Helping developing countries raise capital
OPIC political risk insurance product holds promise for financing large infrastructure projects
One of the key ways OPIC is supporting investment as a stabilizing force in Eastern Europe is through a project in Ukraine that supports the construction of a spent nuclear fuel storage facility that will reduce the country’s need to ship spent fuel to Russia. OPIC provided insurance to support the Central Storage Safety Project Trust’s bond securities issuance in the U.S. capital markets, and the proceeds funded a 20-year loan to State Enterprise National Nuclear Energy Generating Company. The project represents the first time OPIC has used expropriation provided political risk insurance to cover a bond offering for a sovereign state but as OPIC Director Kate Schweigart, explains, it addresses a key challenge developing countries often face financing major infrastructure projects.
Explain the role of political risk insurance in this deal.
We constructed an innovative approach to political risk insurance in order to provide an avenue for lower-middle-income countries to seek financing in the U.S. capital markets. This is the first OPIC deal arranged in this fashion and we are pleased that our pioneering approach to expropriation coverage provided an opportunity for investors of U.S. capital markets to support this important infrastructure project in Ukraine. With OPIC’s political risk insurance enhancement, Moody’s rated the notes Aa2, a considerable uplift from the government of Ukraine's Caa2 rating.
Beyond this single project, what are the potential implications for future projects?
With this product, institutional investors have been given a new opportunity for emerging market investments in the $40 trillion U.S. bond market. It has historically been challenging for lower-middle-income countries to seek investment grade financing in the U.S. capital markets. By lowering the risk profile, we are creating a new opportunity that will allow private sector capital to support much-needed infrastructure projects in emerging markets.
Could a similar structure potentially be used again in other OPIC projects?
Yes. Access to long-term capital markets financing is crucial to the completion of critical infrastructure projects in emerging markets. Many of these countries have a significant need for airports, roads and ports and successful financing solutions may require long tenors that can be achieved on the U.S. capital markets with this political risk insurance enhancement.
How did the deal come together?
As common with all innovative solutions, it was necessary to overcome a number of challenges before we were able to leverage this product to support the project. The project team collectively overcame these challenges with a concerted team effort. While there were too many issues in this two-and-a-half-year effort to itemize them all, I will say that this project could not have taken flight without some key members of the OPIC Structured Finance and Insurance team including Vice President Tracey Webb and Managing Director Steven Johnston. Steven’s novel thinking layered with his expertise in OPIC’s political risk insurance coverage boundaries led to this innovative concept. The idea was moved from concept to reality with the help of Tracey Webb and her long history of successfully structuring intricate and innovative financing solutions to catalyze investment in emerging markets.
Beyond OPIC’s internal team, this project was a collaborative effort with numerous outside partners to include the arranging bank, selected by the Central Storage Safety Project Trust, Bank of America Merrill Lynch. Together, with our respective outside counsels, we worked through a number of issues to include the expedited international arbitration process and the conditions of the sovereign guarantee. The negotiated results ultimately incorporated several liquidity enhancements that reduced the risk of default, thus strengthening the product and allowing for an investment grade rating.