# Sponsor in the Middle Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-03-06 Category: FINANCE Category URL: https://financedigest.com/category/finance Meta Title: Emerging Markets Debt Finance Challenges Meta Description: Discover the hurdles emerging market sponsors face in obtaining debt finance and how development finance institutions provide solutions for sustainable growth. URL: https://financedigest.com/sponsor-in-the-middlehtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/istock-1161275451-1736815992655-compressed.jpg) _By_ **_Marc Naidoo,_** _sustainable finance partner in the London office of international law firm, McGuireWoods_ ![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/marc-naidoo-sustainable-finance-partner-in-the-london-office-of-international-law-firm-mcguirewoods-450x424-1736815992636-compressed.jpg) Marc Naidoo History will tell you that sponsors within emerging markets have had to work harder to obtain debt finance than their counterparts in more developed markets. Market and industry volatility, as well as political uncertainties have meant that emerging market sponsors have had to go above and beyond to convince [financiers that any potential financing would pass internal](https://www.financedigest.com/the-hidden-financial-woes-of-international-students-heading-for-the-uk.html "The Hidden Financial Woes of International Students Heading for the UK") credit and risk reviews. The riskier the project, the more diluted the pool of financiers became, eventually paving the [way for development finance](https://www.financedigest.com/3-key-ways-you-can-transition-from-finance-to-fintech.html "3 key ways you can transition from finance to fintech") institutions to step in and provide much needed capital, especially into more volatile industries such as agriculture. However, debt from [development finance](https://www.financedigest.com/bridging-finance-for-property-development.html "Bridging Finance for Property Development") institutions comes with nuances that are not always easy for sponsors to swallow. For instance, finance documents are policy heavy, which is understandable considering the special status of development finance institutions and the reputational risks involved in high-risk jurisdictions. Timelines for deals can be cumbersome, and debt is usually more expensive both in terms of [pricing and under reporting requirements under information covenant packages](https://www.financedigest.com/unicredit-sets-out-8-billion-aid-package-for-italy-clients-hit-by-surging-prices.html "UniCredit sets out billion aid package for Italy clients hit by surging prices"). By effluxion of time, the more deals concluded in a specific industry or jurisdiction [changes the perception and demographics of financiers](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") available to sponsors. New private sector [debt has become available at opposite ends](https://www.financedigest.com/5-common-ways-people-end-up-in-debt-without-realising.html "5 Common Ways People End Up In Debt Without Realising") of the risk spectrum. Firstly, there are private [sector financiers who approach transactions in a pragmatic fashion, adopting internal protocols copy pasted from development finance institutions, and secondly, there are private sector financiers who have an unsavoury risk appetite who prefer covenant light deals and fast lead](https://www.financedigest.com/invest-in-infrastructure-to-escape-the-starvation-cycle-warns-leading-nonprofit-sector-strategist.html "Invest In Infrastructure To Escape The ‘Starvation Cycle’, Warns Leading Nonprofit Sector Strategist") times. The [issue with the latter is that the market realised that the end game for these financiers](https://www.financedigest.com/how-the-financial-services-industry-can-solve-the-issue-of-vulnerable-code.html "How the financial services industry can solve the issue of vulnerable code") was to control the asset forming the basis of the deal in question. Throughout Africa there are examples of sponsors losing assets to aggressive financiers, who then take over assets and operate them as their own. An unscrupulous, by highly successful strategy. So where does the market sit now? The answer lies in the emergence of the ESG emphasis on transactions. [Emerging markets offer lucrative opportunities for financiers](https://www.financedigest.com/top-6-trends-emerging-in-financial-services-in-2016.html "TOP 6 TRENDS EMERGING IN FINANCIAL SERVICES IN 2016") to achieve their sustainable finance metrics, which in turn satiates stakeholder pressure on these financiers. Sponsors have an even greater choice of potential financiers, including more [risk averse financiers that are enticed by the prospect of growing](https://www.financedigest.com/euro-zone-economy-faces-growing-risk-of-recession-survey-shows.html "Euro zone economy faces growing risk of recession, survey shows") their ESG portfolio. Unfortunately, though, the traction that was predicted has not materialised in the way that the market expected. Without getting themselves into a precarious situation with aggressive financiers, sponsors are faced with