Friday, 21 September 2018

IMF/World Bank 2007: Extreme makeover

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The Inter-American Development Bank has made great strides in repositioning itself as an important player in what is an increasingly complex financial market. The multilateral has moved away from the old notion that development can be spurred only by direct investment, and is now active in a broad range of activities. Christopher Langner reports.

The Inter-American Development Bank (IDB) has changed. Since new president Luis Alberto Moreno announced that the multilateral would become more "nimble and flexible" in a meeting with members in Brazil in 2005, the bank has moved with giant steps toward its stated goal.

The IDB was especially serious in the execution of its promise to streamline its lending policies to meet the needs of its member countries in a fast-paced complex financial environment.

It stepped up its securitisation activities and increased its lending to corporations more than five-fold. Moreover, it has begun to lend directly to banks in a move that signalled the IDB understands commercial lenders can be valuable allies in stimulating growth and development.

"The IDB has taken huge steps ahead,” said a finance ministry official of one of the bank's member countries. "It was just a lender. Now it is really focusing on the development of local markets."

The policy change is a clear indication that the IDB has discarded the development ideas originated by Cepal – a left-leaning Latin-American think-tank. The bank has become more pragmatic and straightforward in its view on how to spur growth and create wealth in its member countries. This includes helping countries develop securitisation markets and assisting corporations to lower their cost of funding.

Powerful guarantor

Perhaps one of the bank's most important moves has been to start providing partial guarantees to select issuances by member country corporates. The backing of the IDB allows some of these companies to tap the markets at rates and tenors they could only have dreamt about if it were not for the multilateral's support.

Late last year, for example, the IDB extended a seven-year US$175m mortgage warehousing facility to Mexican lender Metrofinanciera. The deal was privately placed but it received the best rating ever for such a facility, according to a rating analyst at Standard and Poor's.

The facility is a welcome cushion for Metrofinanciera, which will now have cash available for its lending activities even during the current credit crunch. "The truth is Metrofinanciera would have a hard time getting a facility in these conditions without the IDB," said a banker familiar with transaction.

With the longer than usual tenor – mortgage warehousing facilities offered by banks in the region hardly ever extend longer than a year – Metrofinanciera can withdraw money anytime and pay it back, reinstating the full amount available. Also, when it withdraws money, it pays interest only on the amount withdrawn, not on the entire facility, as is usually the case.

"There is a lot of room for the IDB to grow this initiative of partially guaranteeing deals in Mexico. A lot of good companies can use the rating boost its guarantee provides," said a banker in Mexico City not involved in the Metrofinanciera deal.

Mexico was also the first beneficiary of another change in the IDB's lending policies. Before, the bank could only lend or guarantee up to US$75m for any single corporate deal. But that limit was increased to US$400m. It just recently offered a US$400m partial guarantee for the winner of the auction of rescue trust Farac’s US$4bn contract to build and revamp a network of toll roads in Mexico.

A banker in New York who has worked in tandem with the IDB in deals in Mexico says that the role of the bank as a guarantor will become ever more important after the recent credit squeeze prompted by the sub prime crisis in the US.

"I don't see much room for deals with mezzanine tranches anymore, at least not at competitive prices. Therefore, guarantees from the IDB, which in the beginning of the year sometimes looked expensive, are becoming a more attractive alternative," she said.

Local initiatives

And as the IDB introduces its initiative into other member countries, corporate and finance ministry officials are already showing a keen interest about the prospects of reducing financing costs with the lender's guarantees.

"The more opportunities they show us of doing this kind of product, the better it is,” said a finance ministry official. “It is very positive that they enter our markets isolating the country risk from some of the corporates."

Perhaps most important for the development of the domestic markets is the fact that some of these transactions are being done in local currency. "If we don't have the lending capacity in local currency, we offer the guarantee," said Hans Schulz, manager of the IDB structured and corporate financing department.

However, Schulz acknowledges that the IDB still has a long way to go when it comes to local currency deals. The key is finding ways to fund loans with local tender instead of with dollars. "This is one of the major areas we need to work on," Schulz said.

He confides that the IDB is even considering having local currency desks in its treasury. This would be needed if the IDB were to start tapping local markets regularly for cash to lend to local governments and corporates.

Furthermore, the IDB has finally started to lend to banks directly, which was absolutely prohibited in the bank's former policy mandate. The first bank to get a loan through the IDB was Peru’s Banco de Credito BCP late last year. The Interamerican Investment Corp, the financing arm of the IDB, extended a US$30m subordinated loan to BCP, which agreed to use the money mostly for loans to small and mid-cap companies.

The IDB is also focusing on developing local securitisation markets in an effort to dilute the risk of extending credits and make money cheaper for people in its member countries. According to Schulz, the bank plans to issue Peru's first RMBS this year.

The IDB has also finally become able to revisit projects it had funded originally or even help ongoing projects restructure liabilities. Before, the lender could only lend once to an infrastructure project in its first stage. "We are seeing more depth in terms of transactions," Schulz said.

As a result of the new policy, many of the projects which the IDB funded originally and which now are in their second or third stages are coming back to the lender. "We have seen a renewal of demand in infrastructure," Schulz said.

Before, the prevailing philosophy at the IDB regarding infrastructure projects was that economic results could only be generated by investing in the project itself. Now the bank's management team has broadened its outlook and understands that assistance in liability management can also help keep the project on an even keel. Deals like the US$200m loan guarantee offered to Brazilian utility Energisa in April to help it refinance its debt would not have been possible within the old framework.

More is better

Not only has the IDB become bolder in its financing activities, it also has become far more active. Last year the bank was involved in 27 deals totalling US$920m, almost twice as many as the prior year. This year it expects to reach US$2bn and by mid-September had already reached US$1.5bn.

Ultimately, the bank wants to have 10% of its lending portfolio allocated in non-sovereign deals. That is almost three times the current 3.5%, already a historical high. Though this may be an ambitious goal, Schulz thinks it is easily achievable within a few years, assuming all goes according to plan.

Changes have also happened on the human resources front. The IDB has almost completely revamped its management structure, reshuffling executives among key positions. The bank took a stronger stance on favouring current employees in promotions instead of outsiders.

At the same time, the multilateral institution increased hiring for entry level positions, deferring financial experience in favour of commitment to the bank's mission in the process. In the three months ending in August, the IDB opened 38 management positions. Two-thirds of these positions were filled by people who were already in the institution's ranks.

Toward the end of the year, Schulz says the IDB plans to hire at least 15 more people. He says that managers have been dedicating a considerable amount of time to supervise the hiring process as a way to ensure that new hires will stay and pursue a long career in the bank.

And, naturally, as the bank’s role in developing securitisation markets increases in importance so should the size of the team focused on that sector. The bank currently has only 15 people specialised in securitisation, but Schulz says it plans to build a broader team. He says the goal is to have enough people to allow the bank to do at least 10 structured deals across all sectors. "Securitisation and project financing deals take a lot more work and time," Schulz said.

Finally, the IDB is also making an effort to become closer to its member countries. From now on, part of the country teams will be based in country, instead of in Washington. "We plan to have people in 15 of the member countries," Schulz said. "The challenge is to implement all this at the same time."

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