(Bloomberg) -- Deutsche Bank AG and
The World Bank's private sector arm, International Finance Corporation, has agreed to insure the credit risk on a $500 million portfolio of trade finance tied predominantly to low-income and conflict-affected countries, the lender said in a statement seen by Bloomberg. It's the first such transaction of its kind conducted by the IFC.
Investors include Newmarket Capital, a Philadelphia-based alternative asset manager specialized in structured credit, as well as insurers AXA XL, AXIS Capital and Liberty Specialty Markets. Aside from investing in the risk transfer, Deutsche Bank also helped arrange the transaction, the documents show.
The World Bank's decision to turn to private investors and complex financial instruments is a sign of the times, as governments increasingly weighed down by deficits struggle to expand such lending. The deal also coincides with a war-fueled spike in energy and food prices, which has proved particularly painful for emerging markets.
Makhtar Diop, managing director at the IFC, described the deal as "a bit of a market testing of the structures" available to it, in an interview. Completing the deal means "being able to accelerate the amount of money which is guaranteed for trade financing."
The need for additional World Bank financing is set to pick up as the Iran war drives up prices across key markets spanning energy, mining and agriculture. The IFC deal, a so called Trade Finance Synthetic Securitization, is part of a wider effort to implement a roadmap laid out by the G-20 group for multilateral lenders to find ways to increase funding for development goals in poorer countries.
The risk transfer consists of a $340 million senior tranche, a $110 million mezzanine portion, and a $50 million junior piece, according to the statement. The deal was arranged in a private process and on an "unfunded basis," meaning the investors don't transfer cash, but instead issue guarantees to provide the IFC with credit protection on the loan portfolio in question.
The arrangement significantly ratchets up the amount of lending the World Bank can do in relation to the portfolio targeted in the risk transfer, according to Diop.
"This transaction is important for us because now for $1 that we have put in guarantee, we are able to guarantee 19 times that amount in trade financing," compared with a ratio of 1-to-3 overall for the lender's loan book, he said.
The IFC's latest risk transfer deal follows a $510 million collateralized loan obligation that it completed last year. The lender is now close to doing its second CLO, and is also exploring a potential transaction tied to infrastructure financings, such as transmission lines, Diop said.
In order to focus more on such securitizations going forward, the IFC is expanding its teams dealing with institutional investors in countries including the US, Canada and Japan, he said.
"We are building a force, a workforce to interact with them on a daily basis," he said. "Everywhere where we have large pension funds, where we have large investors, we'll be building a relation team."
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