A/B Loan Structures for Optimizing Cost of Capital

What it is

An A/B loan is a syndicated financing structure most associated with development finance institutions (DFIs) — the World Bank Group's International Finance Corporation (IFC) is the best-known practitioner, alongside regional development banks (the Inter-American Development Bank, African Development Bank, and others). The DFI itself funds and holds the "A loan" — the senior tranche — on its own balance sheet. It then syndicates a "B loan" to commercial banks or institutional investors, who fund their portion but do so under the DFI's own loan documentation and, critically, benefit from the DFI's preferred-creditor status.

Why it lowers the blended cost of capital

Preferred-creditor status is the mechanism that makes this work: many sovereign and quasi-sovereign borrowers (and by extension, borrowers operating in a country where a DFI has this standing) will prioritize continuing to service a DFI's own loan even in a broader debt crisis or political disruption, since jeopardizing that relationship risks the country's or company's access to DFI support more broadly. B-loan participants inherit the benefit of that dynamic even though their capital is commercial, not concessional — meaning commercial banks are often willing to lend into a B-loan tranche at a lower spread than they'd charge for an equivalent standalone loan to the same borrower, because the DFI's involvement itself functions as a form of political and credit risk mitigation.

For an airline — most relevantly one based in an emerging or frontier market where standalone access to competitively-priced aircraft or corporate financing is limited — an A/B loan structure can materially widen the pool of lenders willing to participate and lower the blended interest cost versus what the airline could achieve borrowing commercially on its own credit alone.

How it's used in aviation specifically

IFC and similar institutions have used A/B loan structures to support airline financing — aircraft acquisition, working capital, or broader corporate facilities — for carriers in markets where the DFI's development mandate (supporting connectivity, trade, tourism) aligns with the airline's own financing need, and where the DFI's participation genuinely mobilizes private capital that wouldn't otherwise show up for that borrower on competitive terms.

Risks and considerations

• Not available to every borrower — DFIs have their own development mandates and country/sector eligibility criteria; this isn't a general-purpose financing tool any airline can access on demand.
• Deal complexity and DFI-specific documentation, environmental/social safeguard requirements, and approval timelines are typically longer and more involved than a standard commercial loan.
• The cost-of-capital benefit is real but bounded — it narrows the gap to what a stronger-credit airline in a developed market would pay, it doesn't eliminate the underlying credit and country risk entirely.