A Catalytic Partial Credit Guarantee for a Renewable Energy Project in India

Abstract

This article estimates the fee for a credit guarantee that can enhance a renewable energy project bond to a targeted rating and discusses the risk exposure assessment of a participating financial institution, a development finance institution (DFI), and an institutional investor under the guarantee structure. A solar power developer in India is operating a solar power project through a special purpose vehicle (SPV). An institutional investor, operating within the Solvency II framework, wants to invest in the project bond to be issued by this SPV, but only if the bond is domestically rated at least AA. By improving the green bond’s risk–return profile, the partial credit guarantee will catalyze the participation of investors who otherwise would not have participated. The guarantee fee is estimated using two different approaches: 1) the equivalence premium principle using the simulated cash flows and 2) the expected cost methodology using the default rates and loss given default obtained from the credit ratings. The cost of a counter guarantee provided by the DFI is estimated using the loss costs by layer of guarantee coverage.