world bank group multilateral investment guarantee agency 1 political risk insurance for...

1WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY

Political Risk Insurance Political Risk Insurance

for Securitizationsfor Securitizations

Challenges and SolutionsChallenges and Solutions


Contents

Introduction How credit rating works Role of political risk insurance in improving transaction

ratings Key features of structured finance transactions insured

by MIGA – MSF Funding (Brazil) October 2000

– BALAEF mortgage securitization (Latvia) December 2004

– BTA Ipoteka mortgage securitization (Kazakhstan) February 2006

– Autopistas Del Nordeste project (Dominican Rep.) February 2006


Who is MIGA?

Multilateral Investment Guarantee Agency

Member of World Bank Group Founded 1988 167 Member Countries

Mission

Encourage Foreign Investment through issuance of Political Risk Guarantees


What Assets Can Be Securitized?

Domestic assets Domestically issued securities

Consumer loans and leases

Credit card receivables

Trade receivables

Hard assets: leases, residential mortgages etc.

Off shore assets Internationally issued securities

Future flows

Workers remittances

INTRODUCTION


What Assets Can Be Securitized?

Domestic assets

Leases, SME loans, residential and

commercial mortgages, infrastructure assets etc.

Internationally issued securities

PRI most relevant • Domestic “hard” assets: leases,

residential mortgages etc.• Internationally issued securities

INTRODUCTION


The Issue of the Sovereign Ceiling

Assets

Structure

Systemic: Macroeconomic/legal

Convertibility, expropriation

Source: Moody’s “Securitization in New Markets”

Credit enhancements for systemic risks

• Payment waterfall • Excess spread and over

collateralization• Tranching and

subordination • Cash deposits and

reserve accounts• Currency and interest

rates hedges

CROSS-BORDER SECURITIZATION



How rating agencies analyze risk

Risk layers affecting securitization in new markets

Assets

Structure

Systemic: Macroeconomic/Legal

Convertibility, Expropriation





PRI makes sense when the “local currency rating” (intrinsic value) of the underlying pool of assets is higher than the foreign currency rating of the sovereign.

PRI can bridge gap to desired rating

Assets Credit Quality

Structural Credit Enhancements

Systemic risk

Legal risk

Country Foreign Currency Rating

Aaa

Local Currency Guidelines Rating

Wrap

PRI


Intrinsic Value is higher than

Sovereign Ceiling

Sovereign Ceiling



Economic Benefit of PRI

Coupon without PRI

Coupon with PRIMIGA Premium

Benefit to issuer/originator


Political Risk Insurance

The coverage requirements will vary

RisksRelated to currency flows, assets, government regulations or breach of contract

AmountHow much? For Interest or Principal? Or for both P and I?

TenorHow long?

MIGA’S ROLE


Types of Political Risk Coverage

Protect against losses arising from Currency transfer restriction and inconvertibility

– inability to convert local currency into forex for transfer outside the host country– excessive delays in acquiring forex

Expropriation– nationalization and confiscation– creeping expropriation, partial expropriation (limited coverage)– expropriation of funds only is a possibility– non-discriminatory measures of general application not covered

War and civil disturbance – damage/disappearance of tangible assets due to war or civil disturbance (including

revolution, insurrection, coups d'état, sabotage, and terrorism)– business interruption when investment is a total loss

Breach of Contract – inability to enforce an arbitral award against the Host Government


Rating agency

MIGA works with the arranger, according to the rating agency view of the rating to

customize political risk insurance coverage

Issuer/arranger

The Parties


Rating agency

Key Points

Timely payment

MIGA works to customize policy

Waiting periods

Liquidity facility to bridge gap

Ability and willingness to pay

MIGA explains coverage to Rating Agency

MIGA’s status as a multilateral: Developmental goals


EXAMPLE 1

Securitization ofLease Receivables

MSF Funding

BRAZIL

CLOSED OCTOBER 2000


Project Summary

Securitization of loan and lease receivables from financing of medical equipment in Brazil

MIGA solution $90 M coverage for principal and interest Transfer restriction and expropriation of funds

Results Notes lifted 6 notches above sovereign rating

B2/B+/BB- A2/A/A Lower all-in financing costs


US

MSF Brazil Loans and leases

100% Ownership

MSF Holdings

Investors(institutional investors,

pension funds)MSF Funding

Borrower(local hospitals)

