Non-Payment Insurance

Matrix’s proprietary Non-Payment Insurance (NPI) coverage program is an innovative solution that can add substantial value to major project financings.

Debt markets for project finance have long been relatively inefficient. Large in size, developmental in nature by definition, and with long maturities, the lending marketplace is generally restricted to very large and risk-adverse institutions such as pensions and commercial banks. As a result, it can be difficult to attract capital to support projects that do not fit a tightly-defined template, typically meaning energy projects in relatively stable countries.

Because of Matrix’s wide range of expertise in insurance and capital markets, we are able to address the underlying risk factors of projects on a ground-up basis — sovereign and political risk, FX exchange, commodity pricing, long-term performance of the projects underlying technology, weather exposure and more.

Building a carefully-crafted base of risk management applications enables us to take the next step, writing insurance coverage wrapping the overall risk of the entire project that indemnifies lenders against the risk to capital in the event of a default, bringing A-rated credit enhancement, to support the entire debt financing.

As a result, we are able to create efficiencies in an inefficient marketplace, enabling projects that otherwise would have been difficult, impossible or expensive to finance. This solution allows a wider range of projects to access debt capital, and a broader group of lenders to participate. The result: cheaper capital and an easier funding process.

NPI broadly fall into two categories:

High-credit, developed market projects, often with at least implicit quasi-sovereign or multi-lateral backing, requiring a simple insurance wrapper to demonstrate a clean package to lenders.

Higher-risk transactions can be properly defeased through underlying (re)insurance and provision of collateral. This cover is effectively financial engineering, bundling a range of risks and recoveries into a similarly clean package—creating “debtquity” via an insurance contract.

Additionally, Basel III compliant Non-payment insurance policies offered by A-rated insurance companies are a viable source of investment-grade, unfunded risk capacity, and risk protection for project finance lenders.

Non-payment insurance features can include:

• 100% protection of debt, principal and interest
• More flexibility and protection compared with traditional risk distribution techniques
• Enhances project funders risk-bearing capacity
• Reduces borrower credit risk, country exposure relief and regulatory capital relief
• Reduces the cost of transactional finance

Policies are flexible in design and offer a range of durations, settlement processes and attachment points.

One recent case study is a $300 million agricultural project in a country with a CCC+ rating on the sovereign debt, and perceived to be exposed to major political risk. Using a variety of underyling risk mitigation tools, and collateral available from a well-funded project sponsor, Matrix was able to engineer a comprehensive solution that wrapped the entire bond financing with an A-rated credit backstop. The lower cost of funding far more than offset the cost of the premium for NPI.