USAID s Development Credit Authority. Michael Metzler USAID Office of Development Credit

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1 USAID s Development Credit Authority Michael Metzler USAID Office of Development Credit

2 Enhance the ability of the private sector and government to raise long-term capital Underpin the banking sector with long-term capital Provide long-term investments essential for pensions systems and insurance Create the conditions for sound and steady growth of the sector (i.e., proper, evolving legislation; supervisory capacity; robust settlement systems, full yield curve) 2

3 USAID support of capital markets development Developing stock exchanges Establishing central information systems to disseminate bond-market information; Strengthening legal and regulatory frameworks Supporting government securities Encouraging regulation Developing OTC exchanges Assisting NBFIs, ie Pension funds, Insurance companies Bond guarantees (using the Development Credit Authority) 3

4 Development Credit Authority Legal authority for USAID to issue credit guarantees backed by U.S. Treasury Provides risk mitigation and credit enhancement to encourage local lending in developing countries Requires 50% risk sharing with guaranteed partners Allows USAID field missions to compliment their existing economic growth and policy reform strategies with powerful tool to leverage private sector lending. Mobilize untapped liquidity in the banking sector Cost effective tool (average leverage ratio of 30:1) Market demonstration effect; catalyst for growth of local credit markets

5 DCA Guiding Principles True private sector risk-sharing (50% coverage) Encourage private sector lenders and investors to extend financing when the perception of risk would otherwise prevent them from doing so. Charge origination and utilization fees to foster ownership and encourage utilization. Exit strategy sustainability. No sovereign borrowers, but can cover sub-sovereign: states, municipalities, cities. DCA most effective when linked to technical assistance or policy reform.

6 Loan Guarantee Portfolio ( ) USAID has mobilized $1.8 billion in privatesector credit since DCA s inception in FY99 through $60 million of USAID funding 239 total deals, of which 184 remain active. Leverage rate of 1:30 P o r t f o l i o V a l u e ( $ M i l l i o n s ) # o f G u a r a n t e e s Default Rate: 4.3% 0 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 0

7 Portfolio By Sector and Region

8 DCA Bond Guarantees: Expired Deals Guaranteed Partner (year of expiration) Country Type of Issuer Sector Size Maturity Kalani Tyre Merchant Bank (1999) Sri Lanka Fin. Inst. Micro $5m 7 yrs Banco Santa Cruz (1995) Bolivia Fin. Inst. Micro $6m 3 yrs Banco Boliviano Americano (1996) Bolivia Fin. Inst. Micro $3m 3 yrs Banco National de Bolivia (1996) Bolivia Fin. Inst. Micro $3m 3 yrs BancoSol (1997) Bolivia Fin. Inst. Micro $5m 2 yrs Vanik Incorporation Ltd. (2003) Sri Lanka Fin. Inst. Micro $6m 5 yrs MiBanco (2005) Peru Fin. Inst. Micro $6m 3 yrs Lariba (2005) Kazakhstan Fin. Inst. Housing $1M 4 yrs

9 DCA Bond Guarantees: Active Deals Guaranteed Partner (year of expiration) Country Type of Issuer Sector Size Maturity Tamil Nadu (2017) India Sub- sovereign Infrastructure (Water) $6.4M 15 yrs Karnataka (2020) India Sub- sovereign Infrastructure (Water) $21.7M 15 yrs Deutsche Bank (2011) Worldwide Structured Finance Microfinance $80.6M 5 yrs INECOBANK (2015) Armenia Fin Inst. SME $9M 8 yrs

10 Page 10 Peru Microfinance Bond Guarantee In 2002 USAID guaranteed the first bond issuance of a microfinance institution on Lima s Stock Exchange. Citibank acted as placement agent, issuance was oversubscribed. Proceeds of bond were lent to microenterprises. Results: Since the 2002 issuance, MiBanco has issued and sold subsequent bonds at better terms and without external credit enhancements.

11 Page 11 Kazakhstan Housing Bond Guarantee USAID guaranteed the issuance of Kazakhstan s first corporate bond. The issuer, Lariba Bank, needed access to longer-term funding to expand mortgage lending activities Prior to the bond issuance and through USAID assistance, Kazakhstan adopted international accounting standards, privatized state-owned assets, and open stock markets, enabling pension funds to purchase bonds and creating institutional investors Results: Increased mortgages and home ownership in Kazakhstan, and subsequent bond issuances without the need for a guarantee

12 Page 12 India Water Infrastructure Bond Guarantee USAID guaranteed the issuance of two municipal bonds in India (Tamil Nadu in 2002 and Karnataka in 2003) to raise capital to invest in sanitation and water supply. A pooled financing mechanism was set up to provide a cost-effective way for small villages, towns and cities in the Indian state of Tamil Nadu to implement much-needed water and sanitation projects. Bonds were resold on secondary market. Results: strengthened capital markets and improved access to water services.

13 Page 13 Tamil Nadu Private Placement Bondholders Debt Service Payments (Semi-annual Interest and Annual Principal ) Funds from bond issue Managed by TNUIFSL Water & Sanitation Pooled Fund (WSPF) (like a State Bond Bank) Debt Service Payments Loan/Bond Disbursement Municipal Ratings Gov t of Tamil Nadu Urban Local Bodies (ULBs) Gov t of Tamil Nadu Funds Escrow Account Debt Service Reserve Fund ULB Cash Flows Projects DCA Partial Credit Guarantee 24

14 Page 14 Project revenues, backed by state government transfers Institutional Investors Escrow Account Bonds Funds Bond Repayments Project Revenues Water & Sanitation Pooled Fund Loans Municipal Projects Debt service reserve fund, funded and maintained by state government Bond Service Fund 50% DCA guarantee (if debt service fund is not replenished)

15 Page 15 Armenia SME Bond Guarantee Primary purpose is to assist Cascade Credit in attracting private capital to expand its lending operations to SMEs. A substantial portion of the proceeds was lent to Armenian businesses engaged in the production of exports, which have had difficulty in accessing credit for their working capital needs due to the restrictive lending practices of local banks. It is expected that the introduction of this new investment product will spur the development of capital markets in Armenia.

16 Page 16 Guatemala Microfinance Bond Guarantee In 2004, USAID established a bond guarantee with Genesis Empresarial, a microfinance foundation, to support the issuance of pagarés (promissory notes). Genesis was to use the proceeds to increase their working capital, expand to new departments with the opening of nine new rural branches, and lower interest rates to their customers (by 2 basis points). Notes initially placed privately, with option to place publically through brokerage house if not fully subscribed. Placement never took place. To place notes, Genesis had to convert to a commercial bank, a process they we well on their way to completing when deal was structured. After several extensions and no progress, USAID was forced to terminate the deal.

17 Page 17 Georgia SME / Energy Bond Guarantee The proceeds of the bond issue were planned to be used by TBC Bank to expand its lending activities in both the SME and energy sectors. The bond issue was to serve as a pilot project to test the market and enable TBC to establish a track record, thus laying the groundwork for a larger, offshore bond issue some time in the future. At the beginning stages of structuring the guarantee, it was very difficult for Georgian banks to obtain affordable long-term funding. Over the ensuing year, while the bond was being processed, longer-term funds became much more accessible (in larger amounts) and interest rates came down making bonds a less attractive investment. For these reasons, TBC Bank and USAID mutually agreed to terminate the bond guarantee.

18 Thank you! Contact Information: Michael Metzler