US

Brazil

Loanpayments

Interestand principal

paymentsPaymentflows

MSF BRAZIL

Project Structure


Structuring Solutions

First cross-border hard asset securitization in Brazil First example of MIGA and IFC both supporting a capital

market transaction (IFC bought a mezzanine tranche). First PRI supported transaction to be rated by all

three agencies (Moody’s, S&P and Fitch IBCA) Unprecedented upgrade of 6 notches above the

sovereign ceiling Awarded Structured Finance International “Best

Securitization of Emerging Market Assets”


Industry Opinion

This is the first transaction securitizing existing assets rated by Standard & Poor’s where the assigned rating is higher that the sovereign ratings (both local and foreign currency ratings) of the country where the underlying contracts were originated.

Standard & Poor’s

The ratings assigned to the Notes exceed the B2 Brazilian country ceiling because of the presence of the MIGA guarantee.

Moody’s


EXAMPLE 2

Securitization ofResidential Mortgages

LATVIA

CLOSED DECEMBER 2004


Project Summary

$63.5 M mortgage securitization in Latvia 1st RMBS in Central/Eastern Europe

MIGA Solution $10.5m coverage for interest only on the senior tranche Transfer restriction and expropriation of funds

Results Senior notes lifted 3 notches above sovereign ceiling

(A2Aa2) Improved pricing, tenor, capacity


Baltic American Mortgage Holdings

EquityUS$0.1M

TRANSACTION STRUCTURE

US$60.5MPrincipal & Interest US$2.1M US$0.9M

SENIOR NOTESInstitutional Investorsfrom US (Senior Notes), IFC (US$5 M)

MEZZANINE NOTESIFC (mezzanine)

SUBORDINATED EQUITY

Baltic American Enterprise Fund

(equity)

Mortgages

US$10 million, 18 months of Interest

Baltic American Mortgage Holdings Trust 2004 – 1 (Issuer)

LATVIA Payments

USA

Baltic American Mortgage Company(Originator-Servicer)

Mortgage Portfolio

MortgagePayments

$63.5M THE PROJECT



18 months of interest coverage only was sufficient to upgrade the Senior tranche by 3 notches

Timeliness of payment is key – the total claim process reduced to 87 days to meet the rating agency requirements


Note: Coverage is for transfer restriction and expropriation of funds.

Note: This information has been copied from Moody’s Investors Service web site from the Pre-Sale report for this transaction.

Pre-sale Report


EXAMPLE 3

Securitization ofResidential Mortgages

BTA Ipoteka

Kazakhstan

CLOSED FEBRUARY 2006


Project Summary

$150 M cross-border mortgage-backed securitization in Kazakhstan

MIGA Solution $75 M coverage of principal and interest for the

warehouse facility Transfer restriction and expropriation

Results Credit enhancement necessary to preserve the rating of

the multi-seller conduit (rated A1+) 1st cross-border mortgage-backed securitization in

Kazakhstan and the CIS


Originator:BTA Ipoteka

Issuer: First Kazakh

Securitization Company BV

Commercial Paper

Investors

Commercial Paper Issued

USD Proceeds

Pool of Mortgages (Customers)

Mortgage Certificates

ABN Amro Kazakhstan

ABN Amro Bank

Obligation to pay mortgage principal and interest

TRANSACTION STRUCTURE: WAREHOUSE FACILITY

USD/Local Currency RepaymentsNew & Existing Mortgages

Conversion & Transfer of Repayments

USDRepayments

Purchase Price

New Mortgages

ShareholderLoan

MIGA PRI

Netherlands

Kazakhstan



Coverage for full expropriation including inability to exercise collateral (foreclose on mortgages)

Coverage applied to a warehouse facility and designed/sized to preserve the rating of a multi-seller conduit which is funding the facility.

The coverage uses a flexible revolving mechanism to account for the facility drawdown and potential fluctuations.


Press coverage

Financial Times

Kazakh bank's mortgage deal coup

By Paul J Davies Published: February 22 2006 02:00

“A mortgage bank in Kazakhstan has completed the country's first true sale of residential mortgage risk with a US$150m deal arranged and sponsored by ABN Amro of the Netherlands.

The deal from BTA Ipoteka, a subsidiary of Bank TuranAlem, a Kazakh bank, comes against a backdrop of improving economic conditions, declining interest rates and a growing mortgage market in the country…

…The BTAI deal allowed the bank to diversify its funding sources to international investors with the benefits of political risk insurance from the Multilateral Investment Guarantee Agency, a subsidiary of the World Bank”.


