Inter-American Investment Corporation is looking to free capital as part of its plan to increase lending in Latin America and the Caribbean through a type of synthetic securitization pioneered in Africa almost five years ago.
(Bloomberg) — Inter-American Investment Corporation is looking to free capital as part of its plan to increase lending in Latin America and the Caribbean through a type of synthetic securitization pioneered in Africa almost five years ago.
IDB Invest is looking to build on a $1 billion transaction known as Room2Run, which was first used by African Development Bank and other parties such as Mizuho International Plc in September 2018. A portion of the deal was placed with private investors.
The Washington DC-based lender is getting a contribution from a fund created by the Bill & Melinda Gates Foundation, the Rockefeller Foundation and Open Society Foundations to promote ideas that bolster lending from multilateral development banks to emerging markets.
“IDB Invest will be a recipient of a grant from the Challenge fund to move forward with a pilot securitization of private sector assets,” IDB Invest Chief Risk Officer said Rachel Robboy said during an event organized by the Rockefeller Foundation in Washington DC last week, adding that there’s a reason why there’s only been just one transaction of this kind.
“It’s hard to do,” Robboy said.
In the transaction known as Room2Run, AfDB transferred a riskier slice of the credit risk from a pool of about 50 loans financing assets in the power, transportation, financial and manufacturing sectors to a run by the European Union, the Abidjan, Côte d’Ivoire-based multilateral lender said in a statement at that time.
In synthetic securitizations, a lender typically pays a fee to a third party to transfer part, or all, of the credit risk of a portfolio while keeping the actual loans on its balance sheet. By doing so, the lender reduces the regulatory capital it must hold to cover potential losses so it can deploy more for new lending. It also makes the transaction’s risk more palatable for investors in the safer senior portions of the deal.
In this AfDB case, a fund run by Mariner Investment Group, a global alternative asset manager, was the lead investor in the portion of the transaction that was marketed to private investors, AfDB said in the statement, adding that it was a first-ever portfolio synthetic securitization between a multi-lateral development bank and private sector investors.
Amid the global Covid-19 pandemic in 2021, the European Investment Bank won EU approval to issue a 1.4 billion euro synthetic securitization product in a bid to push commercial banks to lend to small firms rather than shifting to lower-risk assets. These kinds of transactions are more complex in some emerging and frontier markets in Africa or Latin America due to insufficient credit risk databases and higher political and financial risks.
“We’re up to the task and we’ll be moving forward in the next year to implement the securitization,” said IDB Invest’s Robboy. “We need to build our asset class in the market.”
The grants being provided by the Multilateral Development Banks Challenge Fund will be used to finance the costs of putting in place the deal rather than being an investor, Maura Cravero, who manages the philanthropic vehicle, said in an interview.
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