Top 10 FAQs
Understanding credit guarantees
For those unfamiliar with credit guarantees, here are the answers to the most common questions.
What is a credit guarantee?
01
A credit guarantee is a promise to repay a loan or debt to a lender, if the borrower cannot, provided by a third party guarantor. A guarantee reduces a lender’s perceived risk and improves the credit worthiness of a transaction, and is therefore an important tool for borrowers to secure credit.
How do guarantees work?
02
A guarantee is a legal contract that promises repayment of a debt to a lender. This agreement occurs when a guarantor promises to handle the debt if the original borrower defaults or becomes insolvent. Guarantees mitigate the risk associated with lending to borrowers that are considered high risk and extending credit during times of financial uncertainty.
Why are credit guarantees needed?
03
Guarantees are one of the most power tools in development finance yet remain largely underutilised. In a global context of shrinking Official Development Assistance budgets, there is now more than ever a need to ‘do more with less’. Guarantees offer the highest private capital mobilisation rates, effectively bring in private sector finance at scale and allocate this capital towards otherwise underserved sectors and geographies that drive social and environmental impact.
What protection does a guarantee provide?
04
A guarantee provides credit protection to debt providers i.e. investors in the bonds or banks providing a loan. If the issuer or borrower fails to pay all or part of scheduled repayment, then the lender of the guarantee receives timely payment from the guarantor instead under the terms and conditions of the financial guarantee.
What are the benefits for borrowers?
05
A credit guarantee unlocks private investment that a borrower would not have been able to access otherwise. In addition, borrowers may also benefit from accessing a wider range of investors (e.g. accessing global capital markets), greater investment ticket sizes, and better loan terms such as lower rates and/or longer tenors.
What type of guarantees are typically provided?
06
There are a number of credit guarantee types including full, partial, framework, portfolio and counter guarantees:
Full, where 100% of lenders’ principal and return is protected and so the guarantor takes on the full risk
Partial, where less than 100% of the loan is protected and risk is shared between the lender and the guarantor
Framework, where a structure is set up to provide credit guarantees for multiple projects
Portfolio, where a guarantee is provided across a portfolio of loans on a full or partial basis
Counter guarantees, where a guarantee is provided to a guarantor, thereby enabling risk sharing between multiple guarantee providers.
The Development Guarantee Group (DGG) provides guarantees through the guarantors that it manages by mobilising funding for underserved sectors to build global capital markets.
DGG’s guarantors currently include the Green Guarantee Company which provides full and partial guarantees for single transactions, and portfolio guarantees for climate projects in Emerging Markets and Developing Economies. SAFE (Scaling Alternative Finance for Entrepreneurs) provides mainly portfolio and partial guarantees for single transactions in Eastern Europe and the Middle East and Northern Africa. In addition, DGG is setting up Nautilus, the Blue Guarantee Company that will provide full, partial and portfolio guarantees for projects supporting the blue economy to coastal countries in the Global South.
In addition, the guarantors can look at any other credit guarantee structures depending on the requirements of the project.
Can everyone apply for a credit guarantee?
07
Applications depends on the mandate of the guarantor, including criteria around sector, geography, transaction size and tenor.
For instance, the Green Guarantee Company, managed by the Development Guarantee Group, with a guarantee capacity of USD 1 billion, operates in Emerging Markets and Developing Economies, covers five sectors (energy, transport, water, buildings and waste & pollution control), provides up to 100 percent cover for a guarantee between USD 10 – 50 million and a tenor between up to 20 years.
What is a guarantor’s leverage and how is this determined?
08
A guarantee is an unfunded product as it is a ‘promise to pay’ in case a borrower defaults. With an assessment of the underlying risks and likelihood of the guarantee being called on, this promise can be made multiple times to different lenders. This is known as the guarantor’s leverage and it is the key driver of guarantees’ efficiency and value add.
The Green Guarantee Company (GGC) can currently leverage 10 times so the USD 100 million of equity raised provides a USD 1 billion guarantee capacity. This is part of GGC’s operating model which has been reviewed by Fitch who has issued a BBB Stable investment-grade rating to the company.
What is the difference between guarantees and insurance?
09
A credit guarantee is a promise made to repay a loan or debt if the borrower cannot. Insurance is a contract where an insurer agrees to pay for financial losses caused by specific, unforeseen events in exchange for premiums. The main difference is that a guarantee focuses on a specific performance or debt fulfilment while insurance focuses on protection against a broader range of possible losses.
Are credit guarantees a form of blended finance?
10
Guarantees can be considered a form of blended finance as they directly serve to unlock private investment into impactful projects that might have otherwise been perceived as too risky. Guarantees often also bring together public capital (at the guarantor level) and private capital (at the investment level) in the same transaction.
That said, guarantees do not necessarily need to use public funds and can be provided entirely on a commercial basis by the private sector. Guarantees also sit outside of the capital structure for an investment and so they do not reduce the amount of investment required.
