IFC Crisis Response Initiative: Targeted, Temporary and Timely

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IFC Crisis Response Initiative: Targeted, Temporary and Timely Kenroy Dowers IFC DDVE Seminar Presentation 2009-14 A

1 IFC Crisis Response Initiative: Targeted, Temporary and Timely Kenroy Dowers IFC DDVE Seminar Presentation A presentation made on April 23, 2009 at the World Bank-IMF Spring Meetings Civil Society Policy Forum in Washington, DC

2 IFC Crisis Response Initiatives Targeted, Temporary and Timely April 23, 2009

3 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 3

4 Crisis Presents Multiple Challenges 1. Lack of Liquidity: As crisis evolves, money has moved towards low risk (government T bills, large corporates, short-term assets) affecting: Trade - Availability of trade finance declining Infrastructure - Projects with maturity mismatches coming to a halt Microfinance A major cutback, not a priority/core business for commercial lending Agribusiness - As credit is drying up, significant drops in crops next year expected SME Lending Drying up but great job creation role once economy starts to recover 2. Weakened Financial Infrastructure: Weakened financial intermediaries cut back lending, investment; business environment becomes more challenging 3. Bank Recapitalization: As losses mount, recapitalization of the banking sector is needed 4. Debt Restructuring: Even strong businesses in emerging markets struggle to roll over maturing debt 5. Troubled Assets: Collapse of real and financial sector leads to major NPL problem 4

5 Phased Approach Responds to Market Needs 1. Liquidity Trade Finance Infrastructure Agribusiness Microfinance Pillars of Success Mobilization & working with Partners 2. Financial Infrastructure 3. Capital Advisory Support Bank Recapitalization Job Creation Continued Focus on Frontier Markets & Bottom of the Pyramid 4. Troubled Assets Managing Troubled Assets 5

6 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 6

7 Advisory Services Financial Crisis Response Board approval date: December 2008 Where we are: 1. Mobilization: Re-allocating and re-deploying own (FMTASS) resources. Commitments from Austria - $6.7m, Finland - $1m, Luxembourg - $0.9m, Netherlands - $0.5 m; preparing donor agreements; mobilizing additional donor funds to meet the target of $40-60m over FY Access to Finance: reviewed all existing advisory programs; identified programs to be adjusted and focused on crisis response; identified staff to be re-assigned to a crisis response work; started crisis response advisory work in the regions with client workshops, stress-testing support, and individual assignments for financial institutions; set-up an IFC-WB coordination group on Distressed Assets Resolution 2. Business Enabling Environment: initiated development of new insolvency product and scaling-up of the Doing Business Reform Advisory program; established task force to develop investor aftercare approach; reviewing remainder of the BEE portfolio for necessary adjustments 3. Corporate Advice: with first donor commitments in place, starting roll-out of Board Leadership training program and other corporate governance programs in critical regions (e.g. E. Europe); need additional funding for extending systemic interventions going forward Delivery platform: IFC s established advisory services capacity 7

8 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan for banking sector in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 8

9 GTLP and GTFP - The Opportunity A. Trade finance is the lifeblood of US$14 trillion annual global commerce and one of the most fundamental engines for global trade at all stages of the supply chain, especially in emerging markets. B. Current Market Conditions: Availability of trade finance declining Despite global slowdown, growing shortfall in trade financing continues to constrain global trade Driven by scarcity of capital, increased costs and liquidity premiums, heightened risk perceptions, loss of market participants C. Swiftly aggregating resources under simple and efficient structures can enhance impact in the global markets economies of scale and timeliness and flexibility (in both setup and wind down). D. Global Trade Finance Program (GTFP) offers a stand-by letter of credit, which is extended to cover the trade finance risk commercial banks do not want to take. E. Global Trade Liquidity Program (GTLP) aims to address increased risk and liquidity constraints with a funded trade support program. 9

