Risk Exposure and Recovery Assessment under a Guarantee in a Water Project

Abstract

The objective of this article is to assess the risk exposure of a ministry of finance (MOF), a foreign lender, and the Asian Development Bank (ADB) under a guarantee in a water project in an Asian country. Also, the added value to all three parties that ADB'S mediation may offer is determined. There is a state owned water project company (WPC) in an Asian country. A foreign lender in this project wants a guarantee from the Ministry of Finance (MOF) covering debt-service payments of the state-owned project company. The foreign lender also wants the ADB to issue a guarantee against breach of contract from the MOF and to cover the MOF's guarantee obligations. The ADB will issue the guarantee only on the condition of a counter-guarantee from the MOF. The risk exposure assessment uses the method for “quantifying qualitative information on risks” (QQIR) described in an article in the Winter 2008 issue of the Journal of Structured Finance. (“The Quantification and Financial Impact of Political Risk Perceptions on Infrastructure Projects in Asia,” by Tillmann Sachs, Robert L.K. Tiong, and Daniel Wagner). The QQIR method translates expert opinion on perceived risk factors into probability density functions that are the input to stochastic simulations and recovery-rate determination.

TOPICS: Risk management, fixed income and structured finance