## The Scalability of Credit-Enhanced EM Climate Debt — Executive Summary (wpiea2025002-print-pdf) ## Source details **Canonical URL:** [The Scalability of Credit-Enhanced EM Climate Debt — Executive Summary (wpiea2025002-print-pdf)](https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025002-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2025/english/wpiea2025002-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2025/english/wpiea2025002-print-pdf.pdf.json) --- ### Purpose and scope - Objective: discuss ways of attracting domestic and foreign private capital to EMDEs through credit-enhanced debt to finance the transition to a low carbon, climate-resilient economy. - Coverage: guarantees by MDBs, regional and national DFIs, catalytic capital, private sector support, and Debt-for-Climate swaps (DCSs); supply- and demand-side constraints; market-centered approach focused on market acceptance of credit-enhanced instruments. ### Key obstacles to scalable credit-enhanced issuances by EMDE issuers - Fragmentation of the investor space. - Fragmentation amongst guarantors. - Complexities and uncertainties associated with guarantees. - Focus on project-driven rather than programmatic and portfolio approaches. - Debt sustainability concerns. - Illiquidity often associated with idiosyncratic, one-off issuances. ### Assessment of the current system of guarantees - System benefits: - Has added notable value to investments in EMDEs and helped support EMDE sovereigns with difficult market access. - System limits: - Falls short of mobilizing the large-scale private sector funding required for EMDE climate transition. - Guarantee provision is fragmented: different objectives, constraints, and business models across providers produce fragmented product offerings. - Market scale and composition: - Market for worldwide cross-border guarantees exceeds USD900 billion in outstanding guarantees (Berne Union data), with the majority going to EMDEs or projects in EMDEs; data coverage is partial and methodology changed in 2019. - New originations: China’s share moved from 4 percent in 2020 to 7 percent in 2021 then declined to 1 percent in 2023; EMDEs ex. China’s share increased from 62 percent in 2021 to 73 percent in 2023 (Berne Union data), though no clear trend is discernible. ### Findings on investor preferences and market dynamics - Investors prefer simple, standardized instruments that are easily analyzed and replicated to increase secondary market bidding and liquidity. - Persistent investor segmentation: IG vs. HY, EM vs. non-EM, structured product specialists — will constrain adoption of credit-enhanced debt in the medium term. - Many investors require an IG credit rating; the capital pool for sub-investment grade HY debt is far smaller than for IG debt. - Hedging FX risk for high-interest EMDE countries can be costly, negating advantages of hard currency financing (Global Infrastructure Facility (GIF)-IMF (2024)). - Adaptation projects are often considered less bankable than mitigation projects; mitigation is generally equated with bankability in this paper. ### Role, design, and limitations of guarantees and insurance - Distinctions: - Insurance usually conditional on prespecified events and often involves arbitration. - Guarantees typically unconditional and preferred by bond investors for uninterrupted coupon payments. - Partial guarantees: - Often used to preserve issuer “skin in the game”; reduce loss but do not necessarily improve liquidity. - Historical monoline insurers provided 100 percent coverage pre-GFC; such models (close involvement in structuring, unconditional coverage) could inform future initiatives. - Pricing examples: - Sovereign risk coverage premiums from 50 bps/year on are common. - MIGA’s loan guarantee “fees average approximately 1 percent per year but can be significantly lower or higher.” - Guarantee premiums can be due upfront, payable on a present value basis. ### Credit enhancement approaches surveyed - Four broad categories: - (i) guarantees and insurance; - (ii) collateralization; - (iii) climate securitizations; - (iv) layered climate funds. - Key features: - Guarantees and insurance can be at project or portfolio level. - Collateralization can support debt instruments or portfolios. - Securitizations convert illiquid EMDE climate loans into more liquid bonds and allow incorporation of credit enhancements; thematic securitizations (e.g., renewables) could increase investor appeal. - Layered funds and securitizations follow senior/mezzanine/subordinated structures where senior tranches attract total return investors and riskier tranches carry subsidy or catalytic capital. ### Collateralization: design elements and risks - Collateral types: - Self-collateralization (collateral purchased with issuance receipts) typically results in negative carry and raises gross debt accounting implications. - External collateral can be funded from issuer budgets, subsidized by MDBs/DFIs/donors, or provided by third parties at below-market rates. - Financial collateral characteristics: - High credit quality and very liquid; ideally uncorrelated or negatively correlated with issuer credit quality to avoid "wrong-way risk". - Custodied with a reputable custodian operating in a transparent legal framework (ICSD or custody bank). - Maturity of collateral ideally close to maturity of enhanced bond; currency alignment recommended. - Key risks: - Collateral frameworks relying on private custodians are untested in sovereign defaults and may face legal challenges delaying distribution. - Concessional pricing of MDB/DFI guarantees often cheaper than collateralization unless collateral is subsidized at low cost. - Accounting example: - To obtain USD1 billion via a self-collateralized issuance with a one-third collateralization ratio, USD1.5 billion is added to gross debt. ### Climate securitizations: potential and constraints - Benefits: - Risk-tranching can lower funding costs and finance portfolios across jurisdictions. - Can provide capital relief for MDBs and create additional lending headroom (AfDB examples). - Constraints to AE investor appetite: - Legal certainty on asset transfers, liquid capital markets, modified regulatory requirements, and competitive returns are needed. - AE private credit spreads (Spring 2024 context): private credit spreads in the U.S. over SOFR: 500-700 bps; spreads of AAA tranches of U.S. CLOs: approximately SOFR+150 bps. - Practical obstacles: - Limited AE investor familiarity, sparse historical loss data, lumpy underlying debt profiles, and regulatory capital penalties can reduce attractiveness. ### Costs, pricing, and market acceptance - Total return investors demand yield or spread premium for investing in credit-enhanced bonds above instruments already available in the market. - Residual uncertainty around guarantees and insurance (including arbitration and bespoke conditions) can cause an “uncertainty premium.” - Time and resources to analyze guarantees or insurance can be reflected in additional spreads demanded by investors. - Credit enhancements offer issuer benefits but carry explicit costs; issuers and guarantors should consider all-in costs when structuring enhanced debt. ### Recommended way forward and policy implications - Address fragmentation by streamlining and standardization of guarantee types (partial vs. full, minimum credit strength requirements for sovereigns, use of arbitration, etc.). - Transform bespoke, one-off issuances into standardized, sizable issuances focused on transparent, publicly traded bonds to enhance liquidity and enable large-volume issuances at low spreads. - Expedite guarantee review processes to align with private investor time frames and climate funding urgency. - Foster close coordination among guarantee providers (MDBs, DFIs, governments, private providers) to pool resources for scalable EMDE bond finance and design securities that benefit from co-guarantees. - MDBs and DFIs should assess costs and benefits of guarantees within a consistent framework distinguishing adaptation and mitigation finance and including climate, other environmental, and social indicators. - Develop, coordinate, and promote standardized product templates for credit-enhanced securities as a basis for repeat issuances; replicate at scale approaches with positive investor feedback and actively market them. - Consider thematic debt pools and securitizations (e.g., renewables) and use securitization to reallocate credit risk from DFIs and banks to capital market investors. - Expect a multi-year process to build a new fixed income sub-asset class; subsidies to guarantee fees or interest rates may need to be extended to EMDE-based issuers during market development. ### Structuring credit-enhancements: specific proposals - Simplicity, standardization, and speed-to-market are paramount for wide market acceptance. - Regulators and supervisors should consider if existing capital frameworks for banks and insurance companies related to climate-related debt are appropriate and ensure changes are based on underlying credit risks. - Explore securitizations to synthetically transfer risk from MDB/DFI loan books to private investors and for direct funding of non-sovereign climate loans. - Use layered funds and catalytic philanthropic first-loss capital to mobilize private investors while managing downside exposure. - Repacks (repackaging partially guaranteed debt into issuances based on standalone credits) can reduce complexity and align pricing closer to arbitrage-free market prices. - For LICs and market access-challenged countries, consider full guarantees for individual climate bond issuances to obtain notable uplift from CRAs; LICs would receive the most cost benefit from a full guarantee. - Develop targeted marketing: focus initial distribution on active investors and anchor investors, use non-deal roadshows and targeted outreach; expect passive investors to enter later. ### IMF Resilience and Sustainability Trust / Facility role - RST/RSF role: - RSF can currently provide up to USD48 billion in funding to about 143 eligible countries. - A country can receive between 75 to 150 percent of its IMF quota under RSF program, with an absolute cap of 1 billion Special Drawing Rights (about USD1.3 billion). - RSF loans: term of 20 years, with a 10 ½ year grace period; interest rates capped at 2 ¼ percent for some low-income countries. - As of end-October 2024, 20 RSF programs had been approved, USD9 billion committed, and USD2.5 billion disbursed. - Operational constraints: - RSF funds are provided to Governments and cannot be earmarked for specific projects. - Legal and governance frameworks must allow transfers and instruments (e.g., transfer of asset ownership to SPVs for securitizations). - RST convening role: - Uses project preparation facilities (PPFs), financing platforms, and capacity development to reduce informational asymmetries and create project pipelines. ### Case studies and illustrative transactions (selected factual highlights) - Argentina (1999): - Six Argentine zero-coupon bonds covered with successive maturity dates; each bond par amount USD250 million. - World Bank option: ask for repayment of Argentina new PCD within 60 days. - Argentina repaid the WB over five years, starting in 2005. - Ghana (2015): - USD1 billion bond issued in 2015 with a 40 percent first-loss World Bank guarantee. - Bond received a two notch upgrade from both Moody’s and Fitch. - Investors received four coupon payments; WB made a final payment of USD212 million to reach the USD400 million maximum under the guarantee. - Fitch estimated total payout to holders of this issuance could amount to up to 70 percent of nominal value versus ~55 percent recovery for other unsecured Ghana bonds based on market prices in early October 2024. - MIGA and reinsurance: - As of June 30, 2023, MIGA had reinsured 65 percent of its total notional coverage amount. - Ecuador’s 2023 debt-for-nature swap backed by a DFC guarantee was reinsured by 11 commercial reinsurance providers. - MIGA NH product: usually covers 95 percent, requires a 180-day waiting period; 86 percent of NH volume has occurred in middle- and high-income countries; 73 percent of NH volume has been reinsured. - AfDB Room2Run securitization: - Shifted mezzanine risk on a USD1bn portfolio; mezzanine risk protection covered US$152.5 million (2 to 17.25 percent tranche). - Created additional lending space of USD650m. - Transaction took four years to implement; no subsequent MDB securitizations consummated since 2018. - Allianz-FMO SDG Loan Fund: - Fund closed in November 2023 with size of USD1.1 billion. - FMO provided USD111 million in first-loss capital; USD25 million AAA first-loss unfunded guarantee from MacArthur Foundation. - Public-to-private capital mobilization ratio of the fund is 1:9. - Belize 2021 Debt-for-Nature Swap (trilateral example): - Superbond par amount USD553 million; repurchase price 55 cents on the dollar = USD330 million repurchase total. - Blue bond issued: USD364 million to repurchase Superbond, fund a USD24 million Conservation Endowment Fund, and provide USD10 million for a debt service reserve account. - DFC provided PRI, part reinsured