Case Study Details - Playbook of Solutions

Description

Credit guarantees are credit enhancement mechanisms which guarantee debt instruments such as loans or bonds. They’re an irrevocable promise from the guarantor to pay the principal and/or interest up to a pre-determined amount, which is typically expressed as a percentage of principal. A credit guarantee is “partial” when it covers less than 100% of the debt, or “full” if it provides a 100% coverage.

Benefits

Credit guarantees improve the appetite of lenders and investors for financing projects through better risk allocation among funders and guarantors. As a result, guarantees facilitate market access for borrowers, encourage long-term funding, help crowd-in private capital, and allow for better financing terms. They are especially useful for complex development projects in high-risk environments, as they help mitigate political and counterparty risks that are difficult for private investors to manage and price. Additionally, they help expand and enhance the financial sector in developing countries, contributing to overall economic development and stability.

Case Study

GuarantCo’s USD 27 million guarantee facility to boost renewable energy in Southern Africa

GuarantCo, part of the Private Infrastructure Development Group (PIDG), was established in 2005 to help close the infrastructure funding gap and alleviate poverty in lower income countries across Africa and Asia. The de-risking solutions offered by GuarantCo are fantastic illustrations of the enablers needed to mobilize private capital in emerging and developing economies.

As an example, in 2024, GuarantCo provided Africa GreenCo with an 8-year USD 27 million framework guarantee facility to back its payment obligations to the Independent Power Producers (IPPs) it would buy clean energy from. The innovativeness of this structure lied in the fact that, while a guarantee framework was agreed between Africa GreenCo and GuarantCo, guarantees would be issued directly to the IPPs, providing them and their lenders with the comfort to enter into contracts and build renewable power projects in many countries across Southern Africa.

The USD 27 million guarantee is expected to enable up to USD 270 million of private capital in IPPs; an excellent mobilization ratio of ~x5.45. Through the transaction, 200-300MW of renewable energy will be brought online, providing improved electricity access to grid-tied businesses and end users (Sustainable Development Goal 7.1) whilst enabling renewable energy to avoid and reduce GHG emissions (SDG 13).

The Africa GreenCo model is, in itself, also worth highlighting. It helps mitigate the risk of purchaser default through the ability to secure alternative buyers or via trading on the South Africa Power Pool (SAPP) electricity market. Africa GreenCo acts as a credit worthy off-taker of renewable energy from IPPs and, in turn, sells the energy to a diversified portfolio of Commercial & Industrial customers in Southern Africa. Through its activities, GreenCo increases the supply of, and demand for, finance for energy projects, and mobilizes private sector capital faster to boost renewable energy generation in the region.

Additional Sources

Credit Guarantees