EXAMPLE 4

Supporting Structured Financing for Toll Road Project

Autopistas Del Nordeste in

Dominican Republic

CLOSED FEBRUARY 2006


Project Summary

$211 M financing for construction, operation, & maintenance of 106 km

toll road from Santo Domingo to the Samaná Peninsula under a 33 year concession

No project financing available for 20 years in DR

MIGA Solution MIGA guarantee for $100 M Four MIGA covers: transfer restriction, war, expropriation, and breach of

contract 20 year tenor

Results Project financing available with very long tenors One notch rating increase (B- B) with partial coverage (51%)


Autopistas del NorteDominican Republic

Autopistas del NorteCayman Islands

International Sponsors

Grupo OdinsaOdinsa Holding

GrodcoGrodco Panama

Morgan Stanley NYArranger

Institutional Investors

Sub. debt and equity $15 M

Bond: $206 M

Local Sponsor

Consorcio Remix

FINAL STRUCTURE

Astris FinanceFinancial Advisor

$4.5 M

Equity and Sub Debt

Dominican Republic

$103 M


Rating with MIGA coverage

BBB-

STRUCTURING CHALLENGES

Subject to:

Sovereign rating

Six notch increase

Ratification of the Concession (andamendments to the Concession) byCongress

Full coverage of principal and rollinginterest

Four point cover including breachesof government obligations under the toll-road concession

Timely compensation by MIGA underall four coverages

Ratification of the Concession (andamendments to the Concession) byCongress

Full coverage of principal and rollinginterest

Four point cover including breachesof government obligations under the toll-road concession

Timely compensation by MIGA underall four coverages

B-

Fitch’s Rating and Value of MIGA Insurance


Rating agency constraints:

• Non-ratification of concession

Economic constraints:

• With no investment grade, cost/benefit analysis begin to play

Rating agency constraints:

• Non-ratification of concession

Economic constraints:

• With no investment grade, cost/benefit analysis begin to play

MIGA rating:

• 2 notches lost (from BBB- to BB)

Percentage of MIGA coverage:

• 100% = 4 notch increase (costly!)

• Partial coverage = 1, 2, 3 notches

MIGA rating:

• 2 notches lost (from BBB- to BB)

Percentage of MIGA coverage:

• 100% = 4 notch increase (costly!)

• Partial coverage = 1, 2, 3 notches

STRUCTURING CHALLENGES

Non-Political Risks Affect Rating



First use of PRI with four covers on a private placement for an Infrastructure project.

Timely coupon payments ensured through a flexible insurance policy, including– special “fast track” arbitration anticipated in Concession

– shortened waiting, claims determination, and payment periods

Agreement by Insurer to accelerate payout in the event of a claim resulting in “date-certain” payouts by MIGA in case of claims

MIGA coverage reduced to 51% of bond issuance (partial cover more than sufficient to attract investors, the issue was 40% oversubscribed)


Primary Credit Strengths

MIGA Guarantee

The transaction benefits from a PPRG (Partial Political Risk Guarantee) provided by MIGA in an amount to cover 51% of the face value of any loss. The PPRG is conditional and accessible to cover the specific risks of transfer and convertibility, civil disturbance and, most important from Fitch’s view, breach of contract. The breach of contract coverage is designed to help offset any loss that would be attributable to the government not honoring any of its contractual commitments to the toll road. Included in the spectrum of MIGA’s coverage is the government’s commitment to provide the minimum revenue guarantee, as well as broadly defined termination payments.

February 10, 2006

Transportation Projects Autopistas del NordestePresale Report (Cayman) Limited(Preliminary Rating)

Note: This information has been copied from FitchRatings web site from the Pre-Sale report for this transaction. www.fitchratings.com

Fitch Pre-sale Report


MIGA PROCESS

MIGA Application Process

Preliminary application

Submit preliminary application before the investment is made or irrevocably committed

Available online

Free

Confidential

Can be withdrawn at any time

Definitive application

Detailed form, with information on investment, developmental and environmental impact

Application fee

Confidential


Thank you!

Ileana BozaGlobal Head Financial [email protected]. + 1.202.473-2807

Jorge RivasSenior [email protected]. +1.202.473.5698

Olga SclovscaiaSenior [email protected]. +1.202.458.2823

For more information,visit www.miga.org

world bank group multilateral investment guarantee agency 1 political risk insurance for...

Documents