Q&A
Until a few weeks ago, it seemed that Dutch development bank FMO had joined the trickle of players out of emerging market ABS.
And one couldn't blame them. With cross-border investors soured on anything but the safest instruments, there didn't appear to be anyone in the private sector to partner with in a deal.
But news that the bank had bought $29.7 million of a $121.2 million deal by Interbank Peru has sent a clear signal to the contrary: FMO is very much open for business.
Backed by diversified payment rights, the seven-year transaction led by Deutsche Bank priced on June 5 at 425 basis points over three-month Libor.
And there's a strong chance it won't be the only deal this year from FMO.
Indeed, Magchiel Groot, senior investment officer at the bank's capital markets desk, said FMO can invest up to €100 million ($141 million) in structured finance this year.
ASR recently caught up with Groot and Sajeev Chakkalakal, investment officer at the same desk, to chat about the Interbank deal, where FMO sees opportunities in emerging markets, and changes its approach to that sphere.
ASR:
Let's start specifically with the Interbank deal. It's been some time since people in the EM space have heard from FMO, and executing any kind of non-retained issue in this market is an event. Why did you get involved?
Groot:
Interbank's been a longstanding client of FMO. Between 2002 and 2007, we provided a subordinated loan to them, which was prepaid with the proceeds of an IPO in 2007. For the DPR transaction, FMO invested in the 'BBB'-rated A notes issued by offshore vehicle IBK DPR Securitizadora. (The originator and arranger were understood to be initially contemplating a longer-dated B note but jettisoned the idea in favor of a single series.)
We played an anchor role in this transaction by committing ourselves early on in a difficult economic environment. Three other investors, all Peruvian, have joined FMO in investing in the $121.2 million notes.
FMO further deepens its relationships with clients using structured finance products. As FMO, we focus on the three "Access" strategies; finance, housing and energy. What we did specifically with the Interbank deal is by way of a Use of Funds clause, is to make sure that 50% of our investment goes to SMEs and 50% to low-income housing.
ASR:
Did the outcome of the Interbank deal jibe with the FMO's goals of acting as an "anchor investor" to get others interested? There were, after all, no cross-border investors.
Groot:
It's interesting though that the deal was taken up by local investors. Pricing was good for them but not as wide as what's available on the secondary market, which would otherwise have made it attractive to cross-border investors. Shortly before closing FMO decided to switch to the A notes from the slightly longer B notes as we could thereby catalyze another $25.2 million from Peruvian investors. One particular investor was keen to take up the legal maximum, but this maximum percentage is calculated per series hence the switch of FMO to the A notes. This also meant that all investors ended up participating in the A notes.
ASR:
Interbank is not as obviously systemically important as its peer Banco de Credito del Peru, which is a veteran of DPR issuance. The common wisdom about DPR deals is that they're attractive primarily if the originator is too-big-to-fail, since they depend on the survival of the underlying bank. Where does Interbank fit in this?
Groot:
Interbank is the number four bank in Peru. Regarding the possibility that Interbank may not be too big to fail, we've done the analysis and our assessment is that the risk is mitigated.
For each country, each bank we'd look into would be different. In Turkey, for example, we'd like to score a smaller bank; in Guatemala, a larger one. We wouldn't naturally step into a larger bank. We are not the EIB (European Investment Bank), which can scoop up hundreds of millions. Thirty million dollars for a single deal is our upper limit. For an issuer like Akbank, $30 million is a drop in the ocean. In fact, the number seven bank in Turkey may still be bigger than Interbank. In most countries, we're more likely to look at the smaller banks, lower down in the ranking so that our investment can make a difference.
ASR:
The crisis among the Kazakh banks has revealed vulnerabilities in the DPR class and yet two of the programs, at least, have fully paid down in what's inarguably a vindication of the structure as it was set up. Do you think there are any lessons here?
Groot:
My personal view is that it's good that it's happened because it shows us where the risks are. You can see that in one particular Kazakh case, it was a fast-growing bank, and there's also an onshore element. You can see that it's different how they treat offshore dollar flows or onshore dollar flows. (a situation amply illustrated by irregularities in the DPR program of Alliance - see ASR, June '09). None of the risks in these deals were unknown. The investors or the arrangers assessed those risks to be mitigated and they weren't.
