A/B loan: Syndicated loan where commercial banks and other investors provide their own funds and take commercial risk, while a multilateral development bank (MDB) remains the lender of record. B lenders benefit from implicit political risk insurance as host governments are less likely to expropriate or limit the foreign currency available to an MDB-supported project. The borrower benefits from the capital raising efforts of the MDB and from lack of withholding taxes on the entire facility.

acquisition financing: Funds obtained for buying existing companies or projects, as opposed to greenfield financing. Traditionally government agencies have only provided acquisition financing in the context of a major program of expansion or rehabilitation. Privatization projects are generally likely to be supported more actively than private sector mergers and acquisitions.

additionality: MDBs often have an explicit prohibition from competing with (“crowding out”) private sector financial institutions. The additionality test performed early in the screening of a project is meant to assure the MDB that the private sector is not ready to fund the project on “acceptable terms.” For export credit agencies (ECAs) additionality can be satisfied if there is keen, ECA-financed foreign competition for a contract.

bilateral: Direct assistance from a donor country to a recipient country as opposed to multilateral aid. Examples of bilateral agencies include OPIC (United States), FMO (Netherlands), AfD (France), and so on.

bond: A negotiable note or certificate that evidences indebtedness. It is a legal contract sold by one party, the issuer, to another, the investor, promising to repay the holder the face value of the bond plus interest at future dates. Bonds are also referred to as notes or debentures. The term “note” usually implies a shorter maturity than “bond.” Some bond issues are secured by a mortgage on a specific property, plant, or piece of equipment. In an emerging markets context, project finance bonds may carry political risk insurance (PRI) from an MDB or an insurer. Additionally, MDBs may provide parallel lending facilities or liquidity reserves in support of a bond issuance. Finally, MDBs may guarantee specific commercial and political risks, for example to extend the maturity of the bond beyond what the market can do by itself.

breach of contract: Default on any term or condition of a contract, such as a power purchase agreement or a concession, without legal excuse or compensation (e.g., failure to make a payment when due). This is one of the basic PRI coverages provided by insurers such as MIGA and OPIC.

Bretton Woods Institutions: Founded in 1944, and named after the village of Bretton Woods, New Hampshire, the Bretton Woods Institutions were a culmination of international negotiations among 44 nations. It was here that the World Bank and the International Monetary Fund (IMF) were established in order to direct and manage the world economy after World War II.

buyer credit: A financial agreement in which a bank or ECA makes a loan directly to an overseas purchaser to import goods and services. Disbursements may be made either directly to the exporter or to reimburse the buyer for previous payments.

capital markets: All-encompassing term to include tradable debt (bonds), other securities, and equity (exchange traded shares), as distinct from private markets or bank loans. MDBs have recently become more active in assisting emerging markets borrowers and projects to access the international capital markets.

cofinancing: Two groups of lenders (such as ECAs and MDBs) agree to a common legal structure that presents the buyer with one financial package rather than a series of separate loans (e.g., there is only one loan agreement that is backed by ECA guarantees in proportion to each country’s share of the export).

commercial cover: This type of protection applies to the financial loss incurred by an insured party as the result of the insolvency and partial or total default on payments by a private partner in a contract. Typically, ECAs provide commercial cover, while insurers do not.

Commercial Interest Reference Rates (CIRRs): The official lending rates of ECAs for direct loans. They are calculated monthly and are based on government bonds issued in the country’s domestic market for the country’s currency plus a spread—for example, the USD CIRR for long-term loans over 8.5 years is based on the 7-year U.S. Treasury bond yield plus 1%.

commercial risk: Risk of nonpayment by a buyer or borrower due to bankruptcy, insolvency, protracted default, and/or failure to accept goods shipped by the terms of the supply contract.

commitment fee: The fee charged by a lender to compensate for committing funds, based on undisbursed balances.

commitment letter: A formal offer by a lender making explicit the terms under which it agrees to lend money to a borrower over a certain period of time.

completion: The point after which the project’s cash flows become the primary method of repayment. It occurs after a series of completion tests (technical, financial, and legal) are satisfied. Usually, completion occurs months or even years after the project is actually built and commissioned. Prior to completion, the primary source of repayment are sponsor and/or contractor guarantees.

completion support: The contingent guarantees provided by the project sponsors and contractors before completion. These can take the form of corporate guarantees, surety bonds, letters of credit, and so on. The lenders are entitled to call on these guarantees at any time before completion to cover cost overruns, ramp-up failures, and other defaults.

comprehensive coverage: Insurance or guarantee cover that combines both commercial risk coverage and PRI coverage. Typically provided by ECAs.

