IFC - International Finance CorporationIFC - International Finance Corporation -- » Creating Opportunity...
 

Top Lessons by Subject

Loans

1. Debt servicing schedules: In a volatile environment, debt-equity ratios should be low and debt servicing schedules should be extended and/or back-end loaded.  In exchange for this flexibility, IFC could negotiate loan sweeteners.
 
2. Foreign exchange risk: Projects which rely on domestic sales to repay foreign currency debt face foreign exchange risk. This problem can be addressed by:

  • exploring options for providing local currency loans or guarantees;
  • encouraging sponsors to enter into hedge arrangements; or
  • structuring the project conservatively, with a high debt service coverage ratio.
     
    3. Loan covenants should take account of host country regulations where applicable.  Although covenants should be tight enough to encourage compliance, intermediate measures should be used to address technical defaults.
     
    4. Upside/fees: In order to improve its financial returns on loans, IFC should consider:
  • charging a pre-payment fee; and
  • quasi-equity or income participation to benefit from the project's upside.
     
    5. Security: IFC should scrutinize host country legal systems to verify that security can be enforced. Furthermore, it is important to identify security which is valuable to the borrower; selecting specific assets may simplify administration of security.
     
    6. Inflation: IFC's analysis and covenants for companies operating in an inflationary environment should consider the risks to sustained profitability as well as the impact of currency devaluation, particularly when financing is in foreign currency.
     
    7. Transparency: Loan covenants should require the borrower to generate information regularly to IFC and loan participants to improve governance (especially of financial institutions) and facilitate participants' approval of financial restructurings.


    The above lessons are based on 60 lessons from past IFC investments. 
    Last updated June 1998    .

    • Site Tools