Chakkalakal:
The Kazakh banking sector is going through severe stress. I don't think a scenario like this could happen in any jurisdiction.
ASR:
How does FMO approach structured finance internally? What does the organizational structure look like, and where does ABS fit into it?
Groot:
FMO actually reorganized at the beginning of this year and we're now sectoral instead of being regional. The first sector - which focuses on access to finance - provides funding to financial institutions so they are more able to provide money to those that don't typically lack or have difficulty accessing finance. The second sector is housing. Housing consists of housing finance and housing development in emerging countries. The third sector is access to energy - transmission, distribution, and generation. As a product desk the capital markets desk doesn't fall under one of the sectors - we work with all of them. We fall under the directorate of FMO's financial markets department. If one of our products can support a housing finance entity in Panama, we'll do that. If we can help a micro-finance institution and do a CLO, we'll do that. In that way, we support the FMO strategy and the mandate is global.
ASR:
While the mandate is global you clearly have preferences for some kinds of countries, and that seems to have changed over the past few years. For instance, in Mexico, you've provided partial guarantees for a construction loan deal by Credito y Casa and an RMBS by Su Casita. But it's been a while since FMO has been mentioned by Mexican players. Is your apparent pause in activity there just a function of the sharp slowdown in ABS and MBS activity in that country or does it obey other changes?
Groot:
Mexico for us is out. FMO has decided that when an upper middle income country is also investment grade [then] it is no longer covered by us. So not only Mexico but also Brazil and Russia are out. South Africa is an exception, as we have a commitment to increase Africa's share of our portfolio. Our 15% PCG to Su Casita's RMBS in November 2008 will therefore be our last deal in Mexico for a while.
ASR:
Brazil and Mexico have some of the more developed ABS markets outside of the U.S., Western Europe and the more financially sophisticated Asian countries. Does FMO's move away from them indicate that its focus will be more cross-border?
Groot:
There are domestic possibilities in Asia. In the Philippines, Thailand, Bangladesh and India there are quite a few corporates that could benefit from our enhancement. We could provide credit enhancements that could lift a bond to such a rating that it does appeal to investors. Typically our enhancement would not exceed a maximum of 50%.
Chakkalakal:
If you go to Indonesia and India there is more of an internal market although there are legal issues. We've been involved in an ABS transaction for Shriram Transport Finance Co. in India. It was an unfunded guaranty for a deal backed by vehicle loan assets for used trucks. By guaranteeing the mezzanine tranche, we helped the company use their capital more efficiently.
ASR:
What about markets you haven't been in, either on the cross-border or domestic front? Could we see the FMO enter new markets?
Groot:
You have to remember that we're not the World Bank; we can't create a market if one isn't there. As an investor we are very happy to do a first-ever DPR deal in a country, even if that's in a difficult country like Georgia, Nigeria or Azerbaijan. However, creating the enabling - legal - environment is something that should be lead by members of the World Bank group rather than FMO.
ASR:
What about Turkey? There was buzz last year about this time that the Turkish banks were talking to FMO about partnering on a DPR deal; then a couple of months later transactions emerged between the EIB and two Turkish banks: Turkiye Garanti Bankasi and Akbank. But nothing appears to have surfaced between FMO and any Turkish banks. Why?
Groot:
If we want our money to make a difference, we established that it would be best not to deal with the top banks, as they are even larger than the top banks in the Netherlands. We went down the ranking but still wanted a good credit profile. We identified the one bank that fit our criteria, but that didn't go ahead. This year we identified another opportunity, but that one also fell through. We hope that we now have identified a third target that will make it to the finish in 2009. The Turkish banks and other parties haven't met on common ground with pricing. Pricing in the EIB deals wasn't marking conforming. Turkey is still a focus country for the FMO.
ASR:
Finally, in the structured finance field, are there asset classes FMO is more inclined to invest in and others you avoid?
Groot:
We prefer trade receivables and other assets that can have a development angle. What is less favorable to us are credit cards and cars - the deal we did in India involved second hand trucks. And obviously, right now we're probably not going to look at RMBS assets, although a warehouse facility to a mortgage bank in Panama is also something we look at here at our desk.
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