Multilateral development banks’ long-awaited thrust into securitisation is finally gaining momentum as the International Finance Corp pushes ahead with a plan to securitise up to US$2bn of loans originated by multiple lenders, several other MDBs move forward with asset-backed projects of their own and ratings agency Fitch has released a draft framework to assess such deals.
“Interest among MDBs to explore securitisations as a tool for balance sheet optimisation has been growing recently. More and more are regarding securitisations as an effective tool,” said Andrew Hohns, chief executive at Newmarket Capital, which in 2018 as Mariner Investment Group arranged the African Development Bank’s US$1bn “Room2Run” synthetic securitisation.
AfDB is among the institutions looking to bring more deals to the market, as is the West African Development Bank – known by its French acronym, BOAD – which expects to launch its second deal on August 5 referencing loans to corporates and state-owned enterprises.
“Can we help create a securitisable asset class in the space?” asked Anjay Banga, president of World Bank Group, at its annual conference earlier this month on development economics, known as “ABCDE”.
Citing renewable energy as an initial focus, with water and other areas to follow, he described the question as “the most interesting but the most long-term” of the initiatives launched since he assumed the group’s presidency in June 2023. The shift to an “originate-to-distribute” model could take three to six years, he said.
An OTD model would require changes in the way MDBs originate, covenant and bring loans to market, Banga told the conference. Offering major investors multiple small loans with varying rates, repayment schedules and legal terms “doesn't move the needle for [the likes of BlackRock] and having to underwrite 20 loans makes it even harder”, he said.
Securitising the loans could sidestep these problems while strengthening the sector’s firepower.
“There is a substantial and persistent shortfall of capital available for development finance,” Hohns said, noting that MDBs “continue to face significant constraints in raising equity from their public sector shareholders”.
“Positioning MDBs as conduits to facilitate lending to important projects is the only realistic way ‘to go from billions to trillions', and time and again securitisation has shown itself to be among the most scalable tools to access capital markets,” he said.
WESP point
Since the first Room2Run deal, activity has been limited. BOAD carried out a CFA Fr150bn (US$250m) securitisation last year and MDBs have also conducted risk transfers between themselves and with donor governments – including the first non-Triple A “exposure exchange agreement” deal in April, involving the OPEC Fund for International Development and the Inter-American Development Bank.
The IFC is due to announce the first issue from its new "Warehouse Enabled Securitisation Platform" later this year. Banga described the project, termed a “pilot” in a tender document last year for a financial adviser to WESP, as “the first step towards a much bigger idea” of wider MDB securitisation.
The platform would co-finance new Paris Agreement-aligned loans in emerging markets by MDBs at origination and hold them until they can be packaged and transformed into investable securities for institutional investors, according to the document.
It anticipates that aggregate deal flow from multiple MDBs would be enough to establish a warehouse of US$1bn–$2bn. The IFC alone expects to originate US$1bn.
BlackRock’s independent Financial Markets Advisory group won the tender. IFC is now working with a structuring bank and law firm on the debut deal, which will be based on IFC assets.
Private first
The initial focus is on securitising MDBs’ lending to the private sector – particularly that of dedicated lenders like the IFC, IDB Invest and the Islamic Development Bank’s Islamic Corporation for the Development of the Private Sector. Room2Run also referenced AfDB’s private sector loans.
Although MDBs’ private sector loans sometimes carry tighter spreads than comparable commercial lending, advocates of securitisation point to MDBs’ strong default performance, which is at least in part underpinned by their preferred creditor status.
Hohns also cited potential for “engag[ing] blended finance participants to make the economics work”.
Turning MDBs’ concessional sovereign loans into asset-backed securities appears trickier because they offer less yield to be shared with investors, straining deal economics – though capital relief can enable synthetic securitisations of commercial banks’ lower-yielding portfolios.
“There is a question as to whether the economics of the securitisation will work for [MDBs],” said Arnaud Louis, head of supranationals ratings at Fitch, which this month published draft criteria dealing with the impact of synthetic securitisations on MDBs’ ratings.
“Investors take the risk so will need to be paid enough to be attracted by the scheme, but if they are paid too much that might impact financial viability for the MDBs,” said Louis. “There is a question as to what will be the balance between being attractive for investors and those schemes still being profitable for MDBs.”
In some cases, however, MDBs appear to have found ways of addressing even this thorny problem.
BOAD’s higher-yielding regional deal in CFA francs was based on its sovereign lending. AfDB also completed a risk-sharing deal in October 2022 called “Room to Run Sovereign”.
That used a blended finance structure to square the circle. The UK’s Foreign, Commonwealth & Development Office provided US$1.6bn on favourable terms to cover the mezzanine risk of a portfolio of sovereign loans, while insurers AXA XL, Axis Specialty and HDI Global Speciality provided US$400m of unfunded first-loss cover.
Refiled story: Clarifies IFC adviser