by private reinsurers; BBIC beneficiary of reserve account and parametric insurance. ### Debt-for-Climate Swaps (Annex I) — structure, advantages, and limits - Core elements: - EMDE with market-access challenges or development partner cancellation of part of debt; sovereign commits to long-term environmental projects; structuring and monitoring organizations available; donors provide guarantees/insurance. - Mechanisms and variants: - Bilateral swap: debt to multilateral or bilateral creditor cancelled. - Trilateral swap: commercial debt repurchased with third parties (NGOs, philanthropies, banks). - Advantages: - Combine debt reduction with climate-positive investments; climate commitments often funded in local currency. - Limitations: - Complex, can take years to arrange; usually too small to meaningfully affect debt sustainability; idiosyncratic designs hamper adoption at scale. ### Credit Rating Agencies (Annex V) — role and implications for credit enhancements - CRAs as gatekeepers: - Major uses: regulatory capital inputs, index inclusion, asset allocation and risk limits. - Oligopolistic market structure: Moody’s, S&P, Fitch ~95 percent market share. - Ratings thresholds and investor behavior: - Major cliff at BBB- to BB+ (IG to HY); downgrades can cause large spread jumps. - Empirical relationships: - Spreads generally increase with lower ratings but distribution within notches is wide and skewed. - A spread cliff from BBB- to BB+ observed at end-2021 but not at end-2022 or end-2023; the BB- to B+ move shows consistent upward shifts. - CRA horizons and climate assessment: - Typical rating horizons around “three to five years,” with a “through the cycle” element. - Long-term benefits of climate investments unlikely to translate into rating improvements given CRA horizons; CRAs expect tangible evidence of benefits before modifying ratings. - Credit enhancements and uplift: - Fitch and Moody’s cap uplift for partially guaranteed sovereign issuances essentially at three notches. - S&P does not provide uplift for partially guaranteed sovereign debt (policy since 2013). - Historical trend: uplift magnitude from guarantees has declined over time (examples: Argentina 1999 very large uplift; Ghana 2015 two notches; Ecuador 2020 one notch from Fitch on a 75 percent IDB guarantee). - Sovereign restructurings: - Treatment of credit-enhanced bonds varies by negotiation; guaranteed tranches can outperform unsecured creditors in restructurings (Ghana 2015 example). *International Monetary Fund. Executive Summary, "The Scalability of Credit-Enhanced EM Climate Debt."* ### Executive Summary ...................................................................................................... ### Executive Summary ### I. Introduction - Indicates an introductory section (page 9) framing the analysis. ### II. EMDE Climate Funding Needs and Challenges - Identifies a dedicated section (page 9) focused on Emerging Market and Developing Economies (EMDEs) climate funding needs and challenges. ### III. Mobilizing Private Capital through Credit Enhancements - Overview (A) (page 10) - Credit Enhancement Approaches (B) (page 12) - i. Bond Guarantees and Insurance (page 12) - ii. Collateralization (page 23) - iii. Climate Securitizations (page 27) - iv. Layered Climate Funds (page 32) ### IV. Capital Market Considerations - A. The EMDE Investor Base: Who Buys What, Why, and How? (page 35) - B. The Role of Credit Rating Agencies (page 39) - C. The Role of Bond Indices (page 40) - D. The IMF’s Resilience and Sustainability Trust (page 40) ### V. Structuring Credit-Enhancements for EMDE Climate Debt: The Way Forward - A. Improving the Existing Framework (page 42) - B. Extending the Existing Framework (page 44) ### Annexes (topics and focal points) - Annex I. Debt-for-Climate Swaps (page 47) - Annex II. An Example of a Co-Guarantee: MIGA PRI Supported by an EBRD Liquidity Facility (page 49) - Annex III. The Cost of Bond Guarantees and Collateralization: Brady Bonds and the Ghana 2030 Bond (page 50) - Annex IV. A Market-Based Approach to Guaranteed and Collateralized Bonds Valuation (page 54) - Annex V. Credit Rating Agencies (page 55) ### Boxes (selected items listed in source) - Box 1. World Bank Bond Guarantees for Argentina (1999) and Ghana (2015) - Box 2. The Application of Co-Guarantees - Box 3. The AfDB’s Room2Run Securitization - Box 4. The AIIB’s Infrastructure Securitizations - Box 5. Selected Case Studies: Credit-Enhanced Layered Funds - Box 6. The IMF’s Resilience and Sustainability Trust - A V.1. Background on Credit Rating Agencies ### Figures (topics and focus) - Figure 1. Outstanding Global Cross-Border Guarantees - Figure 2. Global Cross Border Guarantee Volumes: New Originations - Figure 3. Selected Spreads/Discount Margins in the USD Fixed Income Markets - A I.1. Belize’s Debt-for-Nature Swap (2021) - A II.1. The Scatec Green Project Bond (Egypt) - A V.1. EMDE Spread Distribution by Notched Sovereign Ratings (BBB to B+) - A V.2. Spreads for Selected B Plus-Rated Countries ### Tables (topics and focus) - Table 1. Five Trilateral Debt-for-Nature Swaps - A III.1. Brady Bond vs. Eurobond Spreads for Selected Issuers - A III.2. Selected Spreads of the Ghana 2030 Bond vs. Comparators - A V.1. Credit Rating’s Changes around Debt Swaps - A V.2. Credit Ratings Changes for Enhanced Sovereign-Related Bonds ### Glossary (selected acronyms preserved verbatim as in source) - AAF African Agriculture Fund - ABS Asset-backed Security (/ies) - ADB Asian Development Bank - AfDB African Development Bank - AE Advanced Economy Country - AIIB Asian Infrastructure Investment Bank - AllianzGI Allianz Global Investors - AUM Assets under Management - BBIC Belize Blue Investment Corporation - bp basis point (one-hundredth of a percentage point, 1/10000) - BRD Development Bank of Rwanda - CBO Collateralized Bond Obligation - CLO Collateralized Loan Obligation - CRA Credit Rating Agency - DCS Debt-for-Climate Swap - CRS Congressional Research Service - DFC United States International Development Finance Corporation - DFI Development Financial Institution - DM O Debt Management Office - DNS Debt-for-Nature Swap - EIB European Investment Bank - EBRD European Bank for Reconstruction and Development - EC European Commission - EM BI J.P . Morgan Emerging Market Bond Index - EMDEs Emerging Market and Developing Economies - ESG Environmental, Social and Governance - EUR Euro currency - FCDO UK’s Foreign Commonwealth and Development Office - FDI Foreign Direct Investment - FI Financial Institution - FMO Nederlandse Financierings-Maastschappij voor Ontwikkelingslanden N.V. (Dutch Entrepreneurial Development Bank) - GBP Green Bond Principles - GFC Global Financial Crisis - GIF Global Infrastructure Facility - GoB Government of Belize - HY High Yield - IABS Infrastructure Asset-Backed Security - ICIEC Islamic Corporation for the Insurance of Investment and Export Credit - ICMA International Capital Markets Association - ICSD International Central Securities Depository - IDA International Development Association - IDB Inter-American Development Bank - IFC International Finance Corporation - IG Investment Grade - IMF International Monetary Fund - IPCC Intergovernmental Panel on Climate Change - IRR Internal Rate of Return - LCBM Local Currency Bond Market - LGD Loss given default - LIC Low Income Country - MDB Multilateral Development Bank - MIGA Multilateral Investment Guarantee Agency - NAIC National Association of Insurance Commissioners - NGO Non-governmental Organization - NH Non-honoring of Sovereign, Sub-sovereign, and State-owned Enterprises Financial Obligation Guarantees - OECD Organization of Economic Co-operation and Development - PBG Policy-based Guarantee - PCD Preferred Creditor Debt - PCS Preferred Creditor Status - PM Portfolio Manager - PPF Project Preparation Facility - PRI Political Risk Insurance - RSF Resilience and Sustainability Facility - RST Resilience and Sustainability Trust - SSA Sub-Saharan Africa - SDG Sustainable Development Goal - SIDA Swedish International Development Agency - SLB Sustainability-linked Bond - SMEs Small and medium-sized enterprises - SOE State-owned Enterprise - SOFR Secured Overnight Financing Rate - SPV Special Purpose Vehicle - TA Technical Assistance - TNC The Nature Conservancy - UoP Use of Proceeds - U.S. United States of America - USAID U.S. Agency for International Development - WB World Bank - WBG World Bank Group *IMF WORKING PAPERS The Scalability of Credit-Enhanced EM Climate Debt — INTERNATIONAL MONETARY FUND* ### Executive Summary ### Executive Summary ### Purpose and scope - Discusses ways of attracting domestic and foreign private capital to EMDEs through credit-enhanced debt to finance the transition to a low carbon, climate-resilient economy. - Explores potential for risk-mitigated products to help EMDEs, particularly low-rated countries, raise capital from public and private sectors and diversify investor bases. - Covers guarantees by Multilateral Development Banks (MDBs), regional and national Development Finance Institutions (DFIs), catalytic capital, private sector support, and Debt-for-Climate swaps (DCSs). - Analyzes both the supply of credit enhancements (institutions and instruments) and the demand-side constraints using a market-centered approach focused on market acceptance of credit-enhanced instruments. ### Key obstacles to scalable credit-enhanced issuances by EMDE issuers - Fragmentation of the investor space. - Fragmentation amongst guarantors. - Complexities and uncertainties associated with guarantees. - Focus on project-driven rather than programmatic and portfolio approaches. - Debt sustainability concerns. - Illiquidity often associated with idiosyncratic, one-off issuances. ### Assessment of the current system of guarantees - The current system has added notable value to investments in EMDEs and helped support EMDE sovereigns with difficult market access. - It falls short of mobilizing the large-scale private sector funding required for EMDE climate transition. - Guarantee provision is fragmented: different objectives, constraints, and business models across providers produce fragmented product offerings. - The market for worldwide cross-border guarantees exceeds USD900 billion in outstanding guarantees (Berne Union data), with the majority going to EMDEs or projects in EMDEs; data coverage is partial and methodology changed in 2019. - New originations: China’s share moved from 4 percent in 2020 to 7 percent in 2021 then declined to 1 percent in 2023; EMDEs ex. China’s share increased from 62 percent in 2021 to 73 percent in 2023 (Berne Union data), though no clear trend is discernible. ### Findings on investor preferences and market dynamics - Market participants prefer simple, standardized instruments that are easily analyzed and replicated, increasing secondary market bidding and liquidity. - Investor segmentation (IG vs. HY, EM vs. non-EM, structured product specialists) is persistent and will constrain adoption of credit-enhanced debt in the medium term. - Many investors require an IG credit rating; the capital pool for sub-investment grade HY debt is far smaller than for IG debt. - Hedging FX risk for high-interest EMDE countries can be costly, negating advantages of hard currency financing (Global Infrastructure Facility (GIF)-IMF (2024)). - Adaptation projects are often considered less bankable than mitigation projects; mitigation is generally equated with bankability in this paper. ### Role, design, and limitations of guarantees and insurance - Guarantees and insurance differ: insurance is usually conditional on prespecified events and often involves arbitration; guarantees are typically unconditional and preferred by bond investors for uninterrupted coupon payments. - Guarantees are often partial rather than full to preserve issuer “skin in the game”; partial guarantees can reduce loss but do not necessarily improve liquidity of claims. - Historical monoline insurers provided 100 percent coverage pre-GFC; many monoline approaches (close involvement in structuring, unconditional coverage) could inform future initiatives. - Guarantee premiums: sovereign risk coverage premiums from 50 bps/year on are common; MIGA’s loan guarantee “fees average approximately 1 percent per year but can be significantly lower or higher.” Guarantee premiums can be due upfront, payable on a present value basis. ### Credit enhancement approaches surveyed - Four broad categories: (i) guarantees and insurance; (ii) collateralization; (iii) climate securitizations; (iv) layered climate funds. - Guarantees and insurance can be provided at project or portfolio level; collateralization can support debt instruments or portfolios; securitizations and layered funds are portfolio instruments that can incorporate credit enhancements. - Securitization can convert illiquid EMDE climate loans into more liquid bonds and allow incorporation of credit enhancements; thematic securitizations (e.g., renewables) could increase investor appeal. - Layered funds and securitizations follow senior/mezzanine/subordinated structures where senior tranches attract total return investors and riskier tranches carry subsidy or catalytic