Non-honoring of sovereign financial obligations
A cover that indemnifies a lender when a state or state-owned company fails to pay an unconditional financial obligation, without waiting for an arbitral award, which brings it closer to credit than to litigation.
Non-honoring of sovereign financial obligations cover protects a lender, or an investor, against payment default by a state, a sub-sovereign entity or a state-owned enterprise on an unconditional financial obligation: a loan, a state guarantee, a payment undertaking that depends on no performance to be verified. It was introduced by the World Bank Group's Multilateral Investment Guarantee Agency in 2009 to close a gap in the classic breach of contract cover. That cover requires the investor first to obtain an arbitral or court award, then for the state to refuse to honor it, which takes years. When the obligation is unconditional, there is nothing to adjudicate: non-payment at maturity alone, after a waiting period, is enough to trigger the indemnity. The cover thus brings political risk closer to credit insurance, and it has become a financing instrument in its own right: a loan covered by a highly rated multilateral guarantee can be refinanced at a cost well below the public borrower's own risk.
When Ghana suspended service on most of its external debt in December 2022, a bank that had lent to a Ghanaian state-owned company under an unconditional state guarantee could have filed a claim under this cover as soon as the payment was missed and the waiting period had run, without starting arbitration against the Republic.
NHSFO, non-honouring of sovereign financial obligations, sovereign non-payment
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