Investment Insurance for Securitizations and Structured Finance Deals SME Asset-Backed Financing Instruments: Opportunities in Europe Bratislava, May 15-16, 16, 2008 1
Contents Introduction Role of Political Risk Insurance in improving transaction ratings Key features of ABS and structured finance transactions insured by MIGA MSF Funding (Brazil) October 2000 BALAEF mortgage securitization (Latvia) December 2004 BTA Ipoteka mortgage securitization (Kazakhstan) February 2006 and March 2007 Autopistas Del Nordeste project (Dominican Rep.) February 2006 2
Who is MIGA? Multilateral Investment Guarantee Agency Member of World Bank Group Founded 1988 172 Member Countries Mission Encourage Foreign Investment through issuance of Political Risk Guarantees 3
INTRODUCTION When PRI most relevant? Domestic Assets Consumer loans and leases, residential mortgages etc. Domestically Issued Securities Future flows Workers remittances Internationally Issued Securities PRI most relevant Domestic assets: consumer loans and leases, residential mortgages, receivables, SME loans etc. Internationally issued securities 4
CROSS-BORDER SECURITIZATION The Issue of the Sovereign Ceiling Risk layers affecting securitization in new markets Convertibility, Expropriation Systemic: Macroeconomic/Legal Structure Assets Source: Moody s Securitization in New Markets 5
CROSS-BORDER SECURITIZATION The Issue of the Sovereign Ceiling Wrap Aaa Intrinsic Value is higher than Sovereign Ceiling PRI Sovereign Ceiling Structural Credit Enhancements Local Currency Guidelines Rating Country Foreign Currency Rating 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 Systemic risk Legal risk Source: Moody s Securitization in New Markets 6
Economic Benefit of PRI Coupon without PRI Benefit to Issuer/Originator MIGA Premium Coupon with PRI 7
MIGA S ROLE Political Risk Insurance The coverage requirements will vary Risks Related to currency flows, assets, government regulations or breach of contract Amount How much? For Interest or Principal? Or for both P and I? Tenor How long? 8
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 9
ISSUER/ ARRANGER RATING AGENCY MIGA works with rating agency to customize political risk insurance coverage 10
RATING AGENCY Timely payment MIGA works to customize policy Waiting periods Liquidity facility to bridge payments during the waiting periods Ability and willingness to pay MIGA explains coverage to Rating Agency MIGA s status as a multilateral: Developmental Goals 11
EXAMPLE 1 Securitization of Lease Receivables MSF Funding BRAZIL CLOSED OCTOBER 2000 12
Project Summary Securitization of loan and lease receivables from financing of medical equipment in Brazil MIGA Solution $90m 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 13
MSF BRAZIL Project Structure MSF Holdings 100% ownership US payment flows MIGA s coverage MSF Funding interest and principal payments Investors (institutional investors, pension funds) US Brazil MSF Brazil loans and leases loan payments Borrower (local hospitals) 14
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 15
EXAMPLE 2 Securitization of Residential Mortgages LATVIA CLOSED DECEMBER 2004 16
Project Summary $63.5m 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 (A2 Aa2) Improved pricing, tenor, capacity 17
TRANSACTION STRUCTURE SENIOR NOTES Institutional Investors from US (Senior Notes), IFC (US$5 M) MEZZANINE NOTES IFC (mezzanine) SUBORDINATED EQUITY Baltic American Enterprise Fund (equity) US$60.5M Principal & Interest US$3.6M US$1.2M Baltic American Mortgage Holdings Baltic American Mortgage Holdings Trust 2004 1 (Issuer) USA LATVIA Equity US$.5M MIGA PRI Payments MIGA PRI US$10 million, 18 months of Interest Baltic American Mortgage Company (Originator-Servicer) Mortgage Payments $63.5M Mortgage Portfolio THE PROJECT Mortgages 18
Structuring Solutions 18 months of interest coverage only 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 19
EXAMPLE 3 Securitization of Residential Mortgages BTA Ipoteka Kazakhstan Phase 1 - Warehousing CLOSED FEBRUARY 2006 20
Project Summary $150m cross-border mortgage-backed securitization in Kazakhstan MIGA Solution $75m 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 21
TRANSACTION STRUCTURE: WAREHOUSE FACILITY Commercial Paper Investors USD Proceeds Commercial Paper Issued Netherlands Mortgage Certificates Issuer: First Kazakh Securitization Company BV Purchase Price USD Repayments Conversion & Transfer of Repayments ABN Amro Bank Shareholder Loan MIGA PRI Kazakhstan Originator: BTA Ipoteka ABN Amro Kazakhstan New Mortgages USD/Local Currency Repayments New & Existing Mortgages Pool of Mortgages (Customers) Obligation to pay mortgage principal and interest 22
