Bulgarian Energy Efficiency and Renewable Sources Fund (EERSF)
Contents
General
The Energy Efficiency and Renewable Sources Fund (EERSF) of Bulgaria was established through the Energy Efficiency Act adopted by Parliament in February 2004. The initial capitalization of EERSF was entirely with grant funds, its major donors being: the Global Environment Facility through the International Bank for Reconstruction and Development (the World Bank) - USD 10 million; the Government of Austria - Euro 1.5 million; the Government of Bulgaria - Euro 1.5 million and several private Bulgarian companies. EERSF has the combined capacity of a lending institution, a credit guarantee facility and a consulting firm. It provides technical assistance to Bulgarian enterprises, municipalities and private individuals in developing energy efficiency investment projects and then assists their financing or co-financing, or it plays the role of guarantor towards other financing institutions. The underlying principle of EERSF's operations is that of a public-private partnership. The Fund pursues an agenda fully supported by the Government of Bulgaria, but it is structured as an independent legal entity, separate from any governmental, municipal and private agency or institution.
Products
The Energy Efficiency and Renewable Sources Fund (EERSF) provides three main categories of financial products: loans, ESCO guarantees and residential guarantees.
Loans
Beneficiary Interest (annual) Maximal Tenor Minimal Equity Contribution of the Project Developer Municipalities 4.5 - 8% up to 5 years 10 - 25% Corporate Clients and Private Individuals 5 - 9% up to 5 years 10 - 25%
1) The conditions are one and the same for EERSF direct financing and for co-financing with a commercial bank.
2) The minimum equity contribution from the Project Developer for the proposed project shall be:
- At least 10% for co-financing mode "EERSF - commercial bank"
- At least 25% for EERSF stand-alone financing.
3) There are NO additional credit conditions (taxes) and the repayment schedule is structured according to the need of the Project Developer.
Partial Credit Guarantees (PCGs)
| Beneficiary | Interest (annual) | Maximal Tenor | Minimal Equity Contribution of the Project Developer |
|---|---|---|---|
| Municipalities | 4.5 - 8% | up to 5 years | 10 - 25% |
| Corporate Clients and Private Individuals | 5 - 9% | up to 5 years | 10 - 25% |
Type of Guarantee Annual Fee Maximal Tenor Partial - 80% on a "pari passu" basis 0.5 - 2 % up to 5 years Partial - 50% on a first-loss basis after the bank-creditor 0.5 - 2 % up to 5 years
Note: Individual (per project) guarantee commitments shall not exceed BGN 800 000.
Portfolio Guarantees
| Type of Guarantee | Annual Fee | Maximal Tenor |
|---|---|---|
| Partial - 80% on a "pari passu" basis | 0.5 - 2 % | up to 5 years |
| Partial - 50% on a first-loss basis after the bank-creditor | 0.5 - 2 % | up to 5 years |
Two kinds of guarantees can be distinguished:
1) ESCO portfolio guarantee - to attract more companies into the ESCO business and to make ESCOs more comfortable by guaranteeing the risk of their counterparties - the project beneficiaries.
2) Residential portfolio guarantee - to kick-start the market of EE investments in the residential sector, by providing market products that overcome the lack of legislation in the country.
ESCO Portfolio Guarantees
Normally ESCOs would bid for a project and then go to a bank to secure finance for it, or have a line of financing ready and fill it in with projects. The shortcoming of this approach is that typical ESCOs rely heavily on raising debt to fund their performance contracts. This requires that the cash flow of their business is very accurately timed and budgeted. Delayed payments from clients, or defaulting clients may severely disrupt the servicing of the debts of the ESCO itself. With our ESCO portfolio guarantee, the EERSF undertakes some of the risk of the ESCO and guarantees that EERSF will cover such disruptions in the flow of receivables of the ESCO.
In practice this means the following:
- EERSF signs a framework agreement with the ESCO to issue a portfolio guarantee for a preapproved portfolio of projects;
- The ESCO wins a tender for an energy efficiency project;
- EERSF approves the project and adds it to the portfolio of approved projects;
- EERSF guarantees that it will cover up to 5% (the percentage is negotiable) of the defaults of the delayed payments of this portfolio;
- With this guarantee, the ESCO gets better interest rates on its debt with commercial banks and has peace of mind that there is a 5% failsafe trigger that will prevent cash flow disruptions and will reduce the risk to its clients.
Statistically, the default rate of clients of ESCOs is negligible so that the 5% cover of the guarantee is more than sufficient. Delays in payments are more probable and in such cases EERSF will act as a financial buffer to take the shocks.
Still, such loans or guarantees provide an excellent leverage of EERSF's own funds. For example a BGN 500 000 guarantee will facilitate a portfolio of investments in the amount of BGN 10 million.
Residential Portfolio Guarantees
The guarantee works in the following way: EERSF helps the households in a building to develop a good project. Then a first class company is selected to implement the investment. The bank gives the funds to the project developer, but the repayments afterwards come from the individual households. Each household pays proportionately to their indoor floor-area. EERSF guarantees that it will cover the first 5% of defaults within this block (or set of blocks). Statistically the default rates in customers' loans vary from less than 1% in some buildings, to about 2.5%-3% in others, so a guarantee of 5% will cover fully the risk of the commercial bank. This product is being developed as a partnership with commercial banks. As mentioned before, the main reason why Energy Efficiency (EE) investments in the residential sector have not materialized yet is because of the lack of adequate legislation. Moreover, in Bulgaria there is no tradition of condominiums or household associations and there is a lack of trust between the families in one building. The EERSF overcomes all this by acting as a gluing component between the commercial banks and EE projects in the residential sector.
