The Preferred Creditor Status of IFC has received consistent universal recognition from entities such as bank regulators, the Bank of International Settlement ("BIS"), rating agencies, and private political risk insurance ("PRI") providers.
In the late 1980s, bank regulators in most developed countries began imposing mandatory country-risk provisioning requirements for banks. Typically, banks became obliged to report their exposures to developing and transition countries, and to maintain minimum levels of loss provisioning for exposures to these countries. These rules limited the appetite of commercial banks for assets in the developing and transition countries.
Beginning in 1990, IFC persuaded many bank regulators of industrialized countries that exposure through B Loans should be exempt from normal country provisioning rules because of the Preferred Creditor Status of IFC in combination with the lender of record mechanism. In certain countries, the exemptions granted by the regulators in the 1990s still remain valid. Please find attached letters from the bank regulators in Canada, France, Israel, Italy, Portugal, and Spaindescribing the exemption from mandatory country-risk provisioning of IFC B Loans.
More recently, bank regulators from several countries (such as France and the U.K.,) moved away from prescriptive and specific country-risk provisioning regimes, while bank regulators from several other countries (such as Germany and the United States) never imposed across-the-board country provisioning. In general, banks in these countries are allowed to formulate their own policies on country provisioning, based on the bank’s assessment of the country risk. Many of these banks provide IFC B Loans with full or partial relief of country provisioning.
BIS under Basel II
The Basel Committee on Banking Supervision is currently formulating a new framework for regulatory capital requirements for banks, generally referred to as Basel II. In a letter from the Basel Committee to IFC dated October 1, 2004, the Committee confirmed that under the standardized approach in Basel II, B Loans can be given treatment as if the loan was rated at the local currency rating of the borrower. This can be very beneficial to banks, particularly when lending to an investment grade borrower in a sub-investment grade country. Additional information on Basel II can be found under http://www.bis.org/publ/bcbs128.htm; the relevant section in the Basel II framework is paragraph 102, footnote 31.
The major rating agencies (Moody’s Investor Services, Standard & Poor’s and Fitch Ratings) have recognized IFC’s Preferred Creditor Status as an effective mitigant of country risk. IFC B Loans have been assigned a foreign currency rating equal to the borrower’s local currency rating by these rating agencies.
S&P states in an article from November 2005 (page 7), "As IFC remains the lender of record on the books of the borrower, the expectation is that the borrowers will be able to purchase the foreign exchange to service their IFC loans (and consequently, the participants in those loans) during times of financial stress when exchange controls prohibit them from servicing foreign-currency loans from commercial lenders. This expectation is based on many years' experience and was met during the Republic of Argentina's latest financial difficulties". Additional information on Preferred Creditor Status of multilaterals can be found in an article from S&P called "How Preferred Creditor Support Enhances Ratings".
As a result of the rating agencies' recognition of IFC's Preferred Creditor Status, several IFC B Loans have been rated above the foreign currency rating of the country (the "sovereign ceiling").
The main private PRI providers (such as Sovereign Risk Insurance and Zurich Insurance) recognize the benefits of IFC’s Preferred Creditor Status and it's "umbrella". Under certain circumstances (e.g., in countries with lower credit ratings), participants may choose to combine a B Loan with private PRI to further enhance the appeal of the overall financing structure. In April 2005, IFC syndicated a B Loan for Transierra in Bolivia for the financing of a gas pipeline, and offered participants the possibility of purchasing limited PRI insurance (against expropriation risk). This feature was key to the success of the syndication and five out of the seven participants purchased the insurance.