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Reprinted for IFC from October 2004 www.euromoney.com
Taking
structured
products to
the world
Taking
structured
products to
the world
Latin American domestic structured issuance has caught up with the more
established cross-border market, thanks in large part to the work of the
International Finance Corporation and structured products expert Lee Meddin. But
this is just the start of Meddin’s plans for the emerging markets, with Latin America
likely to take a pioneering role again. • Felix Salmon reports
EUROMONEY'S FINANCE MINISTER of the Emerging-market borrowers, then, aid of a few hundred million dollars in
year award usually goes to an emerging- inevitably have levels of currency, interest- World Bank capital.
market official, and for good reason. rate and rollover risk that their developed- The man at the IFC in charge of making
Finance ministers outside the OECD might market counterparts would never dream of this happen is Lee Meddin, a former
not be smarter or more sophisticated than having to deal with. structured-products expert at ABN Amro in
their G7 counterparts (although many are) The problem is well known, and the solu- Singapore, who was tapped to set up a new
but they certainly have a much harder job tion has long been known in theory: structured products group in Washington
to do when it comes to managing their emerging-market economies have to at the end of 2000. Since then, his group
countries’ debt. develop liquid domestic capital markets, has helped to mobilize more than
The problem is known as “original sin” – with well-defined yield curves and the abil- $2.5 billion, while putting up only $500
the fact that countries and companies in ity to fund a wide range of credits. million of its own money. Moreover,
emerging markets, when they can borrow, That’s easier said than done, though, so Meddin assures Euromoney, that $500
can usually only raise money in foreign the International Finance Corporation has million generated very impressive returns
currency, or at short tenors, or both. decided to step in and help out, with the for the Bank.
Reprinted from · EUROMONEY · October 2004 www.euromoney.com
Meddin has set himself a highly ambi- credit rating that will allow it to market Ps500 million borrowing programme, and
tious goal: to create whole new asset classes securities to domestic institutional maybe even find entities that could be will-
in emerging-market economies around investors. Now that most emerging-market ing to lend to it directly.
the world. If he is successful, these asset economies have low nominal interest rates, Occasionally, a few hedge funds will even
classes will require zero involvement along with a relatively solid legal and regu- be allowed into the deal, in countries where
from the IFC once the first few deals have latory framework for such issuance, there’s domestic hedge funds are active, such as
been done. really nothing preventing structured Brazil and India. “Sometimes a small alloca-
The initial conditions are certainly in issuance from constituting the lion’s share tion to a hedge-fund investor base is helpful
place. Structured products in general – of the domestic non-sovereign capital because it provides liquidity in the
asset-backed and mortgage-backed securi- markets in some countries. secondary market,” Meddin says.
ties – are now a $7 trillion market in the US, Meddin’s goal isn’t simply to increase the One, investor, however, will always be a
accounting for 31% of the total size of the quantity of structured-product transactions part of any deal that Meddin is involved in:
bond market. Treasury bonds, by contrast, in the emerging markets, however: he the IFC itself. When he first started his
are just 24%. wants the issuers that he is sponsoring to group, Meddin got involved only as an
Europe, too, has posted impressive return at some later date with plain-vanilla adviser in some deals. Those days are
growth in structured products: the market issues as well. over. Meddin’s keen to put his money
there grew tenfold, from $50 billion to “With a partial guarantee, you’re having where his mouth is, usually taking the
$500 billion, in the five years between 1998 the investors do due diligence on the riskiest tranche of any deal. That helps to
and 2003. underlying credit,” he says. “So the borrow- reassure investors, as well as giving him a
ing paves the way for them to borrow in good return on his investment of time and
An ideal market their own name without further enhance- expertise.
The success of structured products in ment.”
