The Use of Financial Guarantees and Contingent Capital in Project Finance

Abstract

Insurers or reinsurers can provide nonrecourse or limited-recourse structures to enhance a project's creditworthiness. These solutions can benefit lenders as well as sponsors. By providing broad credit support in the form of financial guarantees or by carving out risks in the form of contingent capital using defined triggers, insurers or reinsurers can help enhance a project debt rating from below investment grade to investment grade. Such enhancement makes the transaction more attractive to the market. This article focuses on financial guarantees and contingent capital solutions, comparing benefits, pricing elements, and other features of these two solutions.