A new report from UK-backed programme MOBILIST highlights the growing number of successful securitisation initiatives allowing development institutions to unlock more of their capital without putting their AAA ratings at risk.
Securitisation of loans by multilateral development banks (MDBs) is helping to increase the amount of direct lending they can carry out in emerging markets and developing economies (EMDEs) to help mobilise private capital without risking damage to their credit ratings, according to a recently published report from MOBILIST.
The report outlines paths to scaling up the use of securitisation by MDBs and other development finance institutions (DFIs), illustrated by a number of case studies. MOBILIST, a public market investment programme backed by the UK government, has also developed resources on securitisation options.
MDBs and other DFIs can use securitisation techniques to pool financial assets such as loans, or pool risk, so that the pool can be transferred to a third party. That third party can then sell securities or derivatives backed by the asset pool to investors, who receive cash flows generated by the underlying portfolio.
This converts illiquid assets into tradable assets, effectively freeing up space on the balance sheet of DFIs that allows them to boost lending to EMDEs without downgrading their risk profiles. Many DFIs have AAA ratings from the leading credit ratings agencies, which they depend on to borrow money for development lending at low rates.
MOBILIST said existing securitisation structures had demonstrated the viability of this approach, with both true-sale and synthetic securitisation able to increase annual direct lending volumes by MDBs and DFIs.
True-sale securitisation involves the sale outright of underlying loans from the originator’s balance sheet to a third-party, while synthetic securitisation involves the transfer of a share of the credit risk to a third-party, using credit derivatives, while the asset stays on the originator’s balance sheet.
Securitisations resulting in the issuance of listed debt instruments were “particularly compelling” in terms of the scope for replication and private capital mobilisation, due to the transparency and standardisation of public markets, according to MOBILIST.
“Not only are development finance actors executing and proposing transactions at meaningful scale, but private sector supply of – and demand for – sustainable securitisations is growing. These private-sector transactions set benchmark terms that development finance originators and investors should understand, and align with, if they are to see early deals scaled and replicated,” the authors said.
Case studies
The report outlines a number of models for securitisation in development finance, and also includes examples of recent transactions that MOBILIST said were notable in terms of their relative feasibility, commercial viability, additionality, scalability, and replicability.
These include synthetic securitisation by AfDB and IDB Invest, hybrid and True-Sale transactions by Banque Ouest Africaine de Développement (BOAD), and the IFC-MOBILIST Emerging Markets Securitisation Programme.
The report also looks at the potential for MDBs and DFIs to collaborate with partners already active in the public and private securitisation markets as illustrated by the Bayfront securitisation platform created as a joint venture between between Clifford Capital Holdings and the Asian Infrastructure Investment Bank in 2019.
The authors said that chosen routes to scale would reflect the requirements of individual MDBs or DFIs, such as whether they are looking for immediate capacity building or long-term ecosystem development, the amount of control they require and how much complexity they can tolerate in securitisation structures.
MOBILIST stressed the importance of collaboration between DFIs and with other market participants and regulators to build a market for securitisation.
“Letting a thousand flowers bloom will undermine the standardisation upon which securitisation thrives,” it said.
MDBs and DFIs needed to learn from market participants and regulators to align with best practices and investor expectations for deal structures and documentation, while the donor shareholders of MDBs and DFIs needed to gain an understanding of securitisation and its potential advantages, risks, and costs, according to the authors.
On the other side of the equation, private sector rating agencies, legal advisers, and market participants should engage with, and learn from, development finance and donor communities to understand objectives, opportunities and constraints, to create and scale a sustainable market for securitisation of impactful assets.