What is a credit guarantee?
01
A credit guarantee is a promise to repay a loan or debt to a lender, if the borrower cannot, provided by a third party guarantor. A guarantee reduces a lender’s perceived risk and improves the credit worthiness of a transaction, and is therefore an important tool for borrowers to secure credit.
How do guarantees work?
02
A guarantee is a legal contract that promises repayment of a debt to a lender. This agreement occurs when a guarantor promises to handle the debt if the original borrower defaults or becomes insolvent. Guarantees mitigate the risk associated with lending to borrowers that are considered high risk and extending credit during times of financial uncertainty.
Why are credit guarantees needed?
03
Guarantees are one of the most power tools in development finance yet remain largely underutilised. In a global context of shrinking Official Development Assistance budgets, there is now more than ever a need to ‘do more with less’. Guarantees offer the highest private capital mobilisation rates, effectively bring in private sector finance at scale and allocate this capital towards otherwise underserved sectors and geographies that drive social and environmental impact.
What protection does a guarantee provide?
04
A guarantee provides credit protection to debt providers i.e. investors in the bonds or banks providing a loan. If the issuer or borrower fails to pay all or part of scheduled repayment, then the lender of the guarantee receives timely payment from the guarantor instead under the terms and conditions of the financial guarantee.
What are the benefits for borrowers?
05
A credit guarantee unlocks private investment that a borrower would not have been able to access otherwise. In addition, borrowers may also benefit from accessing a wider range of investors (e.g. accessing global capital markets), greater investment ticket sizes, and better loan terms such as lower rates and/or longer tenors.
What type of guarantees are typically provided?
06
There are a number of credit guarantee types including full, partial, framework, portfolio and counter guarantees:
Full, where 100% of lenders’ principal and return is protected and so the guarantor takes on the full risk
Partial, where less than 100% of the loan is protected and risk is shared between the lender and the guarantor
Framework, where a structure is set up to provide credit guarantees for multiple projects
Portfolio, where a guarantee is provided across a portfolio of loans on a full or partial basis
Counter guarantees, where a guarantee is provided to a guarantor, thereby enabling risk sharing between multiple guarantee providers.
The Development Guarantee Group (DGG) provides guarantees through the guarantors that it manages by mobilising funding for underserved sectors to build global capital markets.
DGG’s guarantors currently include the Green Guarantee Company which provides full and partial guarantees for single transactions, and portfolio guarantees for climate projects in Emerging Markets and Developing Economies. SAFE (Scaling Alternative Finance for Entrepreneurs) provides mainly portfolio and partial guarantees for single transactions in Eastern Europe and the Middle East and Northern Africa. In addition, DGG is setting up Nautilus, the Blue Guarantee Company that will provide full, partial and portfolio guarantees for projects supporting the blue economy to coastal countries in the Global South.
In addition, the guarantors can look at any other credit guarantee structures depending on the requirements of the project.
Can everyone apply for a credit guarantee?
07
Applications depends on the mandate of the guarantor, including criteria around sector, geography, transaction size and tenor.
For instance, the Green Guarantee Company, managed by the Development Guarantee Group, with a guarantee capacity of USD 1 billion, operates in Emerging Markets and Developing Economies, covers five sectors (energy, transport, water, buildings and waste & pollution control), provides up to 100 percent cover for a guarantee between USD 10 – 50 million and a tenor between up to 20 years.
What is a guarantor’s leverage and how is this determined?
08
A guarantee is an unfunded product as it is a ‘promise to pay’ in case a borrower defaults. With an assessment of the underlying risks and likelihood of the guarantee being called on, this promise can be made multiple times to different lenders. This is known as the guarantor’s leverage and it is the key driver of guarantees’ efficiency and value add.
The Green Guarantee Company (GGC) can currently leverage 10 times so the USD 100 million of equity raised provides a USD 1 billion guarantee capacity. This is part of GGC’s operating model which has been reviewed by Fitch who has issued a BBB Stable investment-grade rating to the company.
What is the difference between guarantees and insurance?
09
A credit guarantee is a promise made to repay a loan or debt if the borrower cannot. Insurance is a contract where an insurer agrees to pay for financial losses caused by specific, unforeseen events in exchange for premiums. The main difference is that a guarantee focuses on a specific performance or debt fulfilment while insurance focuses on protection against a broader range of possible losses.
Are credit guarantees a form of blended finance?
10
Guarantees can be considered a form of blended finance as they directly serve to unlock private investment into impactful projects that might have otherwise been perceived as too risky. Guarantees often also bring together public capital (at the guarantor level) and private capital (at the investment level) in the same transaction.
That said, guarantees do not necessarily need to use public funds and can be provided entirely on a commercial basis by the private sector. Guarantees also sit outside of the capital structure for an investment and so they do not reduce the amount of investment required.
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