In late December, the European Bank of Reconstruction and Development (EBRD) launched the Mid-size Sustainable Energy Financing Facility (MidSEFF), designed to support renewable energy and industrial energy efficiency investments.
Under this initiative, the EBRD has approved the disbursement of up to â‚¬300 million ($410 million) to four Turkish banks by either providing senior unsecured loans or purchasing notes issued through the diversified payment rights (DPR) securitization programs originated by these banks. In addition, the multilateral has approval to finance directly, as co-lenders, up to â‚¬100 million with the same banks in certain renewable energy or energy efficiency investments.
At the end of 2010, the EBRD made its initial tap of this facility by purchasing a â‚¬75 million, 12-year DPR tranche originated by Turkiye Garanti Bankasi (Garanti Bank). The notes were part of a â‚¬250 million club deal, with the European Investment Bank (EIB) and arranger WestLB buying up the remaining tranches.
Given this public push into ABS by the EBRD, ASR's Felipe Ossa had a chat with Noel Edison, who heads up the multilateral's Insurance and Financial Services (IFS) group, which oversees debt and equity investments in non-bank financial institutions as well as all aspects of structured finance.
The discussion ranged from the virtues of DPRs to what might be done to nurture the growth of local markets in the countries supported by the EBRD, which currently number 29 and stretch from central Europe and the Western Balkans to central Asia. Since 1991, the bank has helped finance more than 2,900 projects, with a combined value of â‚¬53 billion. The EBRD is owned by 61 countries, the European Union and the EIB.
Edison is an old hand in the field, having worked for nearly eight years as a managing director in securitization at Standard Chartered, where he spearheaded the bank's efforts to build a practice of structuring and selling ABS, MBS and future flow deals in emerging markets. During his time at StanChart, his team was responsible for structuring five of the eight DPR programs now established in Turkey.
ASR: First of all, how does MidSEFF differ from TurSEFF, the Turkey Sustainable Energy Financing Facility launched in July of 2010? TurSEFF was a $200 million credit line for households and private enterprises disbursed through local partner banks Akbank, Garanti Bank, VakifBank and DenizBank.
Edison: TurSEFF provides medium-term funding to facilitate investments in small-scale energy efficiency and renewable energy projects, primarily by SMEs and households. MidSEFF complements TurSEFF by providing funding with a longer tenor for the larger, more complex renewables and large industrial energy efficiency investments, typically where funding of 10-plus years is required. We're providing term funding that allows banks to identify and finance term projects with the objective of ensuring that Turkey becomes more energy efficient as well as aiding the diversification of energy sources. Turkey is heavily reliant on imported fossil fuels to meet its energy needs, and the EBRD is providing finance to improve the efficiency of its energy consumption. MidSEFF is a new funding model offered by the EBRD for larger sustainable energy investments and could be replicated in other countries in our region.
ASR: What is the timeframe for MidSEFF?
Edison: There's no time limit on the program, but we expect to see it funded through programs with the four Turkish banks over the next five months. Underlying investments and sub loans to which these funds will be applied will be identified over the following 12-18 months.
ASR: Will DPRs likely be the main conduit of funding for the â‚¬300 million portion of the facility?
Edison: Based on feedback from our client banks and having reviewed market price levels, our conclusion is that DPRs are the only way to economically fund these projects. [The Garanti deal] is the first 12-year senior debt funding the Turkish market has seen, and a structured investment-grade rated program is clearly the vehicle to provide long-term funding.
ASR: In the club deal closed for Garanti last December, the EIB - a stakeholder in the EBRD - purchased a â‚¬75 million, 12-year tranche, basically a mirror of EBRD's participation. The EIB has some experience in this sector. It ventured into DPRs in August of 2008, purchasing a â‚¬393.5 million bond from Akbank and a â‚¬200 million transaction from Garanti. The EIB made a third investment in the DPR asset class last August when it participated in a transaction for Akbank that totaled $862 million. That deal was also partly funding by the International Finance Corp. (IFC) - the first time the private-sector financing arm of the World Bank purchased a future flow deal in Turkey as well as in the entire EMEA region. Could you discuss this interest among multilaterals and when it might start to encourage bond investors to return to DPRs in meaningful numbers?
Edison: We expect that EIB will be a strong partner for EBRD across the broader MidSEFF project. There may also be expanded support among other multilaterals to consider DPR programs as an avenue for providing term funding for their respective projects and facilities. With this renewed level of interest in DPRs, we also believe institutional investors will look again at the inherent value of the DPR asset class and the additional comfort provided by the presence of IFIs (International Financial Institutions) as investors. This point on the performance of the DPR asset class is particularly relevant given that the DPR deals in Kazakhstan that breached covenants during the crisis have repaid investors at par. [Last year, Alliance Bank became the last among its distressed peers to do so.] To date, no rated DPR program has resulted in the loss of any interest or principal to investors.
