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A Focused Assessment of the International Development Association’s Private Sector Window


Credit rating. An independent opinion of the ability of a borrower or issuer of debt to fulfill their financial obligations, including interest and principal payments, in a timely manner.

Expected loss. The amount expected to be lost on a transaction based on the probability of default multiplied by the loss given default (as a percentage). The expected loss is used to establish loss provisions each quarter that flow directly into the International Finance Corporation’s and the Multilateral Investment Guarantee Agency’s financial statements.

First-loss guarantee. A type of guarantee in which the guarantee provider agrees to bear losses incurred up to an agreed percentage in the event of default by the borrower. The purpose of a first-loss guarantee is to reduce risk and attract lenders and investors who may be hesitant to participate in a deal because of concerns about the level of risk involved. By offering to cover the first losses, the guarantee provider reduces the risk and increases the confidence of potential lenders and investors.

Loss given default. The percentage of principal outstanding that is expected to be lost in the event that a borrower defaults on an obligation. The loss given default is affected by various factors, including jurisdictional risk, collateral, and guarantees.

Pooled first-loss guarantee. A pooled first-loss guarantee is a type of guarantee in which multiple lenders or investors pool their resources to collectively bear the first losses incurred in a portfolio of loans or investments. In a pooled first-loss guarantee, each lender or investor contributes a portion of their investment to a common pool. This pool is then used to cover any initial losses that may occur in the portfolio. The guarantee providers agree to bear the first losses up to a predetermined amount. This reduces the risk exposure for individual lenders or investors and increases their confidence in participating in the portfolio. In the case of the Private Sector Window, a pooled first-loss guarantee is used to cover a portfolio of International Finance Corporation transactions, usually loans, made to a variety of different clients in different countries, with different risk ratings. The guarantee covers the first losses, up to an agreed percentage, on the agreed pooled portfolio.

Probability of default. An estimate of the likelihood that a borrower or issuer will default on their financial obligations over a given time horizon. It is a statistical measure based on ratings data covering thousands of companies that is used by lenders and others to assess the likelihood of repayment or default.

Private capital mobilization. The process of attracting and using private funds, such as equity and debt, to finance investments in international development.

Swap market. A financial market in which participants can agree to exchange cash flows on financial instruments based on agreed terms. These cash flows can include interest payments, different currencies, or other financial variables. The swap market provides participants with flexibility in managing their financial risks and optimizing their investment strategies. It allows them to customize their cash flows and exposure to different variables according to their specific needs.