capital. ### Costs, pricing, and market acceptance - Total return investors will demand a yield or spread premium for investing in credit-enhanced bonds above instruments already available in the market. - Residual uncertainty around guarantees and insurance (including arbitration and bespoke conditions) can lead investors and CRAs to require an “uncertainty premium.” - Even time and resources expected to analyze guarantees or insurance can be reflected in additional spreads demanded by investors. - Credit enhancements provide issuer benefits but come at explicit cost; issuers and guarantors should consider all-in costs when structuring enhanced debt. ### Recommended way forward and policy implications - Address fragmentation by streamlining and standardization of different guarantee types (partial vs. full guarantees, minimum credit strength requirements for sovereigns, use of arbitration, etc.). - Transform bespoke, one-off issuances into standardized, sizable issuances focused on transparent, publicly traded bonds rather than loans and private placements to enhance liquidity and enable large-volume issuances at low spreads and narrow bid-offer spreads. - Expedite guarantee review processes to better align with private sector investor time frames and climate funding urgency. - Foster close coordination among guarantee providers (MDBs, DFIs, governments, private providers and other stakeholders) to pool resources for scalable EMDE bond finance and design securities and funds that benefit from co-guarantees. - MDBs and DFIs should assess costs and benefits of guarantees within a consistent framework that distinguishes between adaptation and mitigation finance and includes climate, other environmental, and social indicators. - Develop, coordinate, and promote standardized product templates for credit-enhanced securities as the basis for repeat issuances; replicate at scale approaches with positive investor feedback and actively market them. - Consider thematic debt pools and securitizations (e.g., renewables) and use securitization to reallocate credit risk from DFIs and banks to capital market investors. - Be prepared for a multi-year process to build a new fixed income sub-asset class; subsidies to guarantee fees or interest rates may need to be extended to EMDE-based issuers during market development. *International Monetary Fund. Executive Summary, "The Scalability of Credit-Enhanced EM Climate Debt."* ### Box 1. World Bank Bond Guarantees for Argentina (1999) and Ghana (2015) ### Box 1. World Bank Bond Guarantees for Argentina (1999) and Ghana (2015) ### Case studies: Argentina (1999) - Guarantee structure: - Covered six Argentinean zero-coupon bonds with successive maturity dates on a rolling basis. - Each bond had a par amount of USD250 million. - The guarantee was revolving: once the first of the six bonds matured, the next bond in line would be covered. - Investor perception and rationale for confidence: - General investor perception was that Argentina would not default on the guarantee because: - Once an MDB guarantee has been exercised, it often becomes preferred creditor debt (PCD) of the country and will be outside the parameters of a debt restructuring. - In case of a default on one of the six guaranteed issuances, the WB had the option to ask for repayment of Argentina new PCD within 60 days. - After Argentina repaid the WB, the WB could reinstate the guarantee to cover the next bond in line. - Outcome: - Argentina defaulted on the zero-coupon bond that was fully covered; after paying out on the guarantee, the WB allowed Argentina to repay its new debt to the WB over five years, starting in 2005. - Reinstatement of any guarantees was revoked; rather than safeguarding all six zero-coupon bonds, only a single bond received protection. - Rating agencies' actions: - Initially assigned the nearest bond an AAA rating and elevated ratings of remaining bonds by three to five notches above Argentina's standalone country rating, attributing uplift to the guarantee's rolling nature. - Relevant notes from source: - The WB guarantee commits the issuer to fulfill a set of policy measures. - Another WB bond guarantee (Columbia, 2001) matured on schedule; neither WB nor the sovereign had to take default-related actions. - Definition: A “notch” divides an alphabetical rating into three sub-categories (example: Aa1, Aa2, Aa3). ### Case study: Ghana (2015) - Guarantee and issuance: - USD1 billion bond issued by Ghana in 2015 with support of a 40 percent first-loss guarantee from the WB. - The bond was the third and last PBG for a sovereign bond issued prior to end-2024. - The bond received a two notch upgrade from both Moody’s and Fitch. - Market pricing and subsequent events: - Market contacts noted this bond was issued expensively compared to other outstanding Ghana bonds. - After Ghana’s sovereign default in late 2022, observers noted uncertainty associated with the guarantee and its treatment in an incipient debt restructuring. - The bond was restructured with other sovereign bonds governing its bonds under collective action clauses in October 2024. - Payments and guarantee redemption: - Under the terms of the guarantee, investors benefited from four coupon payments. - The WB made a final payment of USD212 million to reach the maximum total payment of USD400 million possible under the guarantee. - The remaining unprotected part of the guaranteed bond was treated in the restructuring like other senior unsecured debt of Ghana, as envisioned when Fitch and Moody’s rated the bond in 2015. - Recovery estimates and comparisons: - Fitch estimated the total payout to holders of this issuance could amount to up to 70 percent of nominal value. - This 70 percent estimate was significantly more than the 55 percent recovery that holders of other unsecured Ghana bonds were likely to have recovered based on market prices in early October 2024. - Observations: - Owners of a guaranteed bond might believe it advantageous to impede a debt restructuring until the maximum guarantee amount has been paid out; ex-ante certainty on this issue is highly desirable. - The Ghana 2015 outcome illustrated that partial guarantees can lead to guaranteed tranches outperforming unsecured creditors in restructurings. ### Market perceptions, ratings, and game-theoretic considerations - Rating and market effects: - Guarantees can lead to substantial notching uplifts for guaranteed issuances relative to sovereign standalone ratings. - The rolling nature of a guarantee can lead to elevated ratings for subsequent bonds based on perceived continuity of protection. - Game-theory lens on decision-making: - Key factors affecting decisions by issuer and guarantor: severity of the sovereign’s financial distress, total amount of guaranteed bond, and scale of the guarantee. - Outcomes depend on analysts’ information and subjective interpretations; the spread premium charged on issuance depends on the minimum spread at which the marginal investor wants to invest. - Behavioral incentives: - Guaranteed bondholders may delay restructuring actions until maximum guarantee payments are triggered, affecting restructuring dynamics. ### MIGA, private insurers, and reinsurance statistics - Private insurers and reinsurance: - Private insurance companies have expanded PRI activities notably since the 1990s. - Expanded provider base allows investors to select an insurer according to cost, speed of approval, and other criteria. - Reinsurance examples and statistics: - As of June 30, 2023, MIGA had reinsured 65 percent of its total notional coverage amount. - Ecuador’s 2023 debt-for-nature swap backed by a DFC guarantee was reinsured by 11 commercial reinsurance providers. - MIGA NH (non-honoring) product: - NH protects lenders against risk of an unconditional payment obligation not being honored, usually covering 95 percent of such an obligation. - NH requires a 180-day waiting period and is not subject to arbitration. - Objective: provision of long-term debt financing to EMDE sovereigns and SOEs. - Country eligibility requires exceeding a minimum score on MIGA’s proprietary sovereign credit scale. - NH is appealing to banks because NH guarantees are often accorded zero-risk weights under Basel III. - 86 percent of NH volume has occurred in middle- and high-income countries. - 73 percent of NH volume has been reinsured. - Potential to extend NH usage: - Increased NH use could help MIGA target climate and IDA countries. - Current constraints: NH coverage is provided for project-related debt only, not sovereign debt. - Options to increase coverage for IDA countries include relaxing credit rating requirements or mitigating via third-party guarantees or collateralization. - Trade-off: third-party guarantees or collateral could contravene MIGA’s intent not to provide financing close to market rates to countries with low debt-carrying capacity. - Guarantees to riskier borrowers might be harder to re-insure and require higher fees. ### Halo effect of MDBs/DFIs and pricing implications - Three drivers of the “halo effect”: - Participation by an MDB provides a “seal of quality.” - MDBs intermediate relationships between stakeholders and local authorities. - MDBs can be a positive influence when projects run into problems. - Empirical support: - MDB-supported projects are on average higher quality, better selected, and better prepared. - Consequences for guarantee pricing and creditor behavior: - MDBs’ preferred creditor status benefits creditor positions; if an MDB’s guarantee is called, the amount paid typically becomes PCD of the country. - This dynamic allows MDBs to charge low guarantee fees since they expect not to be subject to haircuts. - Borrowers are disincentivized from defaulting on obligations to members of the WBG to preserve relationships. - Similar incentives apply to DFIs; creditor countries may avoid jeopardizing cooperation with DFIs. ### Debt swaps, co-guarantees, and scalability - Debt swaps: - Debt-for-nature and trilateral debt swaps repurchase commercial debt with involvement of third parties; combine debt reduction with nature/climate impact. - Debt swaps are complex and can take years to set up. - They are usually too small to meaningfully affect debt sustainability and thus may not be appropriate for every borrower. - Criticisms: nontransparent, potentially high costs, idiosyncratic designs hamper adoption at scale. - Co-guarantees and liquidity facilities: - Combining guarantees from multiple providers can combine resources, complement guarantee types, or provide capital relief for guarantors. - Example: Barbados’s 2022 debt swap co-guaranteed by IDB and The Nature Conservancy (TNC). - Co-guarantees help overcome fragmentation in guarantee supply and can improve scalability and reduce issuance costs. - Co-guarantees and liquidity facilities close coverage gaps while exposing investors to a single counterparty, bolstering scalability of guaranteed debt issuances. - Capital relief transactions: - Can reduce regulatory capital requirements and allow banks to increase loans with positive environmental and social impact to EMDEs. - Market participants (hedge funds, pension funds, institutional investors) have assumed high-risk portions of loan books since the GFC. - Example: 2024 risk transfer of a £1.1bn energy loan portfolio from a bank to an investment fund illustrating capital relief enabling energy transition financing. ### Relevant numerical and factual highlights - Argentina guarantee: six zero-coupon bonds, each USD250 million par. - Argentina WB option: ask for repayment of new PCD within 60 days. - Argentina WB repayment arrangement: Argentina repaid over five years, starting in 2005. - Ghana issuance: USD1 billion bond issued in 2015 with a 40 percent first-loss WB guarantee. - Ghana rating response: two notch upgrade from both Moody’s and Fitch. - Ghana guarantee payouts: investors received four coupon payments; WB made a final payment of USD212 million, reaching USD400 million maximum payment under the guarantee. - Recovery estimates (October 2024 market context): guaranteed issuance payout up to 70 percent of nominal value; other unsecured Ghana bond recovery likely 55 percent. - MIGA reinsurance: 65 percent of total notional coverage reinsured as of June 30, 2023. - Ecuador 2023 DFC-backed swap reinsured by 11 commercial reinsurers. - MIGA NH product: covers usually 95 percent, requires 180-day waiting period, 86 percent of NH volume in middle- and high-income countries, 73 percent reinsured. - Notching: “notch” subdivides alphabetical ratings into sub-categories (example Moody’s Aa1, Aa2, Aa3). _Italic: Sources: IMF staff, conversations with market participants, and press reports_ ### Box 2. The Application of Co-Guarantees ### Box 2. The Application of Co-Guarantees ### Co-guarantees and liquidity facilities: examples and mechanics - Combining insurance and guarantees or adding a liquidity facility can improve the credit worthiness of a bond. - Examples: - IDB’s liquidity facility pays up to six quarterly coupons on the Galapagos Blue Bond, supported by DFC insurance and financing Ecuador’s 2023 DNS (Columbia Threadneedle (2023)). - EBRD liquidity facility supporting MIGA’s insurance