10 GTLP Investment Approach A. IFC commits US$1 billion and mobilizes 3-4 times over 2-3 years from DFIs = leverage impact US$45 billion financing B. Partner with 6-8 global or regional banks each to channel liquidity to i) the bank s global or regional correspondent trade network, or ii) the bank s client network in a specific sector(s) = global reach beyond individual DFI capacity C. Primary investment structure: funding and risk split 40:60 between IFC/DFIs (40%) and global/regional banks (60%); exceptions possible (eg, fully funded loan to a bank). D. GTLP is designed to fund trade transactions limited to 270 days and self liquidating. Call of funds ramp-up according to demand E. IFC will oversee the GTLP under guidelines and criteria agreed with DFIs in a Master Participation Agreement F. Dialogue ongoing with potential mobilization partners: IFC, CDC-UK, AFDB, CAF, OFID, Proparco. Others under discussions include EIB, SIDA, Canada MoF, Netherlands, Chinese authorities. G. Initial partner banks could include Standard Bank, StanChart, Rabobank, BNP Paribas, JPMC, Commerzbank, HSBC, and Citibank. 10

11 GTLP : Planned Legal Structure DFI/ECA-1 IFC DFI/ECA-2 Framework Agreement Utilization Bank A 60% IFI 20% IFC 20% Utilization Bank B 60% IFI 20% IFC 20% Utilization Bank C 60% IFI 20% IFC 20% LB LB LB LB LB LB LB LB LB LB LB LB LB LB PA PA PA PA PA PA PA IFC PRE-APPROVED PARTICIPANT BANKS Global Reach IFC PRE-APPROVED PARTICIPANT BANKS Regional Reach IFC PRE-APPROVED AGRO-EXPORTER 11

12 GTLP - Pipeline A. IFC advancing with three international banks to launch US$500+ million trade facilities each Program Partners provide up to US$500M (~40%) per facility with the Utilization Bank funding the balance (~60%) emerging market banks in their global networks Beneficiaries expected to be real sector enterprises in Asia, Africa, E. Europe, Middle East and Latin America. B. IFC advancing with a global bank to launch a US$250+ million pre-export facility for agri-exports to Asia & Europe Focus on LATAM producer/exporters in Argentina, Bolivia, Chile, Colombia, Mexico, Paraguay, Peru and Uruguay. Clients are established exporters in sectors that are considered of systemic important to the participating countries (eg, soybean in Argentina and Paraguay or fishmeal in Peru). C. IFC advancing with a leading African bank to launch a US$250 million fully funded loan program for trade finance transactions Beneficiaries expected to be SMEs in Kenya, Angola, Ghana, Nigeria, Mauritius, Malawi, Mozambique, Seychelles and Zambia. 12

13 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 13

14 Bank Capitalization Fund : Opportunity The global financial crisis that erupted in the first half of 2008 is now leading to the worst global economic downturn in 80 years The slowdown is beginning to hit banks hard as default rates on their credit portfolios rise sharply, leading to higher loss provisions, lower earnings and an eroded capital base The crisis poses major challenges for national and global leaders and requires several coordinated action on several fronts address the liquidity and capital needs of banks avert devastating declines in economic activity that would adversely and disproportionally impact low-income groups RF aims to address the capital shortfalls that emerging market banks are likely to face over the coming months as a result of the knock-on effects of the global financial crisis, while generating attractive financial returns 14

15 Bank Capitalization Fund: Investment Approach BCF is a global private-equity fund managed by a subsidiary of IFC Initial Capital Commitments of US$3 billion, divided as follows: Vehicles First Closing Investors Maximum Fund Size Equity Fund (EF) Subordinated Debt Fund (SDF) US$1,275 million US$1,725 million IFC: US$775 million JBIC: US$500 million IFC: US$225 million JBIC: US$1,500 million US$2,500 million US$2,500 million Products: equity, equity-related instruments and subordinated loans Investment objectives: stabilize vulnerable emerging market banking systems while generating financial returns with an attractive risk-return profile Investment strategy: long-term capital appreciation through non-controlling minority stakes in banks Target banks: banks that have large market shares and which, while viable or undergoing major restructuring, are in need of additional capital Exit strategy: as market conditions improve and alternative sources of capital become available to portfolio banks, the Fund will seek to sell its investments in the public markets or to other private investors 15

Co-Investments pro rata Investee Bank 1 Investee Bank 2 Investee

16 Bank Capitalization Fund Structure for BRF LP 3 LP n LP 1 LP 2 LP m IFC BRF Equity Fund Co-Investment Agreement [Africa Fund] Co-Investments pro rata Investee Bank 1 Investee Bank 2 Investee Bank i SSA Investee Bank 1 SSA Investee Bank 2 SSA Investee Bank j 16