Europe and the US should be repeated in Those credits do not need to be classical In hiring mode
good measure in emerging markets. For issuers, either. In August, the IFC provided The IFC has now done 30 deals as what it
one thing, emerging-market economies are a 34% partial credit guarantee to a bond calls “a structuring investor”, mostly in
far more crisis-prone than those in develop- deal from Financiera Compartamos, a Latin America, and it hopes eventually to
ing nations, and structured products microfinance institution in Mexico. do that many each year. Meddin is in hiring
usually have much lower ratings volatility Compartamos is based on the hugely mode: with six professionals at the
than similarly rated plain-vanilla corporate successful Bangladeshi model: 94% of its moment, he hopes to have two more by the
issues. customers are women, the average loan is end of the year, and another couple in the
Emerging-market pension and mutual $300, and most of the loans go to small months following.
funds with long time horizons, then, groups of between 15 and 50 women, The IFC-sponsored deals have taken place
should love to invest in these deals. Even in making repayment in full extremely likely. around the world, in many shapes and
cases of multi-billion-dollar fraud, such as Once the IFC got involved, the deal, for forms. Meddin doesn’t really draw a
with Parmalat in Brazil, many structures just Ps190 million ($16.5 million), received distinction between the securitizations and
have held up perfectly, with no loss to an investment-grade double-A local-scale the partial credit guarantees. In both
investors. credit rating from both Standard & Poor’s instances the IFC puts up capital, takes risk,
Emerging-market institutional investors and Fitch. The lead manager, Citigroup/ and tries to bring new borrowers to the
certainly have cash – Meddin estimates Banamex, then distributed the bonds to markets.
that both Latin America and emerging Asia more than 13 institutional investors. “Just Because the IFC’s books are dollar-
have about $500 billion in domestic savings as many as any deal of any size,” says denominated, it can’t lend directly in local
looking to be put to work – not including Meddin. currency without hedging its foreign-
the money that residents of those countries “We need good distribution,” says exchange risk with a swap; those can be
have held offshore and that might be Meddin. “We follow the bookbuilding expensive in emerging markets, especially
repatriated if local investments started process very closely,” making sure that at longer tenors. Often, then, a partial
looking attractive enough. as many real-money investors as possible credit guarantee makes more sense from
The problem is that there are severe are introduced to the credit and to the the IFC’s point of view. Since it is just a
constraints on permissible investments for asset class. guarantee, no money needs to be disbursed,
most of the funds, especially in Latin Amer- With an AA rating, that’s possible. and no swap needs to be entered into. The
ica. A lot of Latin countries have only a very Mexican pension funds are only allowed to IFC can provision the guarantee at its dollar
small number of big blue-chip companies invest 5% of their assets in single-A rated value when the bond is issued, and charge
with the sort of credit ratings that the assets, which is what Compartamos is, and for it accordingly.
government regulators require – and those they generally save that allocation for To be sure, there is always the risk that
companies can usually get cheaper funding fallen angels – AA-rated corporations the currency will appreciate, and the dollar
from local banks than they can from the which, for whatever reason, have been value of the IFC’s guarantee will go up. But,
domestic capital markets. downgraded. Now they are comfortable notes Meddin: “There’s a correlation
With securitization and partial guaran- with the credit, however, they will probably between corporate defaults and macroeco-
tees, however, any issuer can get the kind of happily take up the rest of Compartamos’s nomic crises. If things improve, one might
www.euromoney.com Reprinted from · EUROMONEY · October 2004
expect the currency to increase in value but the use of domestic players. Meddin’s team. Eventually, Meddin hopes
the economy as a whole will improve too” – In Thailand, the IFC provided a partial to help out not only the big companies and
meaning that default, and an IFC payout, guarantee in October 2002 on what was the projects that he has been funding so far,
will be that much less likely. “We can pick largest domestic corporate bond ever but also the small and medium-size enter-
the better credits in a market,” Meddin issued in the country – a two-tranche, prises that account for more than 60% of
says. He’s confident that he is not going to Bt18.45 billion ($425 million) deal for global GDP.
invest in companies that will default Telecom Asia. The six-year tranche had Meddin doesn’t foresee SMEs individu-
despite an improving economy. So far his no IFC guarantee at all; the eight-year ally tapping domestic capital markets, of
results bear him out: he has never suffered a tranche had a partial guarantee of just course. But, he notes: “Banks can’t keep
loss on any of his deals. under 50%. funding SMEs. They’re good at originating
In Argentina, the IFC got involved in the and servicing loans, but they’re bad at
Groundbreaking deals domestic peso market post default, with a warehousing them.” That’s where the IFC
And it’s not as if Meddin is picking the securitization of pre-shipment export loans can come in. By helping move SME loans
easy deals. His first was a partial credit guar- by three Argentine banks in August 2003. off banks’ balance sheets and into the port-
antee for Indian paper manufacturer In Mexico and South Africa, the IFC folios of institutional investors, Meddin can
Ballarpur Industries in February 2001, help free up more lending capacity across
when no issuer without a triple-A local the emerging markets.
