Using Guarantees To Boost Sustainable Development

As an emerging markets climate-focused guarantor, the Green Guarantee Company (GGC) is a unique entity with big plans for Africa and other emerging markets and developing economies (EMDEs).

Its target is to unlock billions in climate finance for EMDEs by providing guarantees to help borrowers improve their credit ratings to access global capital markets such as through the London Stock Exchange (LSE), as well as green bonds and loans issued in the private credit market in countries eligible for official development assistance (ODA) as defined by the OECD Development Assistance Committee list, excluding China.

GGC’s mandate covers projects in the energy, buildings, transport, waste and pollution control, and water sectors, with up to 100% cover for a maximum of 20 years.

The company’s capital comes from sources including the Green Climate Fund, the UK’s Foreign Commonwealth & Development Office through the MOBILIST programme, German development bank KfW, the Nigeria Sovereign Investment Authority and Norway’s Norfund.

GGC will leverage an initial US$130 million from these investors to provide up to US$1.3 billion of guarantees underpinned by an investment grade rating of BBB/Stable from the US’ Fitch Ratings. Initially, it will focus on private credit and the LSE green bond market but plans to expand to other major exchanges. It will seek to raise additional capital from the private sector as it scales its operations, targeting a guarantee capacity of US$5 billion or more by 2035.

The firm is managed by the Development Guarantee Group (DGG), a specialist advisory, project development and asset management company focused on creating innovative guarantee solutions to help deliver the UN’s Sustainable Development Goals (SDGs).

In late June, GGC closed its first two transactions, which target Africa and have mobilised US$70 million to support the Mission 300 electrification initiative led by the World Bank and the African Development Bank. The initiative aims to provide first-time electricity access to 300 million people in Sub-Saharan Africa by 2030.

The two transactions include a US$20 million framework guarantee to Bank of Africa UK supporting the development of mini-grids in Nigeria, as part of the Distributed Access through Renewable Energy Scale-up (DARES) programme, a flagship initiative between the World Bank Group and the government of Nigeria. The loans provided under the guarantee will support developers to connect an estimated 340,000 people to new or improved energy access and install 13MW of renewable energy capacity.

The second transaction includes a US$50 million guarantee for a green bond listed on the LSE, provided to fund a special-purpose vehicle to on-lend to securitisation vehicles set up by African Frontier Capital (AFC), backed by receivables from distributed solar assets across Sub-Saharan Africa. The move is expected to expand access to clean energy for about 4.3 million people across Sub-Saharan Africa and will recycle capital from development finance institutions (DFI) and multilateral development banks (MDB), supporting the establishment of a replicable private financing solution to scale energy access.

In an exclusive interview, ConstructAfrica spoke with Christopher Bredholt, chief underwriting officer at DGG, about GGC’s unique mandate and its strategy for the African continent.

Q) Tell us more about GGC.

“The Green Guarantee Company was set up just over two years ago with a mission to mobilise international capital markets and institutional investors in the developed markets into emerging and developing economy climate finance.

“There's two key parts of our mandate. One is mobilising investors who haven't been going into these markets that have a great need for climate finance; because of risk perceptions or real risks, those institutional investors aren't able to go in. The second part is what we do has to support climate mitigation or adaptation. And how we do that is through one product, which is an on-demand guarantee of a debt obligation.

“What we cover is full repayment of principal and interest up to the point of default. If a borrower or a project is unable to pay its debt, whatever the reason, we step in and we pay it to that investor. So that allows these opportunities to become investment-grade. Green Guarantee Company is rated BBB Stable by Fitch. So we then open up that universe of investments for those investors.”

Q) What gap in the market was GGC established to fill?

“At the first level, the gap is that the capital wasn't flowing for the needs. There's lots of different estimates floating around, but if you look at the trillions of dollars that emerging markets need between now and 2030 or 2040 for mitigation and adaptation, the global flows of capital haven't been going at the required levels.

“It's not the same picture across all emerging markets; particularly in lower-income markets, we're having a lot less capital flows than some of the more higher middle-income emerging markets. But, broadly speaking, the capital hasn't been flowing. So, the reason to set GGC up was also driven by the need. The development banks, MDBs, they're doing great work, but they are themselves capital-constrained. If you look at governments around the world having to spend on defence priorities and other things, aid budgets are coming down. So, there's a limit to what the MDBs can do.

