Amid growing demand for infrastructure investment in emerging markets, Willis, a WTW business, has successfully placed a number of excess of loss non-payment insurance policies worth around US$250mn. These transactions, backed by multilateral development banks, demonstrate how first-loss guarantee structures can help unlock financing and mitigate risks for lenders and borrowers.

 

Emerging markets face a pressing need for infrastructure financing. Yet access to affordable, long-term funding remains a challenge. Many lenders perceive these regions as high risk, making them hesitant to commit capital. Limited insurer appetite and lenders’ internal country limits further exacerbate the issue. The demand for credit and political risk insurance far outstrips available capacity, particularly in Africa.

Guillaume Simonnet, director, financial solutions at Willis, elaborates: “There is too much to do and insufficient money and capacity in Sub-Saharan Africa. As everyone’s exposure is essentially full up, and only so much capacity frees up every year, it’s a significant issue.”

There has been increased insurer appetite in Latin America, with more banks looking to invest in the region. Asia, however, also remains challenging, with low pricing and limited market capacity. Nevertheless, the need for infrastructure, including roads, hospitals and schools, remains urgent, necessitating innovative financing structures.

The complexities of infrastructure finance in these regions go beyond simple capital constraints. Many governments prefer to secure large-scale financing for multiple projects under a single structure rather than negotiating numerous smaller loans. This streamlines compliance, simplifies debt management and ensures consistent pricing across projects.

Financing projects under a first-loss guarantee (FLG)-backed structure allows governments to achieve long-term savings through cheaper margins on longer tenors while maintaining momentum on critical infrastructure development.

Infrastructure projects in emerging markets also encounter challenges associated with political stability and regulatory uncertainty. Many lenders are reluctant to provide financing in areas with unpredictable legal frameworks, making risk mitigation strategies, such as FLG structures, even more valuable. By offering an additional layer of security, these structures allow projects to advance in environments that would otherwise discourage investment or not get the required capital to fund their projects.

 

Unlocking financing with FLG structures

Willis has been at the forefront of facilitating financing solutions through excess of loss non-payment insurance policies. Working with multilateral development banks such as the African Development Bank and the International Bank for Reconstruction and Development, these policies provide a fixed amount of comprehensive risk cover for commercial and political risks.

Multilaterals’ role in these deals is vital, as in many cases, commercial banks would not be able to arrange further lending for some of these countries or offer the kind of tenors that borrowers are after. But multilateral development banks taking a first-loss position provides commercial banks with an essential level of risk comfort.

Alastair Hill, senior director at Willis, explains: “Crucially, multilaterals cover approximately 50-60% of the transaction. If something goes wrong, the multilateral takes the hit first. It is better positioned to restructure and put the transaction back on track.”

These guarantees are available for principal-only or principal-and-interest coverage, allowing the lender to choose its preferred option. As the loan amortises, the percentage of the principal benefitting from the FLG cover increases, ultimately covering the entire outstanding principal and interest.

Another essential feature of FLG-backed policies is the flexibility in managing default scenarios. Unlike conventional guarantees, which may trigger claims quickly, FLG structures incorporate a built-in buffer, allowing more time for restructuring efforts before private insurers are required to intervene.

“The indemnification by private insurers is backloaded because of how the exposure is structured, essentially as a top-up to the FLG,” says Simonnet. “This shields them from actually paying a claim for a long time, which many see as a positive.”

This approach provides comfort to lenders and encourages long-term investment in regions that require sustained development efforts. By extending the timeline for risk absorption, the structures align with the long-term nature of infrastructure projects, which often require significant time to generate revenue and economic benefits.

 

Benefits for lenders and borrowers

One of the primary advantages of FLG structures is the ability to draw in private sector participation in larger quantums.

“The involvement of a multilateral brings an element of pricing consistency, but it also provides a level of comfort to private insurers,” says Simonnet. “If there is a problem, the expectation is that the multilateral will step in and work to resolve it.”

For lenders, this translates to enhanced deal metrics and the ability to extend loans on more favourable terms. Commercial banks can participate with greater confidence, often leading to an increase in available financing. The presence of an FLG structure enables countries to access funding at significantly lower interest rates than is possible through standalone commercial borrowing.

Borrowers, including governments, benefit from the ability to consolidate multiple smaller loans into a single structure.

“It is far easier to manage a large, consolidated loan than multiple smaller ones, each backed by different export credit agencies (ECAs) with various documentation requirements,” notes Hill. “A single FLG-backed loan also allows for refinancing existing debt or new debt at more preferential rates, generating cost savings.”

This also simplifies regulatory compliance, as governments must adhere to only one set of conditions rather than coordinate with multiple lenders across multiple facilities.

Additionally, FLG-backed financing provides greater flexibility in sourcing materials and contractors on global terms. Projects can be executed more efficiently and at the best available cost without being limited by individual ECA requirements.

FLG structures also assist borrowers in securing financing for longer tenors, which is vital for large-scale infrastructure projects. Many commercial lenders are reluctant to extend credit beyond a certain duration, but with multilateral support, these loans can exceed conventional limits, thereby making long-term financing more attainable.

 

The value of insurers in scaling FLG structures

Crucially, FLG structures require increased participation from insurers for effective scaling. While many insurers value the backloaded exposure model – where claims are delayed due to the multilateral’s preferred creditor status – some hesitate due to reinsurance restrictions.

“Not all private insurers are comfortable with these structures, especially when the tenors are lengthy,” says Simonnet. “Some insurers simply can’t engage due to restrictions under their reinsurance arrangements. If more could participate, it would unlock key additional capacity.”

FLG structures also offer a capital relief advantage for banks, allowing them to integrate the guaranteed portions of these deals into their ongoing covered bond programmes.

“That creates additional flexibility for lenders,” says Hill. “It’s also important for insurers to understand that this is a lower-risk structure, which should encourage broader participation.”

As the demand for infrastructure financing continues to rise, insurers and reinsurers must find better ways to accommodate these structures. Aligning risk frameworks with multilateral-backed structures will be crucial in increasing insurer participation and ensuring these transactions gain increased viability on a larger scale.

 

A proven model for infrastructure finance

Leveraging multilaterals benefits borrowing countries and has far-reaching socio-economic implications. FLG structures support sustainable development and infrastructure growth by providing financial stability and reducing risk.

“These structures allow emerging markets to obtain financing under improved terms, fostering infrastructure development without succumbing to unsustainable debt cycles,” says Simonnet. “For lenders, insurers and governments alike, FLG-backed deals present a win-win solution.”

With a growing demand for sustainable infrastructure finance, Willis remains committed to expanding the use of FLG structures.

“The call to action is clear: more banks should lend under these structures, and more insurers should support them,” Hill concludes. “By working together, we can drive economic development and unlock critical infrastructure financing in the markets that need it most.”