17 Bank Capitalization Fund: Bank Eligibility Criteria Private sector systemic banks Minimum 7% market share (according to IMF s claims on private sector data) Equity Fund ( EF ) not less than 10%, except for banks with market share exceeding 20% where the minimum participation would be 5% Subordinated Debt Fund ( SDF ) Only invest if EF invests an amount equivalent to at least 75% of the SDF investment Subject to IFC s normal Social and Environmental Standards Up to 15% of the Fund may be invested in state-owned banks Anti-Cherry Picking: IFC will not make stand-alone investments in eligible banks unless the Fund rejects such investments 17

18 Bank Capitalization Fund: Diversification Criteria The diversification criteria are as follows: Investments per vehicle EF Maximum amount US$1,275 million US$2,500 million SDF Maximum amount US$1,725 million US$2,500 million Per Bank 10% US$127 million US$250 million US$173 million US$250 million Per Country 20% US$255 million US$500 million US$345 million US$500 million Per Region 25% US$318 million US$625 million US$430 million US$625 million 18

19 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan for banking sector in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 19

20 Microfinance Enhancement Facility (MEF) : Opportunity Context Global microfinance sector reached US$30 billion in assets and 130 million clients. 15 years of very successful growth exposed to various types of crises These were previously regional/country-wide phenomena, which were easier to counterbalance. However, The greater integration of microfinance into the financial sector & commercialization of the industry 2 very necessary developments to foster the rapid growth & broad outreach of the industry have drastically changed the beneficial circumstances, exposing the industry to new threats. Impacts of the Financial Crisis Strong MFIs cannot tap commercial refinancing for growth, either through loans, securitizations or deposit mobilization. Resources for refinancing are quickly drying up locally and internationally. Bank lines are being pulled and in some cases deposits are being eroded. Financings needs reach US$1.8 billion through

21 Microfinance Liquidity Facility: Structure Investors Subscriptions/redemptions of shares Subfund Microfinance Liquidity Facility (MLF) General fees (auditing, regulatory fees, TA ) Investment Manager Charge of asset mgmt fee A Charge of asset mgmt fee B Charge of asset mgmt fee C Portfolio A Portfolio B Portfolio C 21

22 Microfinance Liquidity Facility: Structure The MLF is a SICAV SIF incorporated in Luxembourg with three asset pools (for each investment manager). MLF will have a board & Investement Committee 22

MEF : Pipeline Approved 1 st Loans to MFIs on February 5, 2009 Targeted Pipeline by Region Peru, 17% Tajikistan, 3% Russia, 2% Ukraine, 3% Armenia, 1% Azerbaijan, 4% Bolivia, 10% Southern Europe and

23 MEF : Pipeline Approved 1 st Loans to MFIs on February 5, 2009 Targeted Pipeline by Region Peru, 17% Tajikistan, 3% Russia, 2% Ukraine, 3% Armenia, 1% Azerbaijan, 4% Bolivia, 10% Southern Europe and Central Asia, 21% Central and Eastern Europe, 11% Middle-East and North- Africa, 8% BiH, 15% Nicaragua, 12% Sub-Saharan Africa, 10% Mongolia, 6% Moldova, 3% Kyrgyzstan, 6% Georgia, 1% Cambodia, 4% Ecuador, 7% El Salvador, 6% South Asia, 11% East Asia and the Pacific, 12% Latin America and the Carribean, 27% 23

24 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 24

25 ICF: Opportunity As a consequence of the global financial crisis, private infrastructure in developing countries is severely affected Projects under development are delayed/cancelled, existing projects are at risk due to refinancing requirements Governments and project sponsors reluctant to begin new infrastructure development Current financing market is unreceptive: slowing world growth, withdrawal of equity and term lending from the private sector, higher interest rates, lower commodity prices in the medium term IFC and World Bank research shows that between $ billion of existing and/or new projects could be delayed or suspended due to the financial crisis. Creation of infrastructure crisis facility (ICF) To act as a substitute for temporarily not available commercial financing To expand resources available to IFI club to increase available pool of funds To signal to sponsors continued availability of term debt 25

