Multilateral development banks’ adoption of securitisation is finally starting to accelerate with an Inter-American Development Bank proposal for a multibillion-dollar green loan CLO programme and the World Bank is making its first asset-backed move by approving a new distribution-friendly loan format.
These initiatives follow other recent developments as the sector begins to embrace securitisation as a means of mobilising private capital and increasing lending for transition in emerging markets – both major demands of MDB sovereign shareholders, including G20 countries.
These include the International Finance Corporation preparing the inaugural issue under its US$2bn Warehouse Enabled Securitization Program that includes US$1bn from the IFC.
African Development Bank, which carried out the sector's first securitisation with its US$1bn "Room2Run" transaction in 2018, and Development Bank of Southern Africa have invited proposals from advisers on a synthetic securitisation programme.
A draft outcome document for the United Nations’ Fourth International Conference on Financing for Development in Seville, Spain, that begins on June 30, also encourages the use of asset-backed structures.
“We call on development partners and DFIs to further expand and collaborate on the use of risk-sharing instruments, such as guarantees, securitisation, investment vehicles and insurance solutions for private capital mobilisation,” according to the draft released on Monday by Mexico, Nepal, Norway and Zambia.
Persaud persuades
The IDB proposal is fronted by Avinash Persaud, special adviser on climate to the bank’s president. He has highlighted that performing green loans in Latin America total US$50bn, though the initial asset portfolio appears likely to be US$500m–$1bn.
“We know that billions of dollars [of green loans] are sitting on the balance sheets of commercial banks across emerging and developing countries … in many instances because they cannot sell them either in the local or international market,” said Mattia Romani, senior partner at Systemiq.
“The idea is to turn these commercial banks into engines for the bond market … to turn something which is heterogeneous and quite diverse into tranches which are easy to digest by institutional investors,” he said.
Systemiq is an adviser to the secretariat of Sustainable Business COP, an initiative of Brazil’s National Confederation of Industry for the United Nations COP30 climate conference in Belem in November. SB COP is working on the green loan initiative with IDB and Romani helped draft the Persaud proposal.
Loan originators will not be compelled to use the capital freed by selling their loans to MDBs, either directly or to a special purpose vehicle, which has yet to be decided. “The quid pro quo will be to see these banks invest more in renewables or other sustainability investments, but it cannot be a top-down mechanism that will force them to do it,” said Romani.
Instead, EM banks would be incentivised to recycle capital into sustainable development by “offering them the right opportunities to co-create new deals”. This could involve national development banks as well as MDBs.
Besides Latin America, India is a target, and potential replication in other regions is under discussion with MDBs.
Ambitious and practical
The initiative may use a variety of instruments besides CLOs to distribute purchased loans through the capital markets to institutional investors. These could include CDOs, loan participation notes, credit-linked notes, green bonds and sustainability-linked bonds.
“We're quite open to different instruments to see how they could play out,” Romani said.
Institutions being consulted include BlackRock, Brookfield and TPG, as well as some pension funds, sovereign wealth funds and local EM asset managers.
The initiative aims to announce a structuring adviser, and possibly one or more anchor investors, in Belem after an open competition, with the first deal to follow as soon as possible – though it remains unclear if the inaugural offering will emerge this year.
“Certainly the intention is to get action quickly. We are as ambitious as possible and as practical as possible,” Romani said, highlighting that investors’ involvement in the working group should enable rapid takeup once formally launched.
On June 12, the World Bank’s board approved the first use of a new step-up loan product with incentives to attract private capital.
The loan format is “aligned with the group’s broader originate-to-distribute approach”, the development lender said.
World Bank president Ajay Banga has said developing an OtD model is a major goal for the institution.