Development Credit Authority

DEVELOPMENT CHALLENGES The lack of robust credit markets is a significant impediment to sustained economic growth and a major obstacle to achieving certain economic, social and political development goals in Bulgaria. Rather than relying exclusively on direct grants to enterprises, which can be appropriate but address limited borrowers, USAID emphasizes the Development Credit Authority (DCA) mechanism, in addition to the technical assistance and legal/regulatory reform programs. This gives USAID the ability to leverage and mobilize resources by means of credit guarantee to a bank in order to finance development objectives.

USAID INVOLVEMENT USAID’s DCA permitted the Agency to offer credit assistance in the form of loan guarantees to financial institutions for development purposes. The DCA program in Bulgaria was launched in 1999 with the establishment of two credit programs providing loans to municipalities and industries for revenue-generating energy efficiency projects and to the emerging SME sector in Bulgaria. At present, USAID has various DCAs with local banks covering energy efficiency, agriculture sector operations, private enterprise lending and municipal credit.

GOAL The purpose of USAID’s DCA facility is to stimulate private sector lending that will advance economic, social and political sustainable development impact in Bulgaria.

PROJECT DESCRIPTION The DCA is a financing tool, which enables USAID to mobilize private capital to support its development assistance activities in Bulgaria. Specifically, this authority allows USAID to use credit in the form of partial guarantees to finance its development objectives by risk sharing with private financial institutions. DCA guarantees carry the full faith and credit of the U.S. Government and cover up to 50% of a lender’s net loss on the principal amount of loans extended to qualified, creditworthy borrowers under approved projects. The guarantee covers a portfolio of loans originated by a privately owned financial institution. Sponsor financial institutions bear the credit risk for the portion of loans not guaranteed by USAID and use their own capital to fund these loans. Loans are extended on the basis of market interest rates and terms, and can be originated in local currency or US Dollars. At present, USAID has five active DCA guarantee schemes in the areas of energy efficiency, agriculture, promotion of competitiveness/ small and medium enterprises (SMEs) and municipal credit.

• Municipal Infrastructure
In view of the emerging opportunities in the municipal credit market in Bulgaria, in 2005 USAID signed a $15,000,000 loan portfolio agreement with HVB Bank Biochim. This guarantee facility is expected to stimulate general municipal credit to support the provision of all types of municipal infrastructure. Specifically, it will:
- Contribute to achieve USAID’s local government strategic objective by establishing a sustainable municipal infrastructure finance system.
- Stimulate capital market growth in a sector with little market experience, but significant potential.
- Leverage additional funding including untapped capital in the private capital market and EU pre-accession and structural funds.

• Energy Efficiency
USAID has signed two $10 million DCA loan portfolio guarantee agreements with United Bulgarian Bank (UBB) to mobilize financing for municipal and industrial energy efficiency projects. Reducing energy costs in facilities such as schools, hospitals, orphanages, district heating systems, street lighting and public buildings allowed municipalities to devote more financial resources to providing essential public services.
For more information on the Municipal Energy Efficiency Program please visit the EnCon Services website.

• Competitive Sector and SME Development
In 2001, USAID signed a $20 million seven-year DCA loan portfolio guarantee agreement with First Investment Bank (FIB) to mobilize financing for private enterprises in competitive sectors such as commercial agriculture, light manufacturing, IT and tourism. FIB has placed under coverage loans exceeding $52.4 million.

• Agriculture
Partial guarantees have been especially effective in promoting agricultural lending in rural areas by providing banks with a risk mitigation tool thus directing credit to an underserved market. Often, private farmers and small agribusinesses have difficulty in accessing credit, because they lack the necessary collateral to meet a bank's standard requirements and/or lack a long-term operational track record. Unresolved issues related to land titling frequently further complicate the picture. Guarantees allow banks to gain valuable experience in lending to such high-risk borrowers and provide the basis for bigger outreach of their lending activities. Currently, USAID has two active $10 million DCA loan portfolio guarantee agreements with Hebros Bank and Post Bank. To date, over 50 loans have been placed under coverage by the two banks amounting to over $7.6 million.

SUCCESS STORY Municipal Energy Efficiency Program. USAID negotiated a loan portfolio guarantee with UBB supporting the bank in lending to commercially viable municipalities and municipal enterprises. Covering a number of energy efficiency projects, the scheme supported the reduction of CO2 emissions and complemented the Global Climate Change mitigation activities in Bulgaria. The DCA guarantee helped the development and implementation of the Municipal Energy Efficiency Program under which UBB placed 33 loans under coverage amounting to over $8.2 million. Beneficiaries were municipal enterprises and companies, schools, hospitals, etc. The projects included improved street lights, refurbishing and replacing of old heating installations, and other energy efficiency retrofitting measures and construction.