The International Finance Corp. (IFC) is investing $100 million into a fund that will provide coverage at the mezzanine risk level on portfolios of emerging market debt through a synthetic securitization structure.
This is designed to free up capital at the originating banks that would be otherwise constrained by regulatory rules. Banks using the fund will be obligated to plow that liberated money back into emerging market SME loans.
Managed by boutique shop Christofferson Robb & Co., the fund is raising another $300 million from private sector investors. It is expected to have a six-year life.
“The technology of providing coverage for a portfolio of emerging market SMEs has been used before by us,” said Laila Nordine, chief officer and head of structuring in the structured and securitized products group at the IFC. “The novelty here is having private investors who are interested in the EM SME market come alongside us.”
As the fund will be taking the risk, the mezzanine tranche is likely to be risk rated at zero for the purposes of capital adequacy. The transactions that stem from this fund are meant for international banks that are, or will have to, face Basel II and III rules.
Depending on the country where they are based, emerging market banks are less prone to face the same constraints. But Nordine said a product like this could be eventually used for emerging market banks lending to small and medium enterprises. The multilateral has a long track record of providing this sort of risk coverage on balance sheet for SME lending and other financial activities that fall within its mandate of promoting economic development.
As opportunities arise, transactions through the fund will be split into a senior tranche for the IFC, with an expected yield that is market based and commensurate with the risk taken by the IFC, and a subordinated piece for the private investors.