policy for a hospital bond in Turkey (EBRD (2016), Standard and Poor’s (2018)). - EBRD credit-enhancement facility backing a MIGA PRI policy for a bond financing six Egyptian solar power plants (Annex II; EBRD (2022)). - Guarantees coupled with anchor investments by MDBs and DFIs have been used beneficially for securitizations and layered funds. ### Africa Co-Guarantee Platform (CGP) and notable transactions - CGP was set up in 2018 under AfDB guidance together with five other African supranational organizations to "bring together major guarantee and insurance providers for trade and investment, creating synergies and scale" (AfDB (undated)). - As of late 2022: - CGP pipeline included 20 projects worth more than USD12 billion and was working on backstopping African government sovereign bond issuances (AfDB (2022b)). - ICIEC provided an almost 50 percent backstop to a EUR400 million partial guarantee extended by the AfDB towards a EUR533 million bank loan funding environmental and social projects in Côte d’Ivoire (ICIEC (2024)). - This transaction combined risk-transfer and risk-sharing, with the lender only facing the AfDB as its counterparty. ### Structuring co-guarantees to match different risk-return targets - Co-guarantees can accommodate providers with different risk-return targets via layered (first-loss / second-loss) designs and attachment point adjustments. - Example mechanics: - Entity A provides a first-loss loan guarantee; Entity B provides a second-loss guarantee. - If entity A deducts exposure linearly from capital but entity B uses a risk-based approach, modifying B’s lower and upper attachment points can optimize coverage ratios and combined fee outcomes. - MIGA (housing WBG guarantee products since July 2024) uses such approaches; Traditional IBRD guarantees are combined with MIGA products to design fee-minimizing guarantee portfolios in consultations with banks. ### Capital optimization, philanthropic first-loss, and Room2Run - MIGA’s capital optimization product reduces risk weights for deposits subsidiaries hold at EMDE central banks; example: USD1.85 billion transaction for HSBC Mexico approved at the end of 2023 (MIGA (2023b)). - MacArthur Foundation provided a USD25 million, AAA rated first-loss unfunded guarantee to FMO for losses in its junior USD111 million tranche of the FMO SDG Loan Fund, lowering FMO’s capital requirements. - AfDB’s 2022 Room2Run deal: - Transferred risks on USD2 billion of sovereign loans to three commercial insurers with a 20 percent share and the UK’s FCDO taking the remainder (ODI (2022)). - New lending enabled by capital relief was committed to climate finance, split evenly between adaptation and mitigation. ### Guarantee of a guarantee and catalytic capital - Guarantee-of-a-guarantee can address investor lack of confidence in a first guarantee (example: MIGA NH guarantee in 2017 for Hungary’s case). - Catalytic capital can be employed outside guarantees to attract private capital without taking first-loss positions: - UAE’s Altérra uses first-in, capped-out capital to seed PE funds for climate projects; Altérra caps returns at 6 percent per annum. - African Agriculture Fund (AAF) used three share classes; class C received a 6 percent IRR per annum and full return of capital before class A received payouts. The AAF targeted an IRR of 17 percent. ### Ratings uplift and coverage ratios - Ratings uplift from guarantees: - S&P does not provide uplift for partially guaranteed sovereign debt. - Moody’s and Fitch cap uplift for partially guaranteed sovereign issuances essentially at three notches (Moody’s (2022), Fitch (2024a)). - Ecuador’s 2035 social bond received a one-notch upgrade from Fitch with a 75 percent IDB guarantee. - To receive a high IG rating (e.g., AA or better) a full guarantee would likely be required with the issuance then receiving the guarantor’s rating (Table A V.2.). - Coverage ratios observed in practice range from 15 to 100 percent of an obligation. - Project-related debt typically implies some "skin in the game" for guarantee recipients. - Sovereign blue bonds as part of DNSs received full coverage through DFC insurance; such high coverage does not necessarily yield a high mobilization ratio. - For issuers with market access and spreads about 200 bps or less over U.S. Treasuries or the Euro Mid-Swap rate, careful economic assessment of guaranteed issuance is advised. ### Debt sustainability and transparency - Guaranteed and collateralized debt generally carries non-concessional interest rates above risk-free USD or Euro rates. - Issuers and guarantors should ensure proceeds from credit-enhanced debt finance mitigation and adaptation projects that provide sufficient economic benefits to service the new debt, and communicate this to creditors and CRAs. - Investors and CRAs will consider total debt and subordination exposure from guarantees that, when exercised, will result in principal credit damage (PCD). - Governments receiving guarantees and guarantors (MDBs, DFIs, governments) should be transparent about guarantees received or extended, including modalities—especially when the beneficiary government is itself a guarantee provider. ### Collateralization: definitions, types, and key design elements - Collateralization permits investors to take possession of borrower assets upon default; collateral can be partial or full and may exceed loan amount plus unpaid interest. - Self-collateralization: collateral purchased with receipts from the issuance itself; typically results in negative carry. - Drawbacks: gross debt counts toward IMF calculations (example: to obtain USD1 billion via a self-collateralized issuance with a one-third collateralization ratio, USD1.5 billion is added to gross debt). - Self-collateralized issuances require larger issuances and more collateral than externally funded collateral. - External collateral can be funded from issuer budgets, subsidized by MDBs/DFIs/donors, or provided by third parties at below-market rates. - Financial collateral characteristics: - Should be high credit quality and very liquid. - Ideally uncorrelated or negatively correlated with issuer credit quality to avoid "wrong-way risk." - Should be custodied with a reputable custodian operating in a transparent, reliable legal framework (ICSD or custody bank). - Maturity of collateral ideally close to maturity of enhanced bond; currency alignment recommended to avoid hedging complexity. - Collateralization modalities: - Bilateral collateralization: direct borrower-lender transactions. - Triparty collateralization: third-party collateral agent safekeeps a securities portfolio and selects collateral; portfolio approach may be inappropriate if issuer cannot or will not replenish collateral. - Using FX reserves as collateral raises legal and operational issues (FX reserves are central bank property; securities used as collateral cannot serve as FX reserves anymore). - Advantages and risks vs guarantees: - Collateral can be immediately available upon default (no arbitration delay) but exposed to valuation changes if not replenished. - Guarantees require continued high credit quality of guarantor; MDB/DFI guarantees likely less affected by issuer stress. - Collateral frameworks relying on private custodians are untested in sovereign default contexts and may face legal challenges delaying distribution (ICSD example: eight days to distribute certain repo collateral after Lehman bankruptcy). - Concessional pricing of MDB/DFI guarantees and insurance provides a cost advantage over collateralization, unless collateral is provided or subsidized at low cost. - Pricing and arbitrage considerations: - Based on a non-arbitrage approach, self-collateralized bonds are unlikely to work when total return investors face an issuer with already outstanding bonds seeking to minimize cost. - Self-collateralization may have a role where ratings drive investment or for issuers with no existing bonds outstanding. - Alignment with market standards: - Self-collateralization of Use-of-Proceeds (UoP) bonds may conflict with ICMA principles that require 100 percent of issuance receipts be spent on eligible projects. - Quasi-sovereign example: - Development Bank of Rwanda (BRD) SLB (September 2023): USD10 million of concessional IDA funding on-lent to BRD to purchase Rwandan government bonds used as collateral; leveraged collateral 2.5 times. Followed by a second tranche in October 2024, also partially credit-enhanced through a WB lending operation. ### Climate securitizations: potential, constraints, and examples - Securitizations can lower funding costs via risk-tranching, finance portfolios across jurisdictions, and facilitate third-party credit enhancements. - Generic securitization structure centers on an SPV holding a portfolio of assets funded by issuance of tranched securities. - Potential uses for climate finance in EMDEs: - Fund project loans. - Fund loans to sovereigns (e.g., support for small island developing states). - Provide capital relief for MDBs (example: AfDB securitizations used to synthetically transfer credit risk and create additional lending headroom). - AfDB Room2Run: securitization synthetically shifted USD152.5 million of mezzanine risk related to 45 private sector loans, creating space for USD650 million of additional lending. - Conditions needed to attract AE-based private-sector investors at scale: - Legal certainty regarding asset transfers and sales. - Liquid capital markets. - Modified regulatory requirements. - Competitive returns. - Challenges: - AE investors demand legal certainty on property transfers and timely judicial adjudication. - Regulatory capital requirements in AEs can penalize securitizations relative to other exposures, dampening demand. - EMDE securitizations must compete with AE assets, HY bonds, AE CLO AAA tranches, and private credit; example spreads cited for Spring 2024: - Private credit spreads in the U.S. over SOFR: 500-700 bps. - Spreads of AAA tranches of U.S. CLOs: approximately SOFR+150 bps. - Limited AE investor familiarity, sparse historical loss data, and lumpy underlying debt profiles reduce attractiveness. *Source: IMF staff, Box 2. The Application of Co-Guarantees, IMF Working Paper "The Scalability of Credit-Enhanced EM Climate Debt."* ### Box 3. The AfDB’s Room2Run Securitization ### Box 3. The AfDB’s Room2Run Securitization ### Transaction overview and structure - Originated in 2018, Room2Run was the first synthetic securitization of MDB assets at the portfolio level. - The transaction shifts mezzanine risk on a USD1bn portfolio of pan-African private-sector loans to private investors. - The reference portfolio consists of 45 loans from AfDB’s non-sovereign lending book, spread among 16 African nations and 13 industry classifications. - Mezzanine risk protection was provided on the 2 to 17.25 percent tranche of the reference portfolio, amounting to US$152.5 million. - In exchange for mezzanine risk protection, AfDB will pay investors a floating rate plus spread. - The transaction creates a risk capital reduction for AfDB, which translates into additional lending space of USD650m. - By structuring the transaction as a synthetic securitization, the AfDB remained the lender of record and maintained its relationship with the borrowers, preserving operational benefits of having one counterparty as well as the Preferred Creditor Status (PCS) and the halo effects stemming from MDB lending. ### Implementation process and actors - The transactions took four years from start to finish and involved close cooperation between the AfDB, the EC, the bookrunner, and two anchor investors while developing the transaction. - With MDBs not subject to regulatory oversight, the credit rating agency S&P had a central role in the transaction through its assessment of the capital relief that the deal provided the AfDB with. ### Market and economic constraints observed - Despite expectations that other MDBs would follow, no additional securitizations of MDB assets have been consummated since 2018. - MDB loans typically charge interest rates at below market rates; therefore interest rate subsidies would often be required to place securitization bonds with investors. - The originating MDB or donors would have to fund the needed subsidy, so the need for capital relief has to be significant for such a transaction to be undertaken. - In 2022 the AfDB transferred the risk on USD2 billion of sovereign loans using a direct risk transfer to three commercial insurers and the UK’s Foreign Commonwealth and Development Office (FCDO) rather than the securitization markets, in a deal also called Room2Run. ### Comparative experience and design features relevant to MDB securitizations - The Asian Infrastructure Investment Bank (AIIB) has successfully engaged in securitizations of infrastructure loans: - AIIB anchored a first Infrastructure Asset-Backed Security (IABS) issuance in June 2021 with USD60 million. - AIIB anchored a second IABS with USD80 million. - The 2021 securitization featured the world’s first publicly issued securitization sustainability tranche backed by eligible green and social assets. - Features that helped the AIIB-supported IABS overcome challenges included: - (i) assets underlying the securitization were loans to private-sector borrowers, issued with market-like interest rates; - (ii) the loans were of relatively high quality, mainly originated in middle- and high-income countries; - (iii) loans issued in countries with speculative grade ratings benefited from significant credit enhancements. - The 2023 transaction also benefited from an anchor investment of the UK’s FCDO. ### Investor, rating agency, and liquidity considerations - Securitizations are treated differently by the CRAs for ratings purposes than other debt and appeal to a different investor base than plain bonds, affecting their cost and liquidity. - CRAs view securitizations through their securitization frameworks, which account positively for the diversification effects of the asset portfolio, guarantees, and liquidity facilities. - The highly rated tranches of a securitization will attract investment-grade investors, but many of those investors perform in-depth analyses of structural and legal properties, underlying assets, and guarantees. - Securitizations involving EM assets may span distinct groups of portfolio managers and analysts at many asset management firms, leading investors to demand additional risk and analysis premiums. - The bespoke nature of securitizations makes them generally less liquid than comparable plain vanilla bonds. *Sources: PRI (2019), Kotecha (2022), ODI (2022), Risk Control (2019)* ### Box 5. (continued) ### Box 5. (continued) The Allianz-FMO SDG Loan Fund ### Fund structure, capital contributions, and lifecycle - The fund closed in November 2023 with a size of USD1.1 billion. - FMO provided USD111 million in first-loss capital to the layered fund. - Another USD1 billion was committed to the senior tranche by other investors, including Allianz and Skandia. - FMO’s capital contribution benefits from a USD25 million, AAA rated first-loss unfunded guarantee from the John D. and Catherine T. MacArthur Foundation. - FMO operates under European Union banking regulations that impose heavy bank capital charges for what it considers an equity position in a securitization; the MacArthur guarantee provided notable capital relief for FMO. - The fund will take participations in loans originated by FMO; FMO is the portfolio manager and AllianzGI is the alternative investment fund manager. - The fund will end in 25 years, with a weighted average life of the senior tranche of 7–8 years. - The public-to-private capital mobilization ratio of the fund is 1:9. ### Legal and operational parallels with MDB/IFI risk-sharing approaches - The fund follows the risk sharing approach pursued by the IFC through its loan syndication programs, where institutional investors participate in returns of IFC lending and can benefit from IFC immunities and privileges for its loan book. - The IFC’s and other MDBs’ sales of loan participations are financially similar to the SDG Loan Fund’s operation, though they use different legal structures. ### Investment guidelines and constraints (summary of fund restrictions and investor behavior) - Investment guidelines restrict mainly regional, individual country, and credit risk exposures, including prohibitions on investing in: - Countries on an exclusion list containing 12 countries; - Countries that score highly with regards to corruption; - Countries on a list of high-risk countries maintained by Crédit Agricole (except if the PM determines otherwise). - Only securities listed on a regulated market that carry a credit rating by a major CRA are eligible for purchase. - Constraints are augmented by concentration constraints to limit regional, sovereign, and single issuer exposures, and additional provisions. ### Implications for the investor base and fixed income market fragmentation - The fixed income investor base is fragmented into IG and HY, emerging market and non-EM, structured product specialists, sustainability-focused and general investors, among other categories; CRAs, index providers, and consultants influence asset manager and end investor decisions. - Fragmentation is rooted in fixed income market complexity requiring specialized skills; portfolio managers face explicit and implicit restrictions from end investors, encouraging risk aversion toward new products. - Distinct groups of asset managers (IG vs HY; active vs passive) have differing risk tolerance, producing non-linear demand for EMDE bonds and complicating clear conclusions on demand for credit-enhanced EMDE bonds. - Institutional demand and pricing for EMDE fixed income are significantly affected by regulatory and institutional rules that generally result in high risk aversion for banks, insurance companies, and pension funds. - The traditional 60:40 asset allocation model in AEs disadvantages EMDE bonds because the 40 percent fixed income allocation is usually filled with high-quality bonds like AE sovereign debt to preserve negative correlation with equities. - Regulatory constraints, high perceived risk, and behavioral biases have led European insurers and pension funds to invest far less in EMDEs than they could. - Regulatory reforms could be preconditions for greater investments in EMDEs by these institutions, but the magnitude of potential increases is unclear. ### Competition for EMDE debt and spreads context - EMDE sovereign debt faces competition from AE-domiciled HY bonds and the “private credit” asset class. - Private credit funds can average spreads of about 500 and more above SOFR. - Spreads of B rated sovereigns with market access stood at 453 bps as of end-August 2024. - Figure context: Selected spreads/discount margins in the USD fixed income markets (bps; as of 8/31/2024), with CLO and leveraged loan data as of 7/31/2024. ### Investor segmentation effects on credit-enhanced securities uptake - Active managers benchmarked to the investment grade Bloomberg U.S. Aggregate Index may prefer U.S. corporate bonds or mortgages over EMDE credit-enhanced bonds. - Passive funds may not hold many bonds included in their benchmark due to impracticability of buying all issues; example: Vanguard Total Bond Market Index Fund with more than USD302 billion in AUM contained 11,220 bonds as of June 30, 2024, 2,397 (about 18 percent) less than its benchmark, the Bloomberg U.S. Aggregate Index. - Dedicated EMDE bond investors express reservations about credit-enhanced debt because: - It reduces exposure to the issuer by design, resulting in reduced carry and lower returns during a rally compared with the issuer’s standalone credit. - Enhanced bonds usually outperform during sell-offs but many managers prefer flexible portfolio adjustments aligned with proprietary models. - Adoption of credit-enhanced debt is impeded by required investor skills, segmentation of investor space, and potential loss of original EMDE investors if a HY standalone credit becomes IG via enhancement. - Some investors view fully guaranteed EMDE debt as high-quality debt of the guarantor but note shortcomings; dedicated EMDE investors generally are uninterested because yields are often below the issuing countries’ plain debt yields. Fully guaranteed EMDE climate debt can nonetheless offer yields often far above guarantor plain debt yields. ### Investor types likely to favor de-risked instruments or layered funds - Natural investors in de-risked instruments or layered funds include investors with sustainability mandates but low risk-taking capacity and limited investment capacity, e.g., smaller or medium-sized endowments or pension plans that typically: - Lack budget for requisite staff expertise to analyze credit risk and sustainability credentials; - Have low risk tolerance related to capacity limits, regulation, and public scrutiny; - Face regulations and stakeholder pressures to make climate investments, including in EMDEs. - Funds provide diversified EMDE exposure with reduced downside risk and reduced volatility if liabilities are not marked-to-market. - Example: The AP EGO fund had almost half of its investors being European pension funds. ### Sustainability information needs and conditionality - Investors with sustainability mandates require reliable information about countries’ climate goals and specific bonds’ support for climate adaptation and mitigation. - A lack of sufficiently ambitious climate targets and reliable and standardized data and reporting in EMDEs is a reported factor holding back investments. - Sustainable investors need in-depth information about climate outcomes associated with investments to assess success. - Example: The Galapagos blue bond issued as part of Ecuador’s 2023 debt-for-nature swap allows investors to declare an event of default if Ecuador repeatedly fails to abide by its nature commitments under the swap. ### Constraints from social and governance criteria among large AE pension funds - Some large AE pension funds conduct EMDE investments and analysis in-house with ESG compliance, yet may restrict EMDE investments by imposing minimum human rights and governance credentials, concentrating investments mainly in large middle-income countries. ### Role of Credit Rating Agencies (CRAs) and indices - CRAs act as third-party assessors; ratings are used by regulators, asset owners, asset managers, and in fixed-income indices. - CRAs influence regulatory capital requirements, index inclusion boundaries, and asset owners’ asset allocation decisions and risk limits. - Ratings methods as well as ratings themselves are important and are often embedded in investors’ internal assessments. - The relation between spreads and ratings is imperfect; issuers with similar ratings can have quite different spreads, suggesting marginal investors are likely active EMDE investors. - Some stakeholders call for reevaluation of EMDE credit risk assessments and more comprehensive inclusion of positive effects of EMDEs’ climate investments; empirical evidence is inconclusive. - CRAs have noted that weather-related events due to global warming will likely be negative for most EMDEs given economic impacts and reconstruction costs. - Ratings actions around debt buybacks and exchanges have been criticized for harshness; “distressed exchange” and “selected default” concepts involve judgment and can discourage debt swaps. - Credit enhancements often lead to rating uplifts, varying by debt type and CRA: - On project and structured bond ratings, external enhancements can be incorporated and have positive effects. - Fitch and Moody’s have provided ratings uplifts for LGD reduction from multilateral guarantees; halo effects of MDB guarantees have been positive historically. - A three-notch uplift is currently the most Moody’s or Fitch will provide for partially enhanced sovereign debt. - Since 2013, S&P’s policy is to not provide any uplift on partially guaranteed sovereign bonds. - Analysis shows the impact of partial guarantees on sovereign EMDE bonds’ credit ratings has decreased over time. ### Index inclusion and investability - J.P. Morgan EM bond indices and Bloomberg Aggregate Indices are widely used portfolio benchmarks in fixed income. - Credit-enhanced sovereign bonds have been included in J.P. Morgan’s EM bond indices since October 2020; Bloomberg U.S. Aggregate Index includes USD-denominated credit-enhanced bonds with an IG rating. - For inclusion in J.P. Morgan EM indices, the credit enhancement must cover less than 50 percent of the debt obligation. - Index inclusion improves a bond’s investability significantly but does not guarantee large-scale adoption; small initial shares in benchmarks limit investor attention. - Significant issuance volumes that make credit-enhanced bonds a noticeable part of popular indices could establish them as a sub-asset class and attract meaningful portfolio flows, potentially lowering spreads to fair value. ### IMF Resilience and Sustainability Trust (RST) role (contextual linkage) - The IMF’s RST uses convening power to catalyze programmatic funding approaches at the country level centered on project preparation facilities (PPFs) and linked funding facilities, with MDBs, DFIs, and others providing TA and funding. - Under RST auspices, examples include: - Barbados establishing a Blue Green Bank; - Rwanda establishing a green investment facility (Ireme Invest). - The RST’s fiscal space allows governments to provide seed capital to such facilities alongside partners. - IMF-led coordination aims to reduce informational asymmetries, create project pipelines, and boost market confidence in governments’ climate investment plans, increasing private sector willingness to commit financially. *Sources: IMF staff* ### Box 6. The IMF’s Resilience and Sustainability Facility ### Box 6. The IMF’s Resilience and Sustainability Facility ### Facility design and terms - The RSF can currently provide up to USD48 billion in funding to about 143 eligible countries to reduce risks to their balance of payments. - RSF funding provides low-cost, long-term financing to participating countries undertaking reforms related to climate change and pandemic preparedness. - A country can receive between 75 to 150 percent of its IMF quota under RSF program, with an absolute cap of 1 billion Special Drawing Rights (about USD1.3 billion). - RSF