“The Green Guarantee Company is a private sector solution. It’s important to stress that the company is a commercial guarantor. Our view is that by demonstrating that these investments and business model can be self-sustaining and profitable, that's how you'll get the private sector to come in and replicate. Aid or concessional money is a limited pool and it's not really going to have that effect of snowballing and multiplying.”

Q) What is driving GGC's strategy on the continent?

“We need to find borrowers or projects that are economically viable. A guarantee doesn't make a project or an uneconomic project viable because we have to manage our own risk. We have to make sure our balance sheet is protected. We're not going to come in at the early-stage businesses that are cash flow-negative or that haven't demonstrated proof of technology.

“We also need to focus on borrowers and projects that are raising debt for very clear climate use of proceeds. Our guarantee comes with a climate mandate so we need to be talking to those businesses that are thinking about how they can decarbonise, thinking about how they can save money by moving to solar power. They would not be exposed to the global cost of energy; oil, diesel or gas. Even those with new business models such as waste processing that can reduce emissions; circular economy-type projects.

“As long as there's a viable business model, the risk of what they're doing has been proven, we know it works and they're just capital constrained – that's who we want to be talking to.”

Q) Describe the current financing climate for climate change projects in Africa.

“At a high level, the interest rate environment has recently been a challenge, of course; rates going up. But, if you look at the last couple of years, the climate finance data and the African context, that is a low share of total global climate finance going to Africa.

“If you look at that share, the private capital flows to Africa are actually even smaller still. A lot of it is coming from public sector sources. So the private share in the African context is much less than if you look at other regions of the world, both emerging and developed.

“Now, thinking of the more current climate, there have been a number of sovereign defaults and restructurings on the continent. So that again, in terms of risk perception, can spill over into how investors are seeing the opportunities generally. There can be risk aversion. Investors are looking at opportunities in markets that they know and that there's a sizeable pipeline. So I think that also has been playing into the flows a little bit.

“Things below investment grade can be challenging. You've got pockets of very specialist emerging market investors that are happy to take the uncovered risk. But again, the largest pools of institutional capital are the ones that Green Guarantee Company is trying to mobilise.”

Q) One of the projects GGC is involved in is the DARES programme in Nigeria. What made the firm decide to get involved in that project?

“We are a commercial guarantor, but we're also an impact-driven organisation. Every deal we do, we have to get through two committees – a credit committee and an impact committee. Looking at the DARES transaction, the impact was very clear and very strong from the start.

“This is a part of a broader programme funded by the World Bank and some other institutions. It targets areas that have never had a consistent source of power and it's a grant based programme. What the World Bank and the government of Nigeria wanted to do was to say, well, rather than giving grant money out, we want to have some degree of commercial competition and incentivisation to build and roll the components out.

“So the Green Guarantee Company is covering the construction loan risk effectively. From the point of procuring the panels, building the mini grids, getting the sign-offs technically from the regulator in Nigeria. Then at that point, the grant payment is dispersed from the World Bank funds, but through the Nigerian government. And that credit story is underpinned by the quality of the grant payments.

“The impact story is very clear: we're supporting solar power in rural communities that have not had electricity access.”

Q) GGC is involved in another such impactful project through a partnership with African Frontier Capital and d.light.

“That project spans a number of different countries. That's with our partner African Frontier Capital [AFC], which is a platform for securitising receivables from solar home systems. So again, it's distributed solar energy. AFC has a relationship with d.light and they buy the receivables from d.light at a price that reflects anticipated credit risks, transaction operating costs and so on.

“But they then give d.light that working capital. So rather than d.light having to wait to collect from consumers, AFC buys the receivables and churns and allows them to grow their business, and d.light’s business is growing. So that's across a few countries – Kenya, Uganda, Tanzania – in the structure that we've backed.

“The GGC guarantee brought in large institutional investors, family offices from the US and UK; Legal & General were in it, along with Calvert Impact Capital and the Ceniarth family office. We took those investors and developed a green bond structure that was arranged by Standard Chartered. That green bond then allowed AFC to ramp up its partnership with d.light.

“That is exactly the kind of thing Green Guarantee Company should be doing and wants to be doing – connecting global pools of capital and assets with opportunities on the ground quite far away from where the investors are, and helping to create an asset class for securitisation of these receivables.

