reduction of risk margins applied to senior loans to the project. The LGTT is an EIB instrument, the risk capital for which is jointly provided by the EIB and the European Commission. The guarantee works as follows. In an LGTT project, commercial banks (not necessarily the project lenders) provide a stand-by facility ("SBF") which is available in addition to the usual project finance funding instruments. The SBF can be drawn by the PPP company in the event of unexpected shortfalls in traffic income during the initial ramp-up period of operations. The proceeds of the SBF may be used to cover the debt service of the project's senior credit facilities - in other words, to prevent the project going into payment default under the loan agreements. It is important to note that the SBF may be drawn down only in the initial traffic ramp-up period (i.e. after construction of the project is completed). The LGTT does not cover construction risks. Once drawn, the SBF is serviced, and repaid, on a cash sweep basis, subordinated to the senior loans but ranking ahead of equity. If at the end of the availability period there are still amounts outstanding under the SBF, the LGTT guarantee can be called upon by the SBF providers. At this point, the EIB would pay out the SBF providers and become a subordinated creditor to the project. Once the EIB becomes a creditor to the project, amounts due under the LGTT still rank junior to the debt service of the senior loans and would be repaid either on a cash sweep basis or on a fixed reimbursement profile for the LGTT debt. For further information on the LGTT, please visit: |