loans are for a term of 20 years, with a 10 ½ year grace period, and carry concessional margins over the SDR short-term rate. - Interest rates are capped at 2 ¼ percent for some low-income countries. - RSF disbursements are typically completed within 36 months of commitment. - As of end-October 2024, 20 RSF programs had been approved, USD9 billion committed, and USD2.5 billion disbursed. ### Role in climate finance and catalytic potential - The IMF can play a catalytic role through policy advice, surveillance, program lending, and capacity development. - The IMF uses a three-pronged convening approach in each RST country: project preparation facilities, financing platforms, and capacity development, engaging Governments, MDBs, DFIs, donors, philanthropies, the private sector, and other stakeholders. - RSF funds are provided to the Government and can only support budget financing of the Government; they cannot be earmarked for specific projects. - RSF loans create fiscal space for Governments to fund climate projects by: - Substituting RSF funds for planned government climate investment funding to reduce financing costs; or - Utilizing fiscal space created by RSF to undertake additional climate investments or projects advancing pandemic preparedness. ### Operational constraints and governance considerations - RSF, like all IMF lending, is provided to the Government of the recipient country (not directly to projects). - Legal and governance frameworks must allow for transfers and instruments (e.g., transfer of asset ownership to SPVs for securitizations) and may require donor-supported technical assistance to improve bankruptcy courts and related institutions. - Guarantees should contain the least necessary optionality and, where co-guarantees are used, be structured so investors face a single counterparty to reduce uncertainty and complexity. - Credit-enhanced sovereign debt, while cheaper than non-enhanced debt, can still add to debt sustainability pressures, especially for countries flagged as being at high risk of debt distress. - Policymakers and MDBs/DFIs need to consider limited capacity to originate large numbers of high-quality projects in the short-to-medium term and potential effects on PCS treatment if MDBs move to originate-and-distribute models. ### Structuring credit-enhancements and scaling EMDE climate debt (key proposals and findings) - Simplicity, standardization, and speed-to-market are paramount for wide market acceptance of credit-enhanced debt. - Regulators and supervisors should consider if existing capital frameworks for banks and insurance companies related to climate-related debt are appropriate, ensuring changes are based on underlying credit risks. - Scaling credit risk transfer from banks to institutional investors, pension funds, and public-sector entities can increase system capacity to take EMDE climate finance risks. - Combining MDB/DFI credit risk transfers with their loan origination can expand loan books but faces principal and operational limits. - Securitizations: - Should be explored as tools for synthetic transfer of risk from MDB/DFI loan books to private investors and for direct funding of non-sovereign climate loans in EMDEs. - Can use both small and large loans spanning different countries, aiding projects in small states. - Convert non-tradable assets into tradable securitization tranches, lowering funding costs over the long term. - May require donor subsidies initially; need for subsidies expected to decrease as investor confidence grows. - Layered funds: - Operate with similar risk transfer/reduction mechanisms to securitizations but appeal to a narrower investor base and are likely less liquid and less scalable. - Avoid narrow trading boundaries to improve investor and CRA assessment. - Philanthropies can expand roles as providers of first-loss or catalytic capital by committing to subordinate tranches or guarantees to reduce risk weights and underpin new lending or guarantees by DFIs. - Repacks (repackaging partially guaranteed debt into issuances based on standalone credits) can reduce complexity and align pricing closer to arbitrage-free market prices. - Financial collateralized EMDE climate debt can be beneficial when enabling market access or when no other marketable debt exists; self-collateralization requires careful cost-benefit assessment. - Greater clarity from CRAs on ratings of partially guaranteed debt and multiple guarantees would benefit sustainable finance markets. - For LICs and countries with market access challenges: - Full guarantees for individual issuances of climate bonds or blue bonds should be considered to obtain notable uplift from ratings agencies; LICs would receive the most cost benefit from a full guarantee. - Portfolio-level guarantees can enhance broader EMDE debt portfolios. - Speed-to-market requirements for private investors imply MDB/DFI project-focused approaches must be augmented by scalable financing approaches that allow fast turnaround times. - Standardized product templates for credit-enhanced securities should be developed, coordinated by MDBs and DFIs, and replicated once investor-accepted designs emerge. - Close coordination among guarantee providers (including co-guarantees and co-investments) will bolster scalability; the World Bank Group Guarantee Platform (operational July 2024) is cited as a template for cooperation. - Marketing strategy for new credit-enhanced EMDE securities: - Focus initial distribution on active investors and anchor investors to create trailblazers. - Use non-deal roadshows and targeted outreach to MDB/DFI/sustainable investors, pension funds, and consultants. - Expect passive investors to enter later once the sub-asset class is established. - A medium-to-long term transition may require explicit subsidies for certain funding approaches until markets can function without MDB/DFI/public support. - Extend credit enhancements beyond sovereign debt to project-related and corporate climate debt to avoid worsening sovereign debt sustainability; securitization via collateralized loan obligations can provide scalable private funding channels. - To establish guaranteed climate bonds as a sub-asset class, a long-term approach is needed with recurring follow-on offerings, a set of potential issuers for future issuance, and possible subsidies for low-income countries until spreads on guaranteed issuances decline. *Source: Box 6. The IMF’s Resilience and Sustainability Facility (from the supplied PDF content).* ### Annex I. Debt-for-Climate Swaps ### Annex I. Debt-for-Climate Swaps ### Historical context and scale - Debt swaps first became a debt restructuring tool during the late 1980s and were executed at larger sizes with a focus on commercial bonded debt starting with Belize’s 2021 debt swap. - DNSs executed between 1989 and 2015 covered USD2.6 billion par value of debt, resulting in USD1.2 billion of nature-related spending. ### Definition and core elements of Debt-for-Climate Swaps (DCSs) - DCSs work similarly to DNSs, with future investments focused on climate projects. - Typical required elements: - An EMDE that faces market-access challenges (in cases when commercial debt is repurchased). - The ability to buy back some of the country’s FX-denominated debt at a discount, or a development partner willing to cancel part of the country’s debt. - The ability of the sovereign to commit to long-term environmental projects. - Availability of organizations that can help structure and monitor DCS performance. - Donors or development partners willing to make financial contributions in the form of guarantees or insurance. - Mechanism: the value of the issuer’s climate commitments is less than the savings from the debt swap, combining debt reduction with positive climate impact. ### Operational and structural considerations - Country-specific operational frameworks are required and can take a few years to arrange. - Swap types: - “Bilateral swap”: debt to a multilateral or bilateral creditor is cancelled. - “Trilateral swap”: commercial debt is repurchased with involvement of third parties like NGOs, philanthropies, and banks. - Bilateral DCSs can be easier to execute since financing or external guarantees usually do not have to be secured, and market reactions do not have to be considered. - Common operational features of trilateral swaps: - Setup of an entity in the debtor country that oversees implementation of climate projects. - New debt issued as part of a trilateral operation should be less than the amount extinguished and carry notably lower interest rates than market rates for the borrower. - Typical flow: country owes new debt to an SPV; the SPV issues debt purchased by external investors; proceeds fund repurchase of original debt. - A bank supports trilateral swaps by conducting bond repurchase and finding investors for SPV-issued debt. ### Belize 2021 Debt-for-Nature Swap — case example (trilateral) - Context: Belize had stopped making coupon payments on its sole outstanding Eurobond (“Superbond”), which traded around 40 cents on the dollar of par value for most of 2021. - Key financial facts: - Superbond par amount: USD553 million. - Repurchase price: 55 cents on the dollar = USD330 million repurchase total. - A blue bond in the amount of USD364 million was issued to repurchase the Superbond, fund a Conservation Endowment Fund (USD24 million), and provide the first USD10 million funding for a debt service reserve account. - The reserve account was funded with an initial payment of USD10 million from the bond issuance. - Institutional and risk-mitigation features: - The blue bond was issued by an entity set up by Credit Suisse to raise funds from and distribute funds to blue bond holders (Platinum Securities Ltd.). - A TNC-operated SPV (Belize Blue Investment Corporation (BBIC)) received issuance receipts and transferred them to the Government of Belize (GoB). - The DFC provided PRI, part of which was reinsured by private sector reinsurers. - BBIC is beneficiary of a reserve account covering up to 24 months of interest payments while DFC’s PRI policy undergoes arbitration if activated. - BBIC is also beneficiary of a parametric insurance policy that can make one debt service payment (coupon and interest) if a hurricane fitting the policy’s conditions hits Belize. - Environmental/financial commitments (pillars): - Financial pillar and environmental pillar structure: - GoB committed to pay USD4.2 million (mostly in local currency) into an independent conservation fund over 20 years. - GoB provided USD24 million to fund a Conservation Endowment Fund, which will be invested and provide funding for the Conservation Fund after year 20. - Roles of participants: - Government of Belize (GoB), The Nature Conservancy (TNC), Credit Suisse, and DFC collaborated to structure repurchase and ensure environmental commitments. ### Variations and other country examples - Barbados’s 2022 DNS included guarantees by the IDB and TNC, and repurchase of local and FX-denominated debt, along with specific nature- and marine-related commitments. - Each DNS/DCS is case-specific and can vary across both financial and environmental pillars. ### Advantages and limitations of DCSs - Advantages: - Can lower debt burden while funding climate-positive projects. - Climate commitments from swaps are usually funded in local currency, reducing some FX risk associated with original external debt. - Can be viable for countries whose fiscal space is insufficient to pay for achieving nationally determined contributions. - Limitations: - DCSs are not necessarily the first-best choice for debt reduction and funding climate projects. - Most past debt swaps are too small to meaningfully affect debt sustainability and do not provide a long-term solution to issuers’ debt problems. - Alternative financing mechanisms (e.g., concessional loans or grants) can be superior for funding climate mitigation or adaptation projects. *Source: Annex I. Debt-for-Climate Swaps, wpiea2025002-print-pdf* ### Annex V. Credit Rating Agencies ### Annex V. Credit Rating Agencies ### Role and importance of CRAs - CRAs are described as gatekeepers of the bond markets and third-party assessors of an issuer’s ability to make good on debt service obligations, usually expressed on a qualitative scale from AAA to D. - Key uses of CRA assessments: - Inputs for regulatory capital requirements of banks, insurers, and pension funds. - Factors for security inclusion in fixed income indices. - Inputs into asset allocation decisions and risk limits imposed by asset owners on managers. - The issuer-pays business model and the oligopolistic market structure (Moody’s, S&P, Fitch together about 95 percent market share) create conflict-of-interest concerns and incentives for “agency-shopping.” ### Ratings scales, thresholds, and investor behavior - Major threshold: ratings moving from the BBB- or better category (investment grade, IG) to BB+ or below (high yield, HY). - HY bonds are managed largely by specialized managers; downgrades from IG to HY can cause large jumps in issuer spreads (the “ratings cliff”). - Internal credit assessments by investors are commonly couched in the CRA alphabetical scale; some