Question: What are the procedures and oversight UNCDF utilizes for the purposes of disbursing it financing, particularly with respect to diligencing prospective partners?
In principle, UNCDF has three lines of defense as is common practice in the investment industry: the transaction team, the independent risk assessment by the Least Developed Country Investment Platform (LDCIP) and the approval by the UNCDF Impact and Investment Committee (IIC).
Loan and guarantee transactions are extensively reviewed by the originating Practice (LTF / IDE) / External UN Agency and independently risk assessed by the LDCIP Practice (loans and guarantees risk management function). Part of the underwriting process is the approval required by the UNCDF IIC with half of its members coming from various parts of the investment industry - the UNCDF member being part of the IIC cannot be associated to the investment in any manner.
The investment team is responsible for monitoring all the companies and PPPs in which UNCDF invests. UNCDF uses publicly available information, management meetings, research, and industry information to monitor its clients and ensures that at least two on-site meetings with the investee in a year.
UNCDF loan policy clearly indicates that “A client can have no more than two UNCDF loans or guarantees outstanding at any time from UNCDF under the same program, unless an exception is granted, in writing, by the ES. In addition, there are specific reporting requirements on concentration risks, namely country concentration, sectoral concentration, counterparty concentration and currency concentration.
Funds used to issue loans and guarantees are earmarked for this purpose by the relevant donor and do not come from UNCDF’s reserves – regular feedback on the use of funds is provided to the respective donors.
UNCDF had fully adopted UNDP’s Policies and Procedures, Internal Control Framework (ICF) and Enterprise Risk Management (ERM) policy. This is supplemented by UNCDF’s Operations Manual and Loan and Guarantee policy which address the additional controls and procedures that need to be exercised in view of UNCDF’s unique capital mandate.
Question: What external stress testing or validation has been conducted with respect to UNCDF’s loan and guarantee capabilities?
UNCDF established its independent loans and guarantees risk function (LDCIP) in 2016 and have continued to improve its loans and guarantee policy and underwriting process. In this regard, the UNCDF has subjected its process to review by two independent external organizations with positive outcomes and where required, recommendations are being incorporated.
In addition, the UNCDF has increased the number of staff to support the underwriting and monitoring process over the last two years. Contrary to UNOPS, since the start of the LDCIP the formal requirements for an approval of a loan or guarantee has increased in scope.
UNCDF has received an unqualified audit opinion for the ninth consecutive year and has no long outstanding audit observations.
Question: What is the state of UNCDF’s capacity with regard to issuing loans, and/or a snapshot of UNCDF’s loan portfolio?
Over the five years since creation of the independent loans and guarantees risk function (LDCIP), the UNCDF originated loans and guarantees with a total value of USD 5.8 million to 30 different projects/operations (average transaction size is less than USD 200 000). 4 of the loans have been fully repaid and 1 guarantee has been completed.
Question: What is the geographic mapping of projects supported by UNCDF loans?
UNCDF projects were supported by loans in nine different countries, most of which were in least developed countries (LDC) and included, Burkina Faso, DRC, Ethiopia, Fiji, Malawi, Myanmar, Papua New Guinea, Tanzania and Uganda.
Question: How are the loan operations within UNCDF connected to the wider organization?
Loans and guarantees are incorporated in the wider UNCDF operations as a specific product offering, similar to a grant or technical assistance product offering. The investment platform does not operate as a standalone business, but rather a loans and guarantee risk management function in support of operations originated by other Practice areas.
Question: What are UNCDF’s internal measures to prevent improper disbursements?
UNCDF has a detailed due diligence process for assessing risk in the underlying operation, not least regarding Know Your Client assessment of the person owning the business (and also who owns the parent company if such exists etc.).
Question: What is UNCDF’s credit exposure?
The single largest credit exposure (to one project) represents 7.9% of the outstanding portfolio value with the largest single country exposure representing 20% of the outstanding portfolio.
Question: How does UNCDF ensure fair competition for financing?
Any loan or guarantee issued by UNCDF is sourced through an open competitive process with objective selection criteria.
Question: What is the state of UNCDF’s outstanding debt within its portfolio?
At the end of December 2021, the provision for potential losses of UNCDF’s debt operations reached USD 0.4 million, largely driven by projects in countries under military coup and subjected to the adverse impacts of climate change (flooding) and the prolonged effects of the Covid pandemic. While these operations required provisioning under the accounting policy, a number of them have improved and continue servicing their debt obligations in 2022.
Question: What are the measures UNCDF has or will take to minimize losses?
UNCDF focuses on Least Developed Countries in some of the most challenging parts of the world (subject to military coups, draughts, floods, prolonged pandemic shocks, etc.), with clients normally considered un-bankable by traditional sources of capital due to the early stage of the business and lack of collateral.
UNCDF aims to support these companies and provide an opportunity for these businesses to mature and become bankable – in line with the agreement with the respective donors supporting these endeavors. Within the broader loans and guarantees policy, the stage of project, market segment, country and sector mix of the portfolio is largely influenced by the donors providing the project funding for the relevant intervention – therefore the potential default and loss rates of the portfolio could vary significantly based on the mix of projects supported.
In addition to conducting detailed underwriting and monitoring procedures to minimize potential defaults and losses, several operations benefit from capacity building technical assistance support to improve the long-term sustainability of the operations, which also helps the companies pay back their debts.
Question: What is the profile of a typical UNCDF partner that receives financing?
The majority of the operations supported by the UNCDF relate to early-stage business where profitability remains challenging – this point notwithstanding, we continue to engage with clients on a regular basis to identify specific issues / concerns as early warning and provide assistance where possible and appropriate. A key outcome of all loans and guarantee operations is to graduate an early-stage business into a company that could be serviced by more traditional capital markets (requiring track record, collateral, etc.) At the end of December 2021, the provision for potential losses of UNCDF’s debt operations reached USD 0.4 million. Just to point out these are not realized losses, and some of the clients on UNCDFs “watchlist” has begin to repay the loans again.
Question: How are projects utilizing UNCDF financing monitored to ensure delivery?
Projects are monitored for implementation by the respective transaction teams in country/regional offices during the life of the operation with a loan and guarantee review process conducted twice a year by the LDCIP Practice.
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