Consultant Trust Funds: A financial and administrative arrangement between an MDB and an external donor under which the donor (usually an OECD country) entrusts funds to the MDB to finance a specific development-related activity. Consultant Trust Funds pay for services of consultants engaged by MDBs for assignments in support of operational work. Grant agreements often stipulate use of consultants from the donor country.

corporate finance: The practice and philosophy of the ways firms select and finance their investments, choose between debt and equity instruments, and disburse cash back to shareholders. Technically, project finance is part of corporate finance. As a shortcut, corporate finance is often used to mean “on-balance sheet,” rather than “off-balance sheet” financing of projects.

currency inconvertibility and transfer cover: A form of PRI that protects investors against possible losses from financial crises, hard currency shortages, or political actions that result in a failure of the host country to allow the conversion or transfer of its own currency into foreign currency. This type of insurance does not cover currency depreciation or devaluation.

delegated authority: Authority granted to commercial banks or exporters to approve insurance/guarantees without specific approval from the ECA. Typically, the ECA gives this approval based on previous experience with the bank/exporter. For example, U.S. Ex-Im Bank has an active working capital guarantee program with delegated authority lenders.

development finance institution (DFI): Financial institutions created by governments to stimulate and mobilize private investment in private sector projects in developing and emerging economies. DFIs can be bilateral or multilateral.

development impact: The economic and social consequences of a project supported by a DFI. It is usually measured by incremental GDP growth stimulated, employment, infrastructure improvements, technology transferred, schools and hospitals funded, and so on.

direct loan: Loan from an ECA or an MDB to a borrower without the intermediation of another bank. It is the opposite of a guaranteed loan.

eligible costs: The sum total of the bona fide project costs that includes personnel, durable equipment, subcontracting, travel and subsistence, financing costs, allocated overhead costs, and other specific project costs. Costs are eligible only when they are necessary for the project and are provided for in project contracts. For ECAs, eligible costs are associated with exported goods and services plus a small component for “local” costs.

emerging markets: Lesser-developed countries experiencing rapid economic growth and liberalization of government restrictions on free commerce. The term has almost completely replaced “developing countries,” and the former “Second” and “Third World.”

environmental impact assessment (EIA): Method of identifying the environmental effects of a project. Most MDBs and ECAs follow the World Bank EIA guidelines.

equity: Net worth; assets minus liabilities. The stockholder’s residual ownership position in a company or project. Some MDBs are willing to provide equity for projects, but ECAs do not.

export credit agency (ECA): A government-owned or sponsored financial agency offering loans, guarantees, credit insurance, or financial technical assistance to support exporters.

export credits: Financing provided to an exporter or foreign buyer from a commercial bank or ECA during pre- or postshipment operations.

exposure: From the perspective of a lender or an insurer, it is the potential loss in the event of nonpayment by a borrower or counterparty of the insured entity.

exposure fee: A fee that protects lenders against possible defaults by borrowers. Exposure fees are the primary pricing mechanism by ECAs for direct and guaranteed loans and export credit insurance. Exposure fees are based on several factors, including country risk, tenor of the loan, and type of borrower (sovereign vs. private enterprise). Exposure fees are usually considered an eligible project cost.

expropriation: The official seizure by a government of private property. Any government maintains this right according to international law as long as prompt and adequate compensation is given. This risk is one of the basic PRI coverages. PRI policies also cover “creeping” or de facto expropriation.

facility fee: Up-front payment made by a borrower to a lender for arranging a loan. Usually, it is paid out of the proceeds from the first disbursement of funds.

