Description
A counterparty guarantee is a form of assurance provided by one party (the guarantor) to another party (the beneficiary) to perform the obligation of a third party if the third party fails to perform its obligation. Generally, counterparty guarantees are financial obligations that require the guarantor to make a payment on behalf of the guaranteed entity (e.g., service debt), but they can also require other compensation (e.g., termination payment) and cover operational obligations (e.g. supply of materials, construction).
Benefits
Counterparty guarantees cover counterparty risk (i.e., risks arising from an entity’s – often the utility’s – poor credit quality). In project finance, counterparty guarantees facilitate the financing of projects that would otherwise be considered too risky. Such guarantees can increase investor confidence, broaden the pool of potential financiers, and improve financing terms by reducing costs, increasing available funds, and extending loan maturities. This in turn reduces the annual debt service costs for project users.
Case Study
MIGA issuing guaranteeing the State Bank of India payments
In 2024, the Multilateral Investment Guarantee Agency (MIGA) issued a USD 317.5 million guarantee for loans from Citi, Crédit Agricole CIB and Standard Chartered Bank to the State Bank of India (SBI). The guarantee, with a term of up to 10 years, covers the risk of default by a state-owned enterprise – in this case SBI. It was designed to refinance part of an existing USD 500 million IBRD loan for grid-connected rooftop solar photovoltaic (GRPV) systems in India. The GRPV programme, launched in 2016, supported commercial and industrial customers with solar systems.
The guarantee shall mobilise private sector capital for SBI, facilitate the recycling of IBRD loans for other projects, and potentially save refinancing costs for SBI. At the time of writing, the transaction was expected to have a positive demonstration effect, encouraging international commercial banks to engage in similar projects in India or other countries.
Additional Sources
- S&P Global, Project Finance Construction And Operations Counterparty Methodology, 2011, https://maalot.co.il/Publications/MT20180214122842.PDF
- Global Infrastructure Facility, Government Guarantees for Mobilizing Private Investment in Infrastructure, 2019, https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/2020-02/Government-Guarantees%20for%20Mobilizing%20Private%20Investment%20in%20Infrastructure.pdf
- World Resources Institute, Mobilizing Private Investment in Climate Solutions: De-risking Strategies of Multilateral Development Banks, 2023, https://files.wri.org/d8/s3fs-public/2023-07/mobilizing-private-investment-climate-solutions.pdf?VersionId=eP7TinOgdXimK859xF2Flj_utYKachIT
- https://www.miga.org/project/sbi-rooftop-solar-refinancing-0