European Term | American Term | Definition |
Bank Guarantee (BG) | Bank Guarantee (BG) | A Bank Guarantee (BG) is a financial security instrument used in energy contracts, PPAs, and project financing to assure payment obligations. It acts as a guarantee from a bank that a party will meet its contractual obligations; if the party defaults, the bank covers the payment. In the US, Letters of Credit (LoC) and Performance Bonds serve similar functions in energy transactions, ensuring financial security for developers, offtakers, and counterparties in renewable energy deals. |
Letter of Credit (LoC) | Letter of Credit (LoC) | Another form of credit support. This is a financial guarantee issued by a bank or financial institution that ensures a buyer's payment to a seller will be made on time and for the correct amount. If the buyer fails to fulfill their payment obligations, the issuing bank covers the outstanding amount, providing security to the seller. LoCs are widely used in international trade, large-scale contracts, and energy markets to mitigate credit risk between counterparties. |
Parent Company Guarantee (PCG) | Parent Company Guarantee (PCG) | A parent company guarantee (PCG) is a form of credit support to shield the counterparty from losses from failure to perform contractual obligations. It can be provided to any party of the contract. If the offtaker has a low credit rating – or no credit rating at all – the investment-grade parent company may need to act as guarantor. Lenders usually make it a requirement for a loan agreement. Likewise, an offtaker may ask for such a guarantee from a project developer to mitigate the risks of a project not moving forward after signing the PPA. Other examples of credit risk mitigation tools include bank guarantees or the provision of cash into an escrow account. |
Credit Support Definitions
Updated over 6 months ago