A prime objective for the EBRD is, as stated in its founding Agreement, "to mobilise domestic and foreign capital" in its countries of operations. To achieve this objective, Loan Syndications has chosen a flexible and market-oriented approach. Its goal is to broaden the EBRD's co-financing base by increasing the number of commercial lenders with which it works, by continuing to introduce new co-financing structures and methods, and by introducing new countries to the market. The critical factor in the success of these activities is the extent to which commercial sources of finance are willing to commit funds.
Requirements and benefits
For private sector projects, the EBRD is normally prepared to provide, in the form of debt or equity, up to 35 per cent of the long-term capital requirements of a single project or company. Pricing of debt will reflect primarily country and commercial risks and will conform to prevailing conditions in the syndicated loan market. The EBRD's standing as an international institution and, particularly, its preferred creditor status are taken into account in assessing the risks. Loans by international institutions such as the EBRD are, by tradition, excluded from sovereign debt reschedulings. Banks participating in loans for which the EBRD remains the lender of record share the benefits of this preferred creditor status.
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The EBRD may help borrowers to gain access to the financial market through the provision of guarantees. Various types are available, ranging from all-risk to risk-specific contingent guarantees, but in all cases the maximum exposure must be quantifiable and the credit risk acceptable.
Banking supervisors in many countries allow, either expressly in regulations or in less formal guidance, co-financing through the participation technique used by the EBRD to be given preferential treatment in the application of country risk provisioning requirements. As a result, participations in such jurisdictions may be exempted from the normal country risk provisioning requirements.
Forms of co-financing
Loan Syndications techniques most frequently used to date by the EBRD are:
- the A/B loan syndication structure, where the EBRD remains the lender of record for the entire loan and the commercial banks derive benefit from the EBRD's preferred creditor status
- assignments of part of EBRD loans to domestic commercial banks in its countries of operations to promote their cooperation in medium-term lending
- co-financing with other international financial institutions
- parallel or joint financing with commercial banks supported by ECAs or with direct lending ECAs
- parallel loans with commercial banks
- parallel loans with official government agencies
- various guarantee facilities
- private placements of equity
- debt co-financing with institutional investors
A/B loan structure and preferred creditor status
For private sector projects, the EBRD is normally prepared to provide, in the form of debt or equity, up to 35% of the long-term capital of a single project or company. Pricing of debt will primarily reflect the commercial risk and will be set to conform to prevailing conditions in the syndicated loan market.
In most emerging markets or economies, commercial banks can be expected to have initial concerns relating to country risk. This risk might embrace, among other things, risks such as debt rescheduling, nationalisation of assets, currency convertibility and hard currency transfer.
The country risk, while taken into account in the pricing, is to a degree mitigated by the EBRD's status as a preferred creditor. The EBRD's status as a preferred creditor does not mean that the EBRD guarantees against country risks.
Articles 21 and 49 of the Agreement Establishing the Bank, strengthen the case for preferred creditor status of loans made by the EBRD. All of the EBRD's shareholders are signatories to this Agreement, including the countries of operations.
A/B loan structure
The principal form of mobilising external financing is to provide for the participation by commercial banks in EBRD loans. Through this technique, the commercial banks can share with the EBRD the benefit of its status as an International Financial Institution (IFI). Other IFIs include the World Bank, International Finance Corporation, Asian Development Bank, European Investment Bank.
The EBRD, as lender of record, extends a loan to a borrower on terms pre-arranged with, and to be funded by, bank lenders and the EBRD. Structurally the EBRD sells participations, without recourse to itself, in such loans to the banks. The portion which the EBRD lends is often referred to as the A Loan, with the commercial bank portion being referred to as the B Loan. This terminology is also used by the International Finance Corporation. Through the participation mechanism, each bank may benefit from the EBRD's preferred creditor status.
Consistent with its status, EBRD policy is not to reschedule debt payments or participate in debt rescheduling agreements with respect to its loans to private sector borrowers where the borrower's inability to service its debt is due to a general foreign exchange shortage in the borrower's country.
Preferred creditor status
In practice, loans by IFIs similar to the EBRD, including loans extended and participations sold under the lender of record participation technique, have been excluded from sovereign debt reschedulings. Banks that participate in loans to private sector borrowers made by the EBRD, where the EBRD remains the lender of record, may share in the benefit of this preferred creditor status.
In addition, banking supervisors in many countries recognise, either expressly in regulations or in less formal guidance, that co-financing through the participation technique used by the EBRD should be given preferential treatment in applying country risk provisioning requirements. As a result, participations by banks regulated in these jurisdictions are exempt from country risk provisioning requirements.
Although preferred creditor status is intended to give a degree of comfort to commercial lenders against country risk, it is important to note that the EBRD is not able to represent as to its future efficacy, as the preferred status is largely a matter of agreement by governments and bank regulatory authorities, supported to a large extent by past experience.
The EBRD's preferred creditor status has been tested and found to be effective. In August 1998, when Russia declared a moratorium on hard currency debt servicing, all payments due under EBRD A loans and B loans came through in full and on time.
Loan syndications case studies
Article 21
Determination and use of currencies
1. Whenever it shall be come necessary under this Agreement to determine whether any currency is fully convertible for the purposes of this Agreement, such determination shall be made by the Bank, taking into account the paramount need to preserve its own financial interests, after consultation, if necessary, with the International Monetary Fund.
2. Members shall not impose any restrictions on the receipt, holding, use or transfer by the Bank of the following:
(i) currencies or ECU received by the Bank in payment of subscription to its capital stock, in accordance with Article 6 of this Agreement.
(ii) currencies obtained by the Bank by borrowing:
(iii) currencies and other resources administered by the Bank as contributions to Special Funds: and
(iv) currencies received by the Bank in payment on account of principal, interest, dividends or other charges in respect of loans or investments, or the proceeds of disposal of such investments made out of any of the funds referred to in subparagraphs (i) to (iii) of this paragraph, or in payment of commission, fees or other charges.
Article 49
Freedom of assets from restrictions
To the extent necessary to carry out the purpose and functions of the Bank and subject to the provisions of this Agreement, all property and assets of the Bank shall be free from restrictions, regulations, controls and moratoria of any nature.