credit rating had ever done a five-year
deal. Ballarpur, in contrast, came with a
Meddin usually takes Helping banks lend longer
10-year bond on an issue rated AA+ by the riskiest tranche of “Banks haven’t been lending long term,”
Standard & Poor’s. Meddin notes, “and you need long-term
Then, in June, Meddin helped to create
any deal for the IFC. lending to a larger group of SMEs.” If banks
the very first mortgage-backed security in That helps reassure can start securitizing their loan portfolios,
Korea. Issued by KoMoCo, a borrower that then they will have less of a duration
had been set up with the IFC’s assistance,
other investors and mismatch if they start lending at longer
the bond had a senior tranche of W228 gives a good return tenors. So the IFC has already taken on
billion ($174.4 million) and a subordinated mezzanine risk at certain banks – Meddin
tranche of W9.7 billion. The IFC bought won’t say which – in order to build a track
W54 billion in all, hedged with dollar-won record that it can eventually show to the
swaps. provided the first-ever partial credit guaran- market.
The deal was a huge success. “Today, tees for municipalities: Tlanepantla in Further out in the future are even bigger
there’s no role for the IFC in that market, Mexico in February 2003, and Johannes- possible deals – maybe a securitization
which is a very established market,” burg in South Africa in June 2004. of non-performing loans in China, or
Meddin says proudly. In Korea, just as in And in Saudi Arabia, the IFC was even, eventually, a securitization of the
South Africa, where the IFC did a similar involved in the first ever corporate bond entire IFC portfolio of structured bond
deal – the first MBS in Africa – for South issue in the country, for Saudi Oryx Leasing issues.
African Home Loans in December 2001, the Company in March 2003. But even after just four years in the job,
MBS market is now mature, and needs no All of these deals, however, essentially Meddin has already seen domestic struc-
outside help. took ideas that had been tried and tested tured issuance in Latin America catch up
Since the end of 2001, Meddin has been elsewhere, and simply applied them with the much more established cross-
active all over the world – especially in to emerging markets. In Chile, Meddin border market. If things go according
Latin America, but also in Russia and Asia. went a step further, in an attempt to find to Meddin’s plan, that could be just the
Eastern Europe is a tougher nut to crack, he financing for the Universidad Diego beginning.
says, “because the best corporates were Portales, a university with an ambitious The first hint of what such deals might
bought by western companies”. In any case, expansion plan and no obvious funding look like came in June, when the IFC
now that much of eastern Europe is in the source. provided a partial guarantee on Latin Amer-
EU, those countries are “not a target market Student loan securitizations are nothing ica’s first ever securitization of non-
for us,” says Meddin. new, of course, but UDP wasn’t lending its performing loans.
But Russia has seen a lot of IFC deals, students money, so it wasn’t collecting The deal was in Colombia, where
especially with Russky Standart Bank. their loan repayments. Instead, it decided Titularizadora Colombiana, Colombia’s
“When the longest issues in the market to securitize its student’s tuition payments, secondary mortgage market company,
were three months, we helped do a six- with a UF1 million ($23 million) bond issued the equivalent $67 million in bonds
month bond,” says Meddin. “Then the denominated in Chile’s inflation-indexed backed by non-performing mortgages at
market was doing six months, so we helped currency unit. The IFC’s 30% guarantee got two Colombian banks. The IFC’s guarantee
them do a one-year deal.” The lead the deal a AA– rating from all three ratings helped the senior tranches, at five and
manager on the issues was Troika Dialog, agencies, and the eight-year bond came 240 seven years’ duration, get a triple-A
in line with the IFC’s commitment to basis points over the sovereign. local-currency rating, creating a real market
fostering domestic capital markets through More innovation is forthcoming from for non-performing loans in Colombia.
www.euromoney.com Reprinted from · EUROMONEY · October 2004
