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Financing Options and Instruments in Asset Recycling
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The Guidelines to Implementing Asset Recycling Transactions is intended to be a living document and will be reviewed at regular intervals. Visit the Asset Recycling: Decision maker’s notes for a practitioner's overview of Asset Recycling programs. To find more, check out the Section Overview and Content Outline, or Download the Full Report.

 

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Financing Options and Instruments

This section presents different modes of financing an asset recycling finance. Private sector participants in an asset recycling transaction will be required to fund the upfront payment to secure the concession or lease. The private sector may also be required to fund any required capital expenditure to refurbish or re-develop the asset. This section discusses the financing options and instruments available to the private sector and provides the relevant Authority with an understanding of the criteria issues to ensure the bankability of any proposed asset recycling scheme.

Traditionally, public sources have been the main source of capital available for finance, including financial resources from multilateral development banks (MDBs), multilateral organizations, governments, infrastructure funds and aid agencies. However, the cost of mitigating and adapting to climate change increasingly outweighs the amount of public funds available, thus there is a global need to increase and capitalize funds from the private sector and private sources such as commercial financial institutions, philanthropic organizations, institutional investors, non-profit organizations, corporate actors, institutional funds, etc.

This finance gap has led to the introduction of blended finance, where public and private sources contribute to a single funding flow, helping to reduce investment risks for the private sector. The blended-finance refers to the targeted use of alternative financing for high-impact projects (i.e., large infrastructure projects) where actual or perceived risks are too high for commercial lenders to enter on their own. While the search and preparation costs associated with accessing this means of financing may not always make it economically feasible, especially for small projects, as a rule, for larger projects it is worth exploring options to apply for this type of funding.

There are different typologies of financial instruments which generally fall under four (4) main categories: i) debt instruments; ii) equity instruments; iii) credit enhancement instruments; and iv) risk transfer instruments.

Types of Financing Instruments

The selection of the adequate instrument and/ or finance provider will depend on the type of asset recycling project as well as the type of concessionaire/ private partner selected. In the following table, a list of different types of instruments per category are presented:

Table 8: Types of Financing Instruments 

Documentation
Definition
Finance Provider
Debt InstrumentsNon-concessional loansSum of money that is given but needs to be repaid.Commercial banks, corporates
Concessional loansSum of money that is given at a relative cheaper cost.Governments, multilateral/bilateral finance institutions, infrastructure funds
GrantsSum of money that is given but does not need to be repaid.Public and private investors, MDBs
Debt swapsSale of a foreign currency debt to an investor or debt forgiveness by the creditor, in exchange for the debt relief.Public and private investors
Green, social, thematic and sustainability linked bondsDebt instruments where proceeds are used to finance or refinance, in part or in full, new and/or existing eligible projects/assets/companies.Public (national, sub-national or municipal) and private investors, banks or corporations
Quasi equityDebt, typically unsecured and subordinated that raises capital base with no changes to the ownership structure.Public and private investors
Equity InstrumentsEquity securitiesOwnership interest held by shareholders in an entity (a company, partnership, or trust), realized in the form of shares of capital stock.Public and private investors
Investment grantsSum of money that does not need to be repaid.Governments, multilateral/bilateral finance institutions
Co-financingJoint financing between two entities working to finance an activity.Public and private investors
Credit-enhancement InstrumentsInterest-rate softening mechanismsLower interest rates and other costs below the market rates.Governments, multilateral/bilateral finance institutions
On-lending / re-financingBorrowing from external or domestic sources and thereafter pass the loan to another entity / replacement of an existing debt obligation with another debt obligation under different terms.Development / institutional finance institutions
Project bond credit enhancementSubordinated instrument, either a loan or contingent facility, to support senior project bonds issued by a project company.Multi-lateral / bi-lateral finance institutions
Subordination of credit trenching excess spread, over collateralization, reserve accounts, etc.Prioritization of collateralized debts, ranking one behind another for purposes of collecting repayment from a debtor. Subordinated debts are riskier than higher priority loans, transferring risk in the event the results of projects are not fully achieved.Local and national governments
Risk-transfer InstrumentsInsurancesThe creation of risk transfer mechanisms that provide resources for disasters and transfer loss liabilities to capital market investors.Insurance companies
GuaranteesA promise to repay the debt of another in the event of default.Governments, multilateral/bilateral finance institutions
Results-based climate financeFunds are disbursed by the donor or investor after pre-agreed results of the activity are achieved and verified.Governments, multilateral / bilateral finance institutions
Blended financeDevelopment capital as part of the effort to mobilize private capital.Governments, multilateral/bilateral finance institutions
Technical assistance grantsSum of money that is given for capacity building and information and expertise, instruction, training and consultation related to a climate activity but does not need to be repaid.Governments, multilateral/bilateral finance institutions
Risk capitalFunds (equity / concessional loans) allocated to climate mitigation / adaptation activity with high level of uncertainty.Governments, multilateral / bilateral finance institutions

Instruments that can reduce debt vulnerability risks while facilitating long-term investments would allow private sector to consistently take long-term risks into account.

Related Sections
Asset Recycling Projects
Concession and Lease ModelsInfrastructure is pivotal to sustainable development with positive impacts on the economy,… more
Direct Contractual Agreements Learn more about the Direct Contractual Agreements utilized by public sector entities to monetize brownfield… more
Note/s:

This section has not been prepared with any specific transaction in mind and are meant to serve only as general guidance. It is therefore critical that the content will be reviewed and adapted for specific transactions. 

This is a new section of the website and is currently in draft form. For feedback on the content of this section or to suggest additional links or materials, please contact the PPP Resource Center using the feedback form.