First-loss capital and guarantees: who takes the risk lenders won't

First-loss capital is money placed in the junior position of a fund or loan. If losses occur, it is used up first, protecting the senior investors above it. It is usually provided by donors, foundations or climate funds that accept lower returns to attract larger private investors.

A guarantee puts no cash in upfront. The guarantor promises to repay a lender or bondholder a defined share of losses if a borrower defaults or a specific risk occurs. Because the payment is contingent, a guarantee can support far more lending than the same amount given as a grant.

Each instrument targets a different risk:

• Partial credit guarantees — cover part of a loan or bond if the borrower fails to repay.
• Portfolio guarantees — let a bank lend to many smaller businesses, such as farmers or SMEs, with part of each loss covered.
• Payment or offtaker guarantees — back a buyer's obligation to pay, for example a utility buying power.
• Political risk insurance — covers expropriation, currency transfer restrictions, war and breach of contract by a government.
• Local-currency guarantees — help projects borrow in the currency they earn, reducing exchange-rate risk.
• First-loss tranches — junior capital in a blended fund that absorbs losses before senior investors.

GuarantCo, part of the Private Infrastructure Development Group, provides local-currency guarantees for infrastructure in Africa and Asia. The Africa Guarantee Fund shares risk with banks lending to African SMEs. InfraCredit guarantees local-currency infrastructure bonds and loans in Nigeria. The Green Guarantee Company focuses on guarantees for climate-aligned debt in developing countries. Sida, Sweden's development agency, uses guarantees to share risk with banks and investors.

For first-loss capital, the providers are usually donors and climate funds that anchor blended funds. Convergence, the global blended finance network, tracks how these structures are used and which funds include concessional layers.

Projects rarely apply for a guarantee on their own. The usual sequence is: secure interest from a lender or bond arranger, identify which risk is blocking the loan, then the lender approaches the guarantor. For SMEs and farmers, the practical route is to borrow from a bank that already holds a portfolio guarantee.

First-loss capital is accessed indirectly too: you raise from a blended fund that already has a first-loss layer. When screening funds, ask whether a concessional tranche exists, because that often explains why the fund can accept smaller or riskier deals.

GuarantCo's $27 million guarantee backed Africa GreenCo's payment obligations to independent power producers in Zambia. It did not finance generation directly; it made the buyer creditworthy, which unlocked finance for the projects selling to it. The full breakdown is in our deal structures section.