investors adopt CRA principles such as sovereign ceilings or the lower-guarantor rule for fully guaranteed issuances. ### Empirical relationships between ratings, spreads, and market pricing - CRAs affect bond spreads beyond public fundamentals, but much of the market impact can occur prior to formal rating changes (e.g., “watchlist” actions cause spread moves). - Findings from EMDE sovereign spread analysis (end-2021, end-2022, end-2023): - Spreads generally increase with lower ratings, though not uniformly for adjacent notches. - Distribution of spreads for each rating notch is very wide and skewed to the right; the average spread is usually above the median. - Markets value EMDE sovereigns on their own merits; active investors are often the marginal, price-setting investors, particularly at the lower end of the ratings spectrum, while passive/index-driven flows may affect prices but do not necessarily set long-term issuer-level prices. - Specific empirical observations: - A spread cliff when going from BBB- to BB+ was observed only at end-2021, not at end-2022 or end-2023. - The most notable upward shift consistently across year-ends occurs when moving from BB- to B+, with means and medians of B+ exceeding BB- in the same year. - Time-series spreads for six B+ rated countries (Dec. 1, 2021 – Dec. 31, 2023) show significant variation over time and changes in issuer ordering, indicating CRA ratings are imprecise indicators of market-expressed credit risk. ### CRA horizons and climate-related credit assessment - CRAs’ rating horizons are currently around “three to five years,” with an additional “through the cycle” element intended to mute periodic business-cycle effects. - Implication for climate investments: - Long-term benefits of climate change mitigation and adaptation investments are unlikely to translate into rating improvements given the typical 3–5 year rating horizon. - CRAs have signalled that they expect tangible evidence of benefits from climate investments before modifying ratings; they also view the incidence and severity of weather-related events as generally negative for most EMDEs. ### Treatment of debt buybacks, exchanges, and distressed exchanges - CRAs use the concept of a “distressed exchange”; distressed exchanges often result in a “selected default” rating. - There is judgment and heterogeneity across CRAs when classifying exchanges as distressed; the same swap can be treated differently by different CRAs (examples cited: Belize, Ecuador). - Swaps generally have not led to large ratings improvements because they typically retire relatively small amounts of debt. ### Credit enhancements and ratings uplift - Credit enhancements (guarantees, liquidity facilities, subordination in structured project debt) often lead to ratings uplifts, with effects varying by debt type and CRA. - CRAs emphasize probability of default (PD) reductions more than loss given default (LGD) reductions, though LGD is more important for HY issuances. - Cross-CRA differences: - Fitch and Moody’s have provided uplifts for LGD reductions of multilateral guarantees; Moody’s/Fitch have provided up to a three-notch uplift for partially enhanced sovereign debt. - S&P has not provided any uplift on partially guaranteed sovereign bonds since 2013. - Historical cases show declining uplift magnitudes over time: - Argentina 1999: WB guarantee supported six zero-coupon bonds; the guarantee produced large uplifts (e.g., “11 notches” uplift for the nearest maturity). - Colombia 2001: USD1,000 million WB-supported bond received three and four notches of uplift. - Ghana 2015: USD1,000 million with a 40 percent WB guarantee received only two notches uplift from Fitch and Moody’s. - Ecuador 2020 social bond: USD400 million with 75 percent IDB guarantee received only one-notch uplift from Fitch. - Table and examples indicate that guarantees’ impact on sovereign ratings has decreased over time. ### Sovereign restructurings and credit-enhanced debt - Sovereign restructurings are negotiated processes—there is no formal national or international bankruptcy mechanism for sovereigns—so treatment of credit-enhanced debt depends on negotiation dynamics. - Outcomes can vary: - Some credit-enhanced bonds have been excluded or treated differently in restructurings (Ecuador’s 2035 social bond was left out of Ecuador’s 2020 restructuring). - In Ghana’s 2022 default, the WB-guaranteed Ghana 2030 bond ultimately received WB payouts and holders experienced higher recoveries than holders of other unsecured Ghana bonds; Fitch estimated payout to holders of the issuance could amount to up to 70 percent of nominal value versus ~55 percent recovery for other unsecured bonds based on market prices in early October 2024. ### Market structure, criticisms, and regulatory responses - The credit rating industry is an oligopoly dominated by three CRAs; new entrants (KBRA, DBRS, Scope) have made limited inroads and face the same issuer-pays conflict. - Criticisms of the CRA system include conflicts of interest and procyclicality; regulators have increased oversight post-GFC and implemented separations between sales and analytics, but core dependencies on CRA ratings remain. - Index providers and regulators’ reliance on CRA ratings contributes to cliff effects (e.g., regulatory thresholds that deter regulated institutions from purchasing lower-rated assets). *IMF Working Paper — Annex V. Credit Rating Agencies* ### References ### References ### Multilateral development banks, guarantees, and blended finance - ADB (2022), Strategic Management of Policy-Based Lending, 2022–2024, April. Available at: https://www.adb.org/sites/default/files/institutional-document/800521/strategic-management-policy-based-lending-2022-2024.pdf - AfDB (undated), Africa Co-Guarantee Platform, accessed on August 13, 2024. Available at: https://www.afdb.org/en/topics-and-sectors/initiatives-and-partnerships/africa-co-guarantee-platform - AfDB (2018), African Development Bank, Mariner Investment Group, and Africa50 Price Landmark $1 Billion Impact Securitization, September 18. Available at: https://www.afdb.org/en/news-and-events/african-development-bank-mariner-investment-group-and-africa50-price-landmark-1-billion-impact-securitization-18494 - AfDB (2022a), African Development Bank, United Kingdom and London Market Insurers enter new risk transfer partnership for climate action, October 20. 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Available at: https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/articles/triparty-repo-brochure.pdf.coredownload.pdf - Buchheit, Lee, Chabert, G., DeLong, C., and Zettelmeyer, J. (2019), The restructuring process. In: S. Ali Abbas, Alex Pienkowski, Kenneth Rogoff (eds.) Sovereign Debt: A Guide for Economists and Practitioners October 17. Available at: https://academic.oup.com/book/35147 - Buckberg & Kaune (1996), The Brady-Euro Yield Differential Debate: Why Arbitrage is Infeasible, November. Available at: https://archivescatalog.imf.org/Details/archive/125124666 - Fitch (2000), Fitch Upgrades Argentina World Bank Gtd Ser B Notes To 'AAA', October 18. Available at: https://www.fitchratings.com/research/sovereigns/fitch-upgrades-argentina-world-bank-gtd-ser-b-notes-to-aaa-18-10-2000 - Fitch (2023), Sovereign Rating Criteria, April 5. Available at: https://www.fitchratings.com/research/sovereigns/sovereign-rating-criteria-06-04-2023 - Fitch (2024a), Sovereign Rating Criteria, May 3. Available at: https://www.fitchratings.com/research/corporate-finance/third-party-partial-credit-support-rating-criteria-03-05-2024 - Fitch (2024b), Fitch Assigns Ghana's New USD Bonds 'CCC+' Rating; Upgrades LTLC IDR to 'CCC+', October 10. Available at: https://www.fitchratings.com/research/sovereigns/fitch-assigns-ghana-new-usd-bonds-ccc-rating-upgrades-ltlc-idr-to-ccc-10-10-2024 - Gbohoui, William, Ouedraogo, R. and Some, Y. (2023), Sub-Saharan Africa’s risk perception premium: in the search of missing factors, IMF WP 2023/130, June 23. Available at: https://www.imf.org/en/Publications/WP/Issues/2023/06/23/Sub-Saharan-Africas-Risk-Perception-Premium-In-the-Search-of-Missing-Factors-534885 - Gelpern, Anna, Horn, S., Morris, S., Parks, B., and Trebesch, C. (2021), How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments, AidData Policy Report, March 21. Available at: https://www.aiddata.org/publications/how-china-lends - Kiff, John, Nowak, S., and Schumacher, L. (2012), Are Rating Agencies Powerful? An Investigation into the Impact and Accuracy of Sovereign Ratings, IMF WP 2012/023, January 1. Available at: Are Rating Agencies Powerful? An Investigation Into the Impact And Accuracy Of Sovereign Ratings (imf.org) - Köhler, Horst (2003), Mexico – Marking the Retirement of its Brady Bonds, International Monetary Fund, June ### Capital markets, indices, and investor behavior - BlackRock (2021), The big emerging question, October. Available at: https://www.blackrock.com/corporate/literature/whitepaper/bii-the-big-emerging-question-2021.pdf - Bloomberg (2023a), Gabon’s 2025 Eurobond Rises 1.3% as Nation Plans Debt Buyback, July 25. - Bloomberg (2023b), Nuveen Walks Away From $500 Million Gabon Swap Arranged by BofA, August 11. - Bloomberg, (2023c), US Aggregate Index, December 15. Available at: https://assets.bbhub.io/professional/sites/27/US-Aggregate-Index.pdf - Bloomberg (2024), Ghana Bondholders Overwhelmingly Support Debt Restructuring, October 3. Available at: https://finance.yahoo.com/news/ghana-said-bondholders-overwhelmingly-support-113036500.html - J.P. Morgan (2022), Global Index Product Guide 2022. Available at: https://www.jpmorgan.com/content/dam/jpm/cib/complex/content/markets/index-research/Global-Index-Research-Product-Guide-2022.pdf - J.P. Morgan (2023), EMBI Global and EMBI Global Diversified-Rules and Methodology, August 7. Available at: https://markets.jpmorgan.com/#research.emerging_markets.index - J.P. Morgan (2024), EM as an Asset class Evolves and Diversifies, October 22. February 7. - IEA and IFC (2023), Scaling up Private Finance for Clean Energy in Emerging and Developing Economies, June. Available at: https://www.iea.org/reports/scaling-up-private-finance-for-clean-energy-in-emerging-and-developing-economies - KKR (2023), Is There Hidden Value in High-Yield Bonds?, June. Available at: https://www.kkr.com/insights/are-high-yield-bonds-more-valuable-than-they-appear - FRED Economic Data, Stock Market Turnover Ratio (Value Traded/Capitalization) for United States. Available at: https://fred.stlouisfed.org/series/DDEM01USA156NWDB ### Market infrastructure, repos, and securitization practices - BNY Mellon (undated), Triparty: An Introduction. Available at: https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/articles/triparty-repo-brochure.pdf.coredownload.pdf - Cadwalader (2022), Regulation Q and You-Capital Relief Trades for U.S. Banks, June 10. Available at: https://www.cadwalader.com/resources/articles/in-brief-regulation-q-and-you--capital-relief-trades-for-us-banks - ICMA (2019), Frequently Asked Questions on Repo, updated January. Available at: https://www.icmagroup.org/market-practice-and-regulatory-policy/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/24-what-is- tri -party-repo/ - FDIC (2007), IV. Credit Enhancement Facilities, March. Available at: https://www.fdic.gov/regulations/examinations/credit_card_securitization/pdf_version/ch6.pdf - EBRD (2019), Loan Syndications, Taipei, September. - EBRD (2016), Elazig Hospital PPP, December 8. Available at: https://www.ebrd.com/work-with-us/projects/psd/elazig-hospital-pppp.html - EBRD (2022), EBRD invests in Scatec green bond, April 28. Available at: https://www.ebrd.com/news/2022/ebrd-invests-in-scatec-green-bond-.html - Gorton, Gary, and Souleles, M. (2007), Special Purpose Vehicles and Securitization. In: M. Carey and R. Stulz, eds., The Risks of Financial Institutions, University of Chicago Press, January. Available at: https://www.nber.org/books-and-chapters/risks-financial-institutions ### Policy studies, working papers, and analytical reports - Bandura, Romina, and Ramanujam, S. (2019), Innovations in Guarantees for Development, Center for Strategic and International Studies, October. Available at: https://csis-website-prod.s3.amazonaws.com/s3fs-public/publication/191016_BanduraRamanujam_Innovations_WEB.pdf - Broner, Fernando, Martin, A., Pandolfi, L., and Williams, T. (2020), Winners and Losers from Sovereign Debt Inflows, NBER Working Paper 27772. September. Available at: https://www.nber.org/system/files/working_papers/w27772/w27772.pdf - Chamon, Marcos, Klok, E., Thakoor, V., and Zettelmeyer, J. (2022), Debt-for-Climate Swaps: Analysis, Design, and Implementation, IMF WP 2022/162, August 12. Available at: https://www.elibrary.imf.org/view/journals/001/2022/162/001.2022.issue-162-en.xml - Climate Policy Initiative (2024), Landscape of Guarantees for Climate Finance in EMDEs, February. Available at: https://www.climatepolicyinitiative.org/publication/landscape-of-guarantees-for-climate-finance-in-emdes/ - G20 (2018a), Making the Global Financial System Work for All. Report of the G20 Eminent Persons Group on Global Financial Governance. October. Available at: