Description
A portfolio guarantee is a financial instrument designed to help financial institutions manage and mitigate credit risk associated with a portfolio of assets. The guarantee can take various forms (e.g., risk sharing facility, synthetic risk transfer) and cover various risk allocations (up to 100%). It is structured to cover potential credit losses, thereby allowing financial institutions to manage risks more effectively.
Benefits
Like credit guarantees, portfolio guarantees provide protection against credit losses, which reduces the overall risk for financial institutions. They allow leverage, meaning that a certain amount of guarantee can enable a larger amount of lending. But compared to individual credit guarantees, portfolio guarantees comparatively reduce the overall risk through diversification, which can also lead to lower transaction costs.
Case Study
Green Guarantee Company building a portfolio guarantee for climate mitigating projects in emerging economies
In 2024 was launched the Green Guarantee Company (GGC), a guarantor designed to mitigate investment risks and facilitate institutional investment in green bonds and loans in emerging and frontier markets. The GGC aims to leverage its investment-grade rating, to offer full guarantees on medium to long-term institutional debt issued in hard currencies. In case of payment defaults, the GGC would step in to ensure investors receive payments as scheduled. The GGC could also offer its guarantees along with Multilateral Development Banks guarantees as co-guarantors.
The GGC’s primary goal is to mobilize private institutional capital to finance climate adaptation (including renewable energy projects) and mitigation projects in developing countries. It uses its own BBB credit rating to provide investment grade guarantees to borrowers in emerging markets, which in turn improves the borrowers’ ratings, and unlocks larger pools of capital. The GGC also plans to address technical barriers by providing a technical assistance (TA) facility and a reporting service, enhancing market readiness, and building local capabilities. The TA facility shall aid borrowers with structuring and certification support, while the reporting service ensures transparency and best practices in managing and using proceeds.
GGC’s stakeholder base is comprised of United Kingdom’s Foreign Commonwealth & Development Office, the Green Climate Fund (GCF), the Nigeria Sovereign Investment Authority, the United States Agency for International Development with Prosper Africa and Norfund. These investors will invest USD 100 million so GGC could provide up to USD 1 billion of guarantees. The project proposal was first submitted to the GCF Board by MUFG Bank, which acts as an Accredited Entity of the GCF.
Additional Sources
- Asian Development Bank, Credit Guarantees, 2016, https://www.adb.org/sites/default/files/publication/203871/credit-guarantees.pdf
- https://www.ifc.org/en/what-we-do/products-and-services/treasury-client-solutions/portfolio-guarantees
- https://www.climatefinancelab.org/wp-content/uploads/2023/01/GGC-report.pdf
- MUFG Presentation at virtual meeting of the Deputies (Network to Mobilize Investment for Clean Energy in the Global South), 18 April 2024