risk averse financiers who would like to do ESG [deals but at an acceptable credit](https://www.financedigest.com/eu-us-working-on-deal-to-make-ev-minerals-eligible-for-tax-credits-eu-official.html "EU, US working on deal to make EV minerals eligible for tax credits -EU official") limit. This then leads to the issue that has plagued sustainable finance from the onset, which is scalability. Timid private sector capital inevitably [reaches](https://www.financedigest.com/analysis-g7-fails-to-reach-intervention-deal-to-ease-pain-of-soaring-dollar.html "Analysis-G7 fails to reach intervention deal to ease pain of soaring dollar") a ceiling making it difficult for the “whale deals” to be concluded. The [solution once again lies in development finance](https://www.financedigest.com/xactly-introduces-commission-expense-forecasting-solution-for-finance.html "Xactly Introduces Commission Expense Forecasting Solution for Finance") institutions, just not in the way we would usually expect. By no means are de-risking structures new. Their history [extends all the way back to the first private public partnerships](https://www.financedigest.com/britains-jd-sports-extends-nike-ties-with-partnership-deal.html "Britain’s JD Sports extends Nike ties with partnership deal") which have proven very successful. However, in this market climate development finance institutions have the ability to crowd in private capital by guaranteeing the obligations of sponsors under financing agreements within the ESG sphere. De-risking in itself can form the basis of an article, however for purposes of this article we will focus on the practical implications sponsors should [consider when embarking](https://www.financedigest.com/4-questions-to-consider-before-embarking-on-a-contract-packaging-expansion.html "4 questions to consider before embarking on a contract packaging expansion") on this financing route. The first port of call for sponsor is to identify the [development finance institution that they would like to partner](https://www.financedigest.com/reckon-software-goes-from-strength-to-strength-with-appointment-of-new-partner-development-manager.html "Reckon Software goes from strength to strength with appointment of new Partner Development Manager") with. Ideally sponsors would want a development finance [institution that has a proven track record in a particular jurisdiction or industry which would make marketing a proposed transaction easier when approaching financiers](https://www.financedigest.com/a-cloud-migration-guide-for-financial-institutions.html "A Cloud Migration Guide for Financial Institutions"). The parameters of the de-risking would then need to be [agreed upon as the development finance](https://www.financedigest.com/g7-finance-chiefs-agree-on-russian-oil-price-cap-but-level-not-yet-set.html "G7 finance chiefs agree on Russian oil price cap but level not yet set") institution would conduct its own due diligence on the sponsor and the project in question. Once agreed the sponsor would [open discussions with the private](https://www.financedigest.com/barclays-private-bank-opens-new-office-in-verbier-switzerland-for-2022-23-ski-season.html "Barclays Private Bank opens new office in Verbier, Switzerland for 2022/23 Ski Season") sector, and it is at this point that the sponsor finds themselves as the go between the de-risker and the financier. Financing terms will be discussed with the financier, with the de-risking instrument forming part of the credit decision, however the sponsor will not have to navigate through overlapping issues between all parties, a few of which are briefly discussed below. Firstly, ideological and policy concerns for both the de-risker and the [financier need](https://www.financedigest.com/the-financial-services-industry-needs-to-get-serious-about-cyber-security-in-the-covid-19-era.html "The financial services industry needs to get serious about cyber security in the Covid-19 era") to be navigated through. Each entity will have its own approach to lending and to ESG, which sometimes are not complimentary to each other. It is worth noting that there will be two sets of documents, with overlap in very limited circumstances. The de-risking instrument is a product sold by a development finance institution and will not form part of the composition of the finance documents under the financing. As such there could be policy points that a development finance institution has that [must](https://www.financedigest.com/2019-year-must-re-build-public-trust-finance.html "2019 is the year we must re-build public trust in finance") be referenced in the financing which is benefitting from its product. The difficulty being that there is usually limited interaction between the de-risker and the financier, so the sponsor is placed in a position whereby it needs to [raise points](https://www.financedigest.com/how-to-raise-my-credit-score-40-points-fast.html "How to raise my credit score 40 points fast") for each party while also trying to negotiate their own position. Major policy points would [include sell](https://www.financedigest.com/uniper-sells-uae-marine-fuels-refinery-to-consortium-including-montfort.html "Uniper sells UAE marine fuels refinery to consortium including Montfort") down restrictions for the financier, excluded activities in respect of sensitive industries, and more relevant than ever, sanctions. Secondly, there is the covenant package that must be agreed upon, and, in particular, the information covenant package. As discussed, there will be two sets of documents that the sponsor will need to negotiate. Sponsors would want to ensure that the covenant [packages mirror each other as far as possible across the two sets](https://www.financedigest.com/eu-sets-recycling-reuse-targets-to-cut-packaging-waste.html "EU sets recycling, reuse targets to cut packaging waste") of documents, so as to avoid having to prepare two sets of reporting documents for both the financier and the de-risker. This is harder in practice than in theory, as internal environmental risk [management](https://www.financedigest.com/managing-trade-credit-and-insurance-in-the-context-of-international-commerce-expansion.html "Managing trade credit and insurance in the context of international commerce expansion ") teams will have differing internal protocols and requirements which feed into their ESG reporting matrix. Unfortunately, there is no silver bullet to mitigate this. Sponsors can however try to [match development finance](https://www.financedigest.com/all-shapes-and-sizes-how-to-match-your-technology-to-your-finances.html "All shapes and sizes: How to match your technology to your finances") institutions and financiers who have worked together previously, or that have matching ideologies when it comes to risk and ESG reporting. Practically, sponsors should use the covenant package offered to the de-risker as a baseline when negotiating with financiers. As far as possible these should be replicated into the financing structure, but in reality there will be two sets of covenants to adhere to, and sponsors should rather focus on the [timing of these so as to avoid back](https://www.financedigest.com/love-in-a-time-of-inflation-how-much-will-valentines-day-set-you-back.html "Love in a time of inflation: how much will Valentine’s Day set you back?") office burden or duplication of work. Lastly, given that there are two sets of documents, there could be two sets of security documents as well. De-risking instruments are usually backed by a counter indemnity of sorts, which would need to be bolstered by hard security. Development finance institutions usually favour cash collateral structures (for example debt service reserve accounts or cash sweeps), however share and other hard asset security may be explored. The issue is that the sponsor and the de-risker would have agreed upfront on a security package as part of the de-risking instrument, which in turn means that there must be a separate pool of assets available to a financier. One way to mitigate this situation, would be to ensure that project related assets are [ring fenced](https://www.financedigest.com/uk-energy-regulator-drops-plan-to-ring-fence-customers-cash.html "UK energy regulator drops plan to ring fence customers’ cash") for the financier, while sponsor specific assets or cashflows are ring fenced for the development finance institution. There may still be some creative packages created, however that is part and parcel of running essentially two separate deals, under the umbrella of one. These are some of the considerations that sponsors will need to bear in mind when approaching ESG deals through de-risking. Being in the middle is never easy, and playing the go-between between two separate parties can prove tiresome and frustrating. Especially so if some issues could be dealt with by those parties simply speaking directly. However, this rarely happens as the sponsor offers both de-riskers and financiers a buffer as between each other, where each can still hide behind the guise of policy and internal protocols, while leaving things to the sponsor to settle. But, the pros certainly outweigh the cons, if sponsors can get through being in the middle, they would have unlocked more capital through crowding in the [private sector](https://www.financedigest.com/dollar-slides-on-contraction-in-private-sector-activity.html "Dollar slides on contraction in private sector activity") which addresses the fundamental issue of scalability. More so, if the structure works, it opens up the possibility of replicating the structure between the same parties with just commercial terms needing to be refreshed from tranche to tranche. Perhaps we are looking at this incorrectly, as instead of being the middle man, sponsors can actually be seen as the bridge between public and private sector in the context of ESG, or maybe something in the middle. Marc Naidoo is a finance partner specialising in sustainable finance in the London [office of international law firm](https://www.financedigest.com/international-law-firm-calls-in-viato-connect-uk-and-us-offices.html "INTERNATIONAL LAW FIRM CALLS IN VIATO CONNECT UK AND US OFFICES"), McGuireWoods.  He can be reached at mnaidoo@mcguirewoods.com --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---