Impact investor responsAbility Investments AG sold a $175 million so-called microfinance collateralized loan obligation earlier this month with the help of JPMorgan Chase & Co., reviving a type of financing for emerging-market entrepreneurs and small businesses that last saw the light of day in 2007.
CLO manager ZAIS Group acted as adviser on the transaction as part of its recent push into ESG and impact investing via the securitization markets. The company hired structured finance veteran Desiree Fixler in March to build out ZAIS’s own securitized-product line for the ESG space.
“The CLO and securitization format helps to attract institutional investors -- pension funds, insurance companies and even family offices, because many prefer a transferable, listed security and they might not have the capacity to invest in fund structures, which is the only structure currently available to most microfinance investors,” Fixler said in an interview.
She helped create the idea for microfinance CLOs while at JPMorgan in the early 2000s, and advised on two pre-crisis deals completed by Morgan Stanley.
“They find the option of choosing a suitable risk/return profile very compelling and the nature of tranching can capture the widest range of investors. This template can potentially open up the market to become a multi-billion dollar asset class,” she said.
The proceeds of the responsAbility deal, which was arranged and structured by JPMorgan and took a year to put together, will flow through to 26 bank and non-bank financial intermediaries in 17 developing countries as far-flung as Botswana and Kyrgyzstan, according to bankers on the transaction. These organizations, in turn, will provide capital to 30,000 small businesses and 5.6 million microfinance borrowers -- 81% of whom are women.
Overseas Private Investment Corporation (OPIC), a U.S. government development finance institution that helps American businesses gain footholds in emerging markets, was a key investor and partner on the deal, putting up $150 million. Alecta, a Swedish pension plan, bought the so-called equity piece, which is the riskiest and first to take losses if there are loan defaults. Impact investor Calvert Impact Capital was another key investor.
Structure May Evolve
The securitization structure for the bond was loosely based on a simplified CLO format, bankers say, and was specifically chosen to attract U.S. investors seeking additional yield in the capital markets while also meeting their need for investments that satisfy environmental, social and governance criteria. The trade was unrated, and a mezzanine tranche -- which accounted for 10% of the deal -- yielded as much as 5.44%.
Future iterations of this basic template may be more complex, however.
“The deal could potentially be replicated,” Thomas Müller, co-head of financial institutions debt at Zurich-based responsAbility, said in an interview. “There’s the potential to eventually do a follow-up deal that is actively managed with a longer maturity, where the repayments could be reinvested,” a feature which is a hallmark of traditional leveraged-loan CLOs.
However, the structure for the recent deal “is very straightforward, with three-year tranches matching the underlying three-year bullet loans,” said Eric Wragge, managing director in the JPMorgan securitized products group in London. “In real life, these (borrowers) may be people who don’t have bank accounts. So that’s why it’s structured as a series of loans to individual borrowing intermediaries, set up as financial institutions and banks.”
Pre-Crisis Deals
Impact investor BlueOrchard completed at least two microfinance CLOs pre-crisis, including a 2007 trade that received ratings as high as AA from S&P Global Ratings in a Morgan Stanley led deal. The issuer was the first to syndicate this type of offering, and a handful of issuers followed with similar structures before the market shut down at the onset of the financial crisis.
While principal and interest were eventually paid back on the two pre-crisis BlueOrchard Loans For Development, or BOLD, CLO deals, the portfolios were stressed for a variety of reasons, such as the excessive use of leverage.
Additional obstacles came from local political crises in various countries, such as the 2008 “No Pago” movement in Nicaragua, which was a protest forcing microfinance institution branches to close, and a growing trend toward overindebtedness in 2010, caused by too many institutions lending to the same low-income people. The effects of the global financial crisis itself also complicated the deals’ performance.
The new deal does not use leverage, and the overindebtedness problem has been solved by the development of local credit bureaus in participating countries, which oversee due diligence and governance.
Obtaining a rating would be the next milestone for the revived sector, although that will be expensive. “It would be difficult to move toward a rated deal without the initial support of public money,” said responsAbility’s Müller.