https://www.globalfinancialgovernance.org/files/g20epg-full%20report.pdf - G20 (2018b), Introductory Guide to Infrastructure Guarantee Products from Multilateral Development Banks, December. Available at: https://publications.iadb.org/en/introductory-guide-infrastructure-guarantee-products-multilateral-development-banks - Henisz, Withold, and Zelner, N. (2010), The Hidden Risks in Emerging Markets, April. Harvard Business Review. Available at: https://hbr.org/2010/04/the-hidden-risks-in-emerging-markets - IMF (1997), Developments and Prospects in Emerging Markets, IMF International Capital markets 1997, chapter IV, November. Available at: https://www.imf.org/external/pubs/ft/icm/97icm/pdf/file04.pdf - IMF (2004), The IMF and Argentina, 1999-2001. September 30. Available at: https://www.imf.org/en/Publications/Independent-Evaluation-Office-Reports/Issues/2016/12/31/The-IMF-and-Argentina-1991-2001-17590 - IMF (2017), State-Contingent Debt Instruments For Sovereigns—Annexes, Annex VIII, March 23. Available at: https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/05/19/pp032317-annexes-state-contingent-debt-instruments-for-sovereigns - IMF (2022), Global Financial Stability Report, Chapter 3, October. Available at: https://www.imf.org/en/Publications/GFSR/Issues/2022/10/11/global-financial-stability-report-october-2022 - IMF (2023), Global Financial Stability Report, Chapter 3, October. Available at: https://www.imf.org/en/Publications/GFSR/Issues/2023/10/10/global-financial-stability-report-october-2023 - IMF and World Bank (2020), Collateralized Transactions: Key Considerations for Public Lenders and Borrowers, February 19. Available at: Collateralized Transactions: Key Considerations for Public Lenders and Borrowers (imf.org) - IMF and World Bank (2023), Collateralized Transactions: Recent Developments and Policy Considerations, September 15. Available at: 121423.pdf (imf.org) - Jarvasuriya, Dulani (2016), The Rise and Fall of the Monoline/Bond Insurers: Icarus of The 21st Century, July 22-23. Available at: https://nbmconference.wordpress.com/wp-content/uploads/2017/03/648-665.pdf - Gabor, Daniela (2019), Securitization for Sustainability, Heinrich Böll Stiftung, Washington DC, October. Available at: https://us.boell.org/sites/default/files/gabor_finalized.pdf ### Regulatory, legal, and technical guidance - CRS (2017), U.S. Foreign Assistance: USAID Loan Guarantees, updated July 17. Available at: https://crsreports.congress.gov/product/pdf/IF/IF10409/5 - CRS (2023), Bank Capital Requirements: A Primer and Policy Issues, March 9. Available at: https://crsreports.congress.gov/product/pdf/R/R47447 - ICMA (2022), Green Bond Principles (with June 2022 Appendix 1), June. Available at: https://www.icmagroup.org/assets/documents/Sustainable-finance/2022-updates/Green-Bond-Principles-June-2022-060623.pdf - ICMA (2023a), Social Bond Principles, June. Available at: https://www.icmagroup.org/assets/documents/Sustainable-finance/2023-updates/Social-Bond-Principles-SBP-June-2023-220623.pdf - ICMA (2023b), New Guidance on Blue-Themed Bonds to Help Unlock Finance for a Sustainable Ocean Economy, September 6. Available at: https://www.icmagroup.org/News/news-in-brief/new-guidance-on-blue-themed-bonds-to-help-unlock-finance-for-a-sustainable-ocean-economy/ - CRS (2018). Debt-for-Nature Initiatives and the Tropical Forest Conservation Act (TFCA): Status and Implementation, July 24. Available at: https://crsreports.congress.gov/product/pdf/RL/RL31286/16 *References from wpiea2025002-print-pdf - References* ### 12. Available at: https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp061203a ### IMF WORKING PAPERS The Scalability of Credit-Enhanced EM Climate Debt — References (section 12) ### Major categories of cited literature - Multilateral development bank (MDB), guarantee, and political-risk-insurance materials - MIGA (2015), Providing Political Risk Insurance and Credit Enhancement Solutions. - MIGA (2017), MIGA Coverage for Loans to Hungary EXIM Bank Boosts Domestic SMEs, June 20. - MIGA (2023a), Management’s Discussion & Analysis and Financial Statements, June 30. - MIGA (2023b), Press Release. MIGA Backs Sustainable Finance in Mexico in Largest Transaction Ever, December 5. - World Bank (2001), Colombia Ensures Financing for 2001 with Support from the World Bank under a Policy Based Guarantee, Project Finance and Guarantees, September. - World Bank (2016a), Pricing partially guaranteed bonds, Occasional Paper 001, February. - World Bank (2016b), Findings from Evaluations of Policy-Based Guarantees, June 21. - World Bank (2018), IBRD Financial Products. - World Bank Group (2024), World Bank Group Guarantee Platform Goes Live, July 1. - World Bank and Rothschild (2016), Utilizing World Bank partial guarantees in support of sovereign or sub – sovereign commercial debt financings, August. - OECD (2021), The role of guarantees in blended finance. - NAIC (2023), Political Risk Insurance, last updated on June 13, 2023. - Liberty Mutual (2022), Financial guarantee insurance and the Appleton Rule, July 28. - Lloyd's of London (2010), Y439– - Financial Guarantee Insurance, Contract Frustration, Trade Credit and related classes, May 7. - Credit ratings, rating methodologies, and market-implied ratings - Moody's (2015), Loss Given Default for Speculative-Grade Companies, December 4. - Moody’s (2019), Moody’s Market Implied Ratings: Description and Methodology. - Moody's (2021), Credit Opinion – Bayfront-Infrastructure-Capital-II -Pte-Ltd, June 18. - Moody's (2022), Rating Methodology Sovereigns, November 22. - Moody's (2023), Rating action: Moody's assigns definitive ratings to four classes of notes issued by Bayfront Infrastructure Capital IVPte.Ltd, September 20. - Standard and Poor’s (2008), The Basics of Credit Enhancement in Securitizations, June 24. - Standard and Poor’s (2013), Sovereigns: Methodology: Rating Partially Guaranteed Sovereign Debt, May 6. - Standard and Poor’s (2017), Sovereign Rating Methodology, December 18. - Standard and Poor’s (2018), It's Time For A Change: The Role Of Credit Enhancement In Mobilizing Private Investment In Infrastructure, September 28. - Standard and Poor’s (2022), General Project Finance Rating Methodology, December 14. - Standard and Poor’s (2023), Credit Trends: A Rise In Selective Defaults Presents A Slippery Slope, June 26. - Standard and Poor’s (2024), Debt-For-Nature Swaps Are Gaining Traction Among Lower-Rated Sovereigns, February 27. - Livingston, Miles, and Zhou, L. (2020), Credit Ratings and Rating Agencies, Oxford Research Encyclopedia of Economics and Finance, August. - Slapnik, Ursula and Lončarski, I. (2021), On the information content of sovereign credit rating reports: Improving the predictability of rating transitions, Journal of International Financial Institutions and Money, April 20. - Debt-for-nature / debt conversion and sovereign debt case studies and analyses - Latinadd (2023a), Galapagos debt conversion deal - an ignominious legacy, May 25. - Latinadd (2023b), Risks in Galapagos Islands debt swap are flagged, June 9. - LatinFinance (2023), Moody's classifies Ecuador debt exchange as default, May 18. - Leonard, Stephen, Harrould-Kolieb, E., Reyes, O., Torres, J. T., and Crespo, E. (2020), Scaling-up Ecosystem-based Debt-for-Climate Swaps: From the Millions to the Billions, Heinrich Böll Stiftung, Center for Sustainable Finance (SOAS, University of London), and Global Development Policy Center (Boston University), November. - TNC (2021), Belize Debt Conversion Case Study, November. - TNC (2023), Case Study: Barbados Blue Bond for Ocean Conservation, May 10. - OMFIF (2023), How debt-for-nature swaps can affect sovereign credit, August 16. - OECD (2007), Lessons Learnt from Experience with Debt-for-Environment Swaps in Economies in Transition. - Standard and Poor’s (2024), Debt-For-Nature Swaps Are Gaining Traction Among Lower-Rated Sovereigns, February 27. - Blended finance, green / sustainability-linked bonds, and climate finance scaling - NGFS (2023), Scaling Up Blended Finance for Climate Mitigation and Adaptation in Emerging Market and Developing Economies (EMDEs), December. - Musca, Xavier, and Samama, F. (2019), IFC and Amundi’s innovative partnership to finance green projects in Emerging Markets, LSE Global Policy Lab. - Nuveen (2024), Nuveen Core Impact Bond Fund: Fund Description, as of July 17. - NatWest Group (2024), NatWest executes £1.1bn own-asset securitisation deal as part of its renewable and transition energy lending growth ambition, August 13. - Pilar Garrido, Pillar, and Sayinzoga, K. (2024), Sustainability-linked bonds: What markets can learn from Rwanda, The Banker, May 14. - World Bank (2023), How Rwanda’s inaugural Sustainability-Linked Bond broke new ground in leveraging private capital, November 30. - Leonard et al. (2020), Scaling-up Ecosystem-based Debt-for-Climate Swaps: From the Millions to the Billions, November. - Securitization, collateralization, and asset-backed structures - Kotecha, Mahesh (2022), MDB Loans: A New Asset Class Colleteralized Loan Obligations, Bretton Woods Committee, November 15. - Segoviano, Miguel, Jones, B., Lindner, P., Blankenheim, J. (2013), Securitization: Lessons Learned and the Road Ahead, IMF WP 2013/255., December 13. - Mobilist (2023), Mobilist Makes Catalytic Equity Investment in Infrastructure Debt Securitisation Transaction sponsored by Singapore-based Bayfront Infrastructure Management, September 13. - The Asset (2013), Bayfront prices IABS with sustainability tranche, September 13. - Pozzolo, Alberto (2002), Secured Lending and Borrowers’ Riskiness, February 2. - Menkhoff, Lukas, Neuberger, D., and Rungruxsirivorn, O., (2012), Collateral and its substitutes in emerging markets’ lending. Journal of Banking and Finance (2012), pp. 817-834. - Office of Financial Research (2016), A Map of Collateral Uses and Flows, May 26. - Segoviano et al. (2013), Securitization: Lessons Learned and the Road Ahead, IMF WP 2013/255. - Policy, regulatory, and historical perspectives on sovereign debt and restructuring - Shenai, Neil, and Bolhuis, M., (2023), How the Brady Plan Delivered on Debt Relief, WP 23/258, December. - Sharma, Vaishali (2024), Credit ratings in China-pushing a narrative built in wonderland, Asia Power Watch, July 25. - Patterson, Bronwyn, (2023), How the World’s Largest Green Bond is Making Waves in Emerging Markets, Kleinman Center for Energy Policy at the University of Pennsylvania, June 14. - Reuters (2024), Ghana clinches preliminary $13 bln debt deal with bondholders, June 24. - Wall Street Journal (2003), Brady Bonds are Rapidly Fading, July 22. - Phatisa (2021), Phatisa wraps up fundraising for second food fund-African Food Fund 2, February 8. - Research on guarantees, policy-based guarantees, and MDB risk transfer - ODI (2022), AfDB’s new Room2Run highlights opportunities and questions about MDB risk transfer, December 6. - Risk Control (2019), RoomtoRun: the AfDB’s Approach to Sharing Risk with the Private Sector, April 30. - PRI (2019), PRI Awards 2019 case study: Room2Run, September 10. - PwC (2022), 6.2 Financial guarantee insurance, May 31. - World Bank (2014), Development Policy Operations, September. - World Bank (2022), The Multilateral Investment Guarantee Agency’s Experience with Non-Honoring of Sovereign, Sub-Sovereign, and State-Owned Enterprise Financial Obligation Guarantees. Meso-Evaluation. Independent Evaluation Group. May 19. - Legal, market practice, and technical notes - Ng, Leonard (2010), Credit default swaps, guarantees and insurance: same effects, different treatment? Sidney & Austin. December. - Moody's (2019), Moody’s Market Implied Ratings: Description and Methodology. - Standard and Poor’s (2008), The Basics of Credit Enhancement in Securitizations, June 24. - Segoviano et al. (2013), Securitization: Lessons Learned and the Road Ahead, IMF WP 2013/255. ### Representative case citations and noteworthy examples (selected) - Bayfront Infrastructure: multiple entries including Moody's (2021) Credit Opinion and Moody's (2023) Rating action relating to Bayfront Infrastructure Capital entities. - Room2Run / AfDB risk-transfer efforts: Risk Control (2019); PRI (2019); ODI (2022). - Galapagos / Ecuador debt conversions and exchanges: Latinadd (2023a); Latinadd (2023b); LatinFinance (2023). - Nicaragua / Belize / Barbados debt conversion case studies: TNC (2021); TNC (2023). ### Thematic emphasis in the reference set - Heavy coverage of guarantees, political-risk insurance, and MDB instruments as mechanisms for credit enhancement and mobilizing private finance. - Considerable attention to credit-rating methodologies and the interaction of guarantees and structured instruments with sovereign ratings. - Case-based evidence on debt-for-nature / debt-for-climate swaps and securitization examples that illustrate practical implementations and market responses. - Policy and evaluation literature on MDB risk-transfer, partial guarantees, and blended finance approaches aimed at scaling climate and sustainable finance in EMDEs. *Source: wpiea2025002-print-pdf - 12. Available at: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025002-print-pdf.pdf* --- _Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025002-print-pdf.pdf_