26 ICF: Investment Approach Components Funding Min. Commitment Potential Partners/Investors Maximum Size Debt Trust Mezzanine loans, grants, senior concessional loans US$1.5billion Governments or their designated institutions US$10.0billion Equity Fund Straight equity or non reimbursable grants US$0.5billion IFC: US$300 million Governments, IFIs, commercial investors US$1.5billion Investment objectives: Stabilize viable existing infrastructure projects which are facing temporary liquidity problems, and enable some continuation of new project development in private infrastructure Debt Trust passive vehicle to provide loans for existing and new infrastructure projects. Senior secured loans on a club matching basis. loan terms will be those of originating IFI loan except pricing. Projects must meet eligibility criteria of originating IFI. Equity Fund global infrastructure private equity fund to invest in viable projects facing distress 26

27 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. IFIs Joint Action Plan in Central and Eastern Europe 9. Other Projects 10. Co- Investments Opportunities 27

28 Global Food Fund Opportunity The recent food and financial crisis have caused significant financial distress in the agribusiness industry with rippling effects to food supply chains across the globe. Global food crisis threatens social and political stability and years of improvements in poverty reduction and nutrition. Create a Global Food Fund Crisis response with short-term debt. Long-term impact with equity. Catalyze investments in Agribusiness. Increase liquidity in Agribusiness value chain to meet seasonal working capital needs. Increase global supply of agriculture commodities and food. Develop necessary global, regional ad local agriculture infrastructure. Play a pro-active role in responding to the food crisis. Leverage IFC s global expertise and local presence to mobilize investments in Agribusiness. 28

IFC Global Food Fund Investment Approach Debt Self liquidating debt fund for short-term working capital, trade and export financing transactions with a tenor of less than 1 year.

29 IFC Global Food Fund Investment Approach Debt Self liquidating debt fund for short-term working capital, trade and export financing transactions with a tenor of less than 1 year. Facility will address shortage of liquidity faced by agribusiness players whose business is being impacted in the short term. Equity in agribusiness production, processing and farm land investments 29

30 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Bank Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. Other Projects 9. Regional Action Plans 10. Other Projects 11. Co- Investments Opportunities 30

31 Regional Action Plans 31

32 IFIs Joint Action Plan in Central and Eastern Europe : Investment Approach As part of the Joint IFI Action Plan: IFIs would act within their own mandates and procedures, and according to their respective product strengths, in a flexible way. Subject to each IFI s internal approval processes, IFIs may commit up to 24.5 billion over the next two years in support of the JIBSI. Proposed IFI contributions coordinated through the Joint IFI Action Plan World Bank Group EIB EBRD Other IFC: 2 bn through the Bank Recapitalization Fund (equity/quasi-equity finance), GTFP (trade finance) and other Crisis Response Initiatives IBRD: 3.5 bn through an ECA-wide banking sector strengthening facility and SME/ Export facility MIGA: 2 bn 7.5 bn through debt finance 6 bn through equity, debt and trade finance Part of Financial Institutions Business Plan To be defined through political risk insurance (PRI) 32

33 Agenda 1. Overall Strategy 2. Advisory Services Financial Crisis Response 3. Global Trade Liquidity Program and Trade Finance Initiatives 4. Bank Capitalization Fund (BCF) 5. Microfinance Enhancement Facility (MEF) 6. Infrastructure Crisis Facility (ICF) 7. Global Food Fund 8. Other Projects 9. IFIs Joint Action Plan in Central and Eastern Europe 10. Co- Investments Opportunities 33

34 Other Projects Distressed Asset Recovery Program (DARP) To create private sector program for addressing financial sector and systemic clean-up of banking systems resulting from increased distressed assets given financial crisis. As an initial step, an investment program of about US$50 million for IFC account to expand servicer / platforms network and at a later stage, a Distressed Asset Investment Facility of potentially up to $500 million for IFC s account to create a bigger facility through mobilization. SME Initiatives Expand Private Equity Funds directed to SMEs - Expand investment in SME-targeted funds during FY The size of the program will be subject to capital availability Expand IFC s Small Direct Investment Initiative in real sector with focus on IDA countries Continue implementation of IFC SME Ventures Fund Closer alignment between Advisory Services & Investment 34

International Finance Corporation Olaf Schmidt Global Head - Tourism, Retail & Property Manufacturing, Agribusiness & Services Department

International Finance Corporation Olaf Schmidt Global Head - Tourism, Retail & Property Manufacturing, Agribusiness & Services Department Structured Finance Conference November 15, 2012 IFC is a Member