ASR: Just as TurSEFF was a replication of programs already in effect for EBRD member countries such as Ukraine, Russia, Georgia, Romania, Bulgaria, Western Balkans, Central Asia and the Caucasus, could MidSEFF and its effective encouragement of DPR issuance be extended to other countries? If so, which ones? What would be the criteria?
Edison: Yes, we believe there may well be similar applications of DPR programs in other jurisdictions. Wherever there is a need for long-term funding for the EBRD's programs, we will consider very carefully the benefits of a structured deal as a way of mitigating our risk and finding the right balance of pricing and structure for the client. Our approach is not to act in the capacity of an arranger, but as an investor, and in that context we know of discussions going on in Russia, Ukraine and several other countries for structured programs, though the discussions are at an early stage.
ASR: Is MidSEFF focusing on particular Turkish banks for purchasing DPR tranches?
Edison: The first four MidSEFF banks - Akbank, Garanti Bank, VakifBank, and DenizBank - are existing clients under the TurSEFF program. Their selection as MidSEFF banks was driven by their readiness to finance sustainable energy investments and their openness to adopt our more stringent environmental standards for the investments. These same banks that have the foresight to support sustainable energy investments are also advanced in their funding programs and as a consequence also have established DPR programs. A DPR program is not a criteria for being eligible for MidSEFF, though, in the current markets, DPR programs enable us to provide term funding on more economic terms that make the on-lending commercially viable.
ASR: Multilateral banks are famous champions of local market development in emerging markets - the thinking being that domestic funding in local currency can help corporate and public-sector borrowers better manage currency fluctuations and unsteady foreign investment flows. While sizable local markets have grown over the last decade in markets such as Brazil and Mexico, many that fall under the purview of the EBRD have only a shallow investor base, if any. Is the EBRD working in this area?
Edison: The EBRD's IFS group also has responsibility for providing developmental funding for the financial infrastructure of EBRD's countries of operation. Last May, at our annual general meeting, a joint initiative was announced by the EBRD, the IFC and the World Bank to assist in the development of local capital markets and is now formally underway. The EBRD is prepared to support this initiative with equity and debt funding of specific projects, act as an issuer of local bonds as well as play the role of anchor investor in certain private-sector debt programs whether they be senior unsecured bonds, covered bonds or securitizations. Our role is to act as a catalyst, and to that end we will also actively engage in policy dialogue with government to improve regulation, laws and tax regimes so that these local markets can develop in a constructive and sustainable way. Our focus is also on the domestic investor base of pension and insurance companies, and the development of derivative and FX markets along with the local stock exchange and related CCP (central counterparty) and depository functions.
ASR: How does this relate to ABS/MBS specifically?
Edison: We believe the more traditional asset classes of ABS/MBS are good for the development of the local capital markets. They promote disciplines within companies to monitor the performance of their receivable portfolios, they go hand in hand with developing local rating agency presence, they provide alternative investments to local investors and they have performed well during the crisis, unlike the more complicated and esoteric asset classes that have given securitization a bad name. Our focus is on local currency issuances, where possible, and transactions are being discussed in Poland, Turkey, Russia and Romania. The EBRD invested in six ABS programs in Russia, pre-crisis, and four have repaid on time with the remaining two performing well, so our experience has been good to date. This includes investments in both senior and mezzanine tranches though, post-crisis, our initial focus will be oriented to rated senior tranches.
ASR: Covered bonds have held the attention of investors since putting many other asset classes to shame during the crisis. A number of emerging markets are looking into them. What's the EBRD's take on covered bonds in the countries it oversees? Is it playing an active role in encouraging the use of this instrument?
Edison: We have invested in covered bonds in the past and are actively exploring ways that we can assist, either as an investor or through policy dialogue through our announced local capital markets initiative. We see covered bonds playing an important role in providing medium- and long-term local currency funding to domestic and foreign-owned subsidiary banks.
ASR: As with other multilaterals, the EBRD has fallen under pressure from NGOs and community groups looking to influence its investment decisions - more often than not to decline to fund or withdraw funding from environmentally destructive projects. From this standpoint, is securitization politically contentious at all, especially given the bad name of the sector during the crisis? Is this is a viable analogy?
Edison: We use securitization where it makes sense for the project and the client's financing needs and are not inconsistent with the transition objectives of the project. For MidSEFF, the DPR structure is the most appropriate funding mechanism to allow us to engage with the Turkish banks to push for an expansion in financing of renewables and an upgrade in environmental and social due diligence of such investments. Without attractive funding structures, we would be less successful in supporting low-carbon and environmentally sustainable development in our countries of operations.