DCA Products
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| A textile
factory in Benin takes advantage of DCA backed financing. |
Private sector resources can be mobilized in many ways through
a number of appropriate financial instruments available under
DCA. The four DCA credit tools available to Missions are described
below. The use of these instruments can be modified and tailored
to address a particular project’s financing needs.
Loan Guarantee
The typical Loan Guarantee (LG), also referred to as a project-specific
guarantee, allows USAID to use DCA for specific credit enhancement
purposes in cases where the borrower, lender, and uses of
loan proceeds are known.
Loan Portfolio Guarantee
A Loan Portfolio Guarantee (LPG) provides financial institutions
with partial coverage on a portfolio of loans that they provide
to their customers. In the case of the LPG, USAID agrees to
share in the risk of a broadly defined category of bank loans
with a view toward inducing local banks to extend credit toward
an underserved sector. The individual borrowers under a LPG
are not predetermined at the time the Guarantee Agreement
is signed, but the borrowers must fall within a pre-agreed
definition of “Eligible Borrowers,” such as borrowers
that are small businesses operating in a specific geographic
area.
Bond Guarantee
Bond Guarantees (BG) support the issuance of bonds by financial
institutions, private sector corporations, or sub-national
entities. The funds generated from the bond issuance can,
for example, assist in raising local funds to initiate municipal
infrastructure or utility projects, which require substantial
upfront capital investments. The Bond Guarantee or guarantees
for other types of debt instruments are typically an option
for DCA credit assistance if the capital and financial markets
are fairly well advanced in a particular country to support
a bond issuance. However, the DCA guarantee can also be used
to encourage the development of bond issuances in less sophisticated
markets.
Portable Guarantee
Slightly different than the Loan Guarantee, the Portable Guarantee
(PG) provides an identified potential borrower with a letter
of guarantee commitment through which the borrower may seek
the most advantageous terms from the local financial market.
Portable Guarantees are appropriate for specific credit enhancement
purposes when the borrower is known, but the lender is not
yet known. In these cases, a minimum credit rating (e.g.,
from rating agencies such as Standard & Poor’s and
Moody’s) is established, and the risk calculation and
subsidy cost are based on the assumption that the eventual
lender will have a rating equal to or above this minimum rating.
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