Structuring Solutions 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 multiseller conduit which is funding the facility. The coverage uses a flexible revolving mechanism to account for the facility drawdown and potential fluctuations. 23
EXAMPLE 4 Securitization of Residential Mortgages BTA Ipoteka Kazakhstan Phase 2 - Kazakh Mortgage-Backed Securities 2007-1 B.V. CLOSED MARCH 2007 24
Project Summary Securitization of first-ranking residential mortgage loans denominated in Kazakh Tenge (KZT) and indexed to USD The transaction totals US$141.4m MIGA Solution Coverage for six months of scheduled payments of interest on the mortgage portfolio up to US$10.2 million against Transfer Restriction (T&C) and Expropriation Results One notch rating increase, BBB+ to A-(Fitch) due to T&C coverage First publicly rated RMBS transaction from the Republic of Kazakhstan 25
TRANSACTION STRUCTURE: TERM DEAL Class A to C Notes MIGA PRI Off-shore Mortgage Certificates First Kazakh Securitization Company BV (Loan Notes Issuer) Purchase Price Class A to C Loan Notes Conversion & Transfer of Payment Kazakh Mortgage- Backed Securities 2007-1 B.V. (Issuer) Kazakhstan Originator: BTA Ipoteka Interest and Principal Payments ABN Amro Kazakhstan (Kazakhstani Account Bank) Pool of Mortgages (Debtors) 26
Fitch Ratings RMBS/Republic of Kazakhstan New Issue Report, April 2, 2007 Kazakh Mortgage-Backed Securities 2007-1 B.V. The transaction benefits from a political risk insurance policy provided by the Multilateral Investment Guarantee Agency (MIGA, AAA/F1+ ), a company of the World Bank Group that provides liquidity to the transaction in the event certain transfer and convertibility risks (T&C) were imposed. As the class A notes are rated above the Kazakhstan country ceiling of BBB+, the issuer has entered into a political risk insurance contract with MIGA ( AAA/F1+ ) to provide coverage for six months of scheduled payments of interest on the mortgage portfolio in the event the Kazakhstan government imposes certain T&C restrictions. 27
International Securitisation Report 7 December, 2007 Kazakh Mortgage Backed Securities 2007-1 is awarded RMBS Deal of the Year - Europe Kazakh Mortgage Backed Securities 2007-1 unlocked the potential of Kazakhstan's booming mortgage market. Taking its structural innovations and wide distribution into account, Kazakh Mortgage Backed Securities 2007-1 is ISR's RMBS Deal of the Year. There have been several securitisation transactions from Kazakhstan in recent times in the form of future-flow deals, but in March 2007 ABN AMRO took a huge step by issuing the country's first true-sale RMBS, Kazakh Mortgage Backed Securities 2007-1 (KMBS 2007-1). The transaction incorporated a political interest payment contract provided by the Multilateral Investment Guarantee Agency (MIGA), a subsidiary of the World Bank that covers transfer and convertibility risk, as well as expropriation risks. KMBS was the first emerging market transaction to include expropriation risk, which in turn enabled higher ratings. 28
Fitch Ratings Kazakh Mortgage-Backed Securities 2007-1 B.V. Press Release, January 23, 2008 Fitch Ratings has affirmed today the ratings on all the notes of Kazakh Mortgage Backed Securities 2007-I B.V. Despite the recent revision of the Outlook of the Republic of Kazakhstan's Long-term Issuer Default Rating (IDR 'BBB') to Negative from Stable, the Outlooks of the notes remain Stable. The performance of Kazakh Mortgage Backed Securities 2007-I has been strong, with negligible arrears and significant payment rates It is likely that a downgrade of the country's IDR would also result in the lowering of the Country Ceiling ('BBB+'), reflecting an increased risk of the Kazakhstan government imposing restrictions on the transfer and convertibility (T&C) of the currency in a stressed environment. However, Fitch believes that the political risk insurance (PRI) contracted with the Multilateral Investment Guarantee Agency (MIGA, a company of the World Bank Group rated 'AAA'/Outlook Stable/F1+') is still sufficient to protect against this increased risk. Under the PRI, MIGA would pay out up to USD10.2m of interests due under the mortgage portfolio in the event of any T&C restrictions being imposed on the currency This is therefore sufficient to cover the 12 months interruption of the transaction flows envisaged by Fitch in its criteria for notes rated two notches above the Country Ceiling. 29
Thank you! Olga Sclovscaia Senior Underwriter osclovscaia@worldbank.org t. +1.202.458.2823 For more information, visit www.miga.org 30