Credit enhancement

Project finance transactions may feature various forms of credit enhancement. For example:

•  Credit support from sponsors and subcontractors: Senior lenders will often require sponsors to put in place certain credit-enhancement measures that take some of the risk away from those senior lenders (and in some cases, equity holders) These may take a variety of forms, including:

•  guarantees by the sponsors and third parties relating to the performance of the PPP Company's14 or other participants'15 obligations under the project documentation;

•  financing facilities that provide temporary liquidity to deal with specific risks (e g a large depreciation of the local currency); and

•  insurance against certain project related risks (e.g. construction risks, loss of revenue, third party liability, environmental liability).

•  Public sector support: Public sector support instruments may also be deployed, for example:

•  direct funding support by way of public sector capital contributions These may come from community, national, regional or specific funds They may be designed to make a project bankable or affordable  Guidance 122; and

•  contingent support or guarantees by the public sector to the PPP Company or other private sector participants for certain types of risks which cannot otherwise be effectively managed or mitigated by the PPP Company or other private sector participants (e.g. minimum revenue guarantee for a toll road)  Guidance 8, 123

•  Loan Guarantee for TEN-Transport (LGTT): The LGTT is a unique credit enhancement instrument specific to TEN-T projects in which the private sector takes traffic risk  Guidance 124

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14  For example, standby or guarantee letters of credit used to protect against the PPP Company's failures to meet its payment and other obligations due by it under the project agreements.

15  For example, performance bonds callable in the event of the contractor's failure to perform the terms of the construction contract. Parent company guarantees will also often be required from construction and other service subcontractors.