In the field of asset-backed transactions, where deals are done for hundreds of millions of dollars, a securitization of loans for poor food vendors, seamstresses and other owners of small businesses in Latin America could be difficult to assess.
But Accion International, a micro-finance pioneer that provides small, short-term loans to the self-employed poor through its network of lending affiliates in Latin America and the U.S., is confident that it can successfully securitize its microlending portfolios. At the core of Accion's securitization efforts is the recognition that microcredit must be financially sustainable, as opposed to being dependent on donations or government aid.
"Securitization would be a very important achievement for our affiliates in Latin America as they develop and need to make more and bigger loans to their clients," said Michael Chu, Accion International's president and CEO.
The Accion Network provides loans that start as low as $100 in Latin America and $500 in the U.S. Borrowers who repay their loans on time are eligible for larger loans. While this lending model provides much needed capital for low-income entrepreneurs who have accumulated a few assets but