“If you look at the securitisation markets in the US, in Europe, there is a lot of flow and transactions. It's a model that can be easily replicated. So our hope is that this really takes off in the African context.”

Q) GGC also targets projects in sectors such as green infrastructure and clean transportation. Tell us more about those strategies.

“Our mandate is dark green. Everything we do has to have a mitigation or an adaptation justification and be backed by science and data. On the infrastructure side, the obvious one is solar, but we're also seeing some interesting things in water, which can help from an adaptation and a resilience perspective. We're working on a deal in Africa that will involve building out piped water networks. So, helping resilience and adaptation, and also impact on reducing the amount of time people have to walk to collect water.

“We're also seeing interesting things in green real estate. One example is agricultural companies looking to reduce their carbon footprint and build out green warehousing. We've also looked at some LEED/IFC Edge green-certified housing developments. There's a couple of interesting developments on the continent that we've been talking about. On the infrastructure side in Africa, that is specifically what we're looking at.

“Within clean transport, we've had a couple of early-stage discussions. We could look at battery charging infrastructure. We could look at e-buses, e-bikes. In Africa, I think there's quite a lot of interest and business models coming up around e-scooters; different models to get e-scooters out to rent the battery or do the charging stations.

“But everything we do in transport has to have a green element to it. We can't do pure roads as it were. We have to do either electric vehicles or the supporting charging infrastructure; anything that is reducing emissions. We could also look at opportunities that might enhance resilience. For example, if there are infrastructure assets, bridges or roads that are particularly prone to flooding or climate change, we can look at projects that will enhance their resilience.”

Q) GGC is looking to raise additional capital from the private sector as it scales up, targeting a guaranteed capacity of US$5 billion or more by 2035. How has progress been so far on that front?

“Obviously, we were delighted with the German government's investment. And if you look at our shareholder base now, it's public sector, but they've come into us on a commercial basis.

That's key to how we're operating. Because the goal eventually is to migrate to private sector capital ownership. Now to do that, we'll need to continue to execute on our business plan, build our portfolio, get the demonstration effect; we're progressing very well with that.

“That's a couple of years away. We're in the process now of also raising other capital, in particular talking to other different public sector-types of providers. So there'll be a staged journey of increasing the capital base. The intent is to build a standalone, profitable commercial business model that then can scale.”

Q) African governments are now looking within to find financing. What are GGC’s thoughts on this?

“Green Guarantee Company is focused on mobilising institutional investors in the global capital markets. These are hard currency investors; dollar, euro, yen investors. Local pension funds, local markets, that is also an important source of finance. Green Guarantee Company doesn't cover local currency as our core mandate.

“But, given the size of the need for investment in adaptation, resilience and mitigation, particularly in Africa, and in the context of the size of these domestic pools of capital, if you look relative to other countries or regions in the world, the actual size of the domestic savings is very small. If you take away South Africa, Nigeria, Kenya, the actual pools and the depth of that local currency capital – it's just not there.

“So you have to have that international capital, and to diversify sources of capital away from MDB capital. That's what we're doing. Domestic sources are certainly important and, ultimately, African governments should be investing in their own economic development.

“Historically, many of the African pension funds have been focused on just sovereign debt or maybe some bank debt. They haven't really gone too much into infrastructure or other types of corporates. And, as I said, those pools of capital generally are pretty small relative to the need. So you've got to have a hard currency solution, which is what GGC does.”

Q) How do you see Africa's climate finance landscape evolving over the next decade?

“There's a lot of interesting and exciting developments on the continent driven by need.

There are many businesses that are realising they can make money by adapting and taking a climate focus in what they're doing. And those businesses are capital-constrained; the capital isn't flowing. So I think, apart from the work we're doing, and we're just a small player relative again to the size of everything that's needed, we'll see more diversification of sources of capital coming in. They'll start to be more nuanced and the capital markets landscape will become more sophisticated in the sense of more dedicated pockets of capital that are talking to the right people that have the right intermediaries. Because that's also important.

“Oftentimes, in the last few years, we’ve talked to businesses or project developers and it's clear that they might not realise which risk capital they really need; is it really senior debt they're looking for or should they be looking for more risky venture debt or mezzanine debt or does the project need equity? So I think we'll start to see this landscape of different pockets of risk capital start to become more nuanced and built out. And I think that's a good thing.”

Photo: Christopher Bredholt (Source: LinkedIn @ GGC)