feasibility study: A comprehensive assessment of the technical, financial, and legal feasibility of a proposed project. A credible feasibility study is usually required by project finance lenders. The expense associated with preparing a feasibility study is usually borne by the project sponsor although agencies such as USTDA can help defray some costs.

financial guarantee: A commitment or assurance that in the event of nonpayment of an export credit by a foreign borrower, the ECA will indemnify the financing bank if the terms and conditions of its guarantees are fulfilled.

foreign direct investment (FDI): Investment in a foreign company or foreign joint venture. The investment is normally made in cash but sometimes in the form of plant and equipment or know-how. As defined by the OECD for statistical purposes, FDI is investment in at least 10% of voting stock of a foreign company. FDI is typically a long-term investment in unlisted companies or projects, as opposed to a short-term portfolio investment in listed securities.

grace period: An interval of time allowed to the borrower by the lender after loan proceeds are disbursed and before repayment of principal begins. In project finance, the grace period usually covers the construction period plus 6–12 months.

grant: Financing extended by a government agency to a recipient government or a private enterprise that does not carry interest or the obligation to repay. For example, U.S. Trade and Development Agency and USAID have a variety of grant programs to promote international development.

greenfield: A new capital investment as opposed to an acquisition of existing assets. Typically, the project finance loans provided by MDBs are for greenfield investments or major expansions.

guarantee: Used generally to denote any assurance of payment or compensation given to the entity financing an export credit, which is to be honored in the event of default or nonpayment by the primary obligor.

insurance: Cover that indemnifies the insured from loss due to a specified type of contingency or peril. Insurance in project finance is commercial, political, or comprehensive.

lender: Investor who provides (senior) debt to a company or project. Typically, lenders are MDBs and commercial banks but can also be institutional investors, corporations, and so on.

letter of interest (LI): A preexport marketing tool. An LI is an indication of willingness to consider financing for a given export transaction that can be used to assure counterparties. However, an LI does not imply a commitment to finance.

LIBOR: The London Interbank Offered Rate of interest on deposits traded between major banks. There is a different Libor rate for each deposit maturity and currency (e.g., Euro LIBOR).

limited recourse finance: See Project Finance

loan: A senior debt instrument that is typically held privately rather than traded on an exchange or over the counter (a bond).

loan guarantee: A partial or comprehensive assurance of repayment provided by an ECA, MDB, or other entity to a lender.

long term: Repayment terms greater than 5 years. Organisation for Economic Co-operation and Development (OECD) rules limit the tenor that can be offered to borrowers. For project financing, ECAs are limited to an average loan life of 7.25 years, which is equal to 14 years of level repayment or 12 years of mortgage-style repayment.

medium term: Repayment terms usually ranging from one to five years.

multilateral: Agreements or arrangements that involve more than two countries as opposed bilateral. Multilateral banks include the World Bank, Inter-American Development Bank (IDB), and European Development Bank (EBRD).

OECD arrangement: Agreement adopted in 1978 by members of the Paris-based Organisation for Economic Co-operation and Development (OECD) to limit credit competition among member governments in officially supported export credits. The OECD Arrangement superseded the OECD Consensus.

Organisation for Economic Co-operation and Development (OECD): A group of 34 (mostly wealthy) member countries sharing a commitment to democratic government and the market economy. OCED also produces studies, decisions, and recommendations to promote “rules of the game” in areas where multilateral agreement is necessary for individual countries to make progress in a global economy, such as export credits, foreign investment, intellectual property, and so on.

partial risk guarantee: Used typically in the context of a capital markets financing. An MDB may issue a guarantee that covers specific risks (e.g., devaluation) in support of a locally or internationally placed project finance bond.

political risk insurance (PRI): Insurance or guarantee cover that protects the exporter or financing bank from nonpayment by the buyer or borrower because of political events in the buyer’s country or a third country through which either goods or payment must pass. The four basic PRI covers offered by insurers include inconvertibility and transfer restrictions (but not devaluation), political violence and war, expropriation, and breach of government contract.

political violence cover: A form of PRI that covers loss of assets or income due to war, revolution, insurrection or politically motivated civil strife, terrorism, or sabotage.

premium rate: Cost of insurance per dollar of coverage, usually calculated on the gross invoice value for short-term sales or on the financed portion for medium- and long-term sales. PRI providers often distinguish between the current rate and a lower standby rate, which is similar to the commitment fee of a loan.

private equity: Investment in the unlisted stock of a privately held company or project. Venture capital refers to early-stage investments, while mezzanine capital refers to the later-stage investments when the company is up and running but not quite ready for a public offering. Private equity is often used to denote later-stage investing in established companies (e.g., in the context of management buyouts).

project financing: A technique for financing the projects of a firm. It is a form of “off-balance sheet” financing from the perspective of the sponsoring entity. The primary source of loan repayment is the individual project, rather than the entire asset base of the firm.

quasi equity: This type of financing is usually considered debt for tax purposes but maintains the characteristics of equity such as flexible repayment, higher rates of return, and lack of a security package. Payments to quasi-equity investors are subordinated to those senior lenders.

recourse: The right of a financial institution to demand payment from the guarantor of a loan, if the primary obligor fails to pay. Project financing is often referred to as limited recourse financing because the lender cannot force the sponsor to repay the debt after completion.

refinancing: Repaying existing debt and entering into a new loan, typically to meet some corporate objective such as the lengthening of maturity or lowering the interest rate. MDBs typically do not provide refinancing loans but may include limited refinancing as part of the eligible project costs.

reinsurance: One lead insurer (e.g., Multilateral Investment Guarantee Agency [MIGA]) fronts the entire cover while participating insurers (e.g., private-sector players) provide reinsurance. Reinsurance is used to expand the available capacity for any single project or country.

repayment style: Level repayment of principal, mortgage style (equal payments of principal and interest), or tailored.

repayment term: The term (also known as the tenor) of the loan—for example, “20 semiannual installments.”

risk capital: Usually synonymous with equity funding, in particular early stage.

secured debt: Senior debt that has first claim on specified assets in the event of default. Project finance loans are usually secured with all assets of the project and a pledge of sponsor shares.

short term: Repayment terms generally of up to 180 days. Berne Union OECD guidelines for short-term ECA insurance refer to repayment terms of up to 2 years depending on the product and the size of transaction.

small- and medium-sized enterprises (SMEs): While classifications of SMEs vary, they are commonly defined as enterprises with between 10 and 300 employees, with total assets of up to $15 million and total annual sales of up to $15 million.

structured finance: Financing arrangements that are customized to the specific needs of a borrower.

subordinated debt: All debt (both short- and long-term) that, by agreement, is subordinated to senior debt. Often, subordinated debt is considered a type of quasi equity. Some MDBs offer this type of debt, but ECAs do not.

supplier credit: Financial arrangement in which the supplier (exporter) extends credit to the buyer to finance the buyer’s purchases. Normally the buyer pays a portion of the contract value in cash and issues a promissory note or accepts a draft to evidence the obligation to pay the remainder to the exporter. ECAs can then insure or guarantee the draft or promissory note.

technical assistance: Transfer or adaptation of knowledge, practices, technologies, or skills that foster economic development. Financing for this type of assistance is generally granted in order to contribute to the design and/or implementation of a project or program in order to increase the physical capital stock of the host country.

tenor: Total repayment period of a loan. Also referred to as the “term.” Door-to-door tenor refers to the grace period (during construction) plus the repyment period. OECD rules limit the tenor of the loans that can be extended by ECAs.

tied aid program: Tied aid is provided by agencies of the rich-country governments, sometimes in conjunction with their national ECAs. Tied aid differs from typical export credit terms offered by ECAs in that it usually involves concessionary terms: total maturities longer than 20 years, interest rates equal to one-half to two-thirds of market rates in the currency of denomination, or large grants.

venture capital: Risk capital extended to start-up companies or small going concerns. Venture capital is a form of private equity.

waiting period: Period following the occurrence of a loss during which exporters or banks must wait before filing a claim with an export credit insurance agency.

working capital: Cash required to fund inventories and accounts receivable. Accounting definition is current assets less current liabilities. MDBs can fund start-up working capital as an eligible project cost. ECAs have programs to assist the accumulation of export-related working capital.