Targeted Risk Capital

Abstract

Targeted risk capital (TRC) products are a class of structured finance products that mitigate specifically defined project risks by providing liquidity on a contingent, revolving basis. By narrowly defining and isolating project risks, TRC products can enhance credit and reduce the cost of capital more efficiently than broader financial guarantee products. Because many key project risks are created by short-term deviations from long-term equilibrium positions, TRC products typically are structured as contingent revolving debt facilities that become subordinated project loans once drawn down. TRC products rely on a provider's ability to assess long-term equilibrium positions and fund liquidity during short-term deviations. Examples of TRC products and the risks they address include: real exchange rate (Rex) facility (inflation-devaluation correlation), spark spreads (fuel-power price correlation), and input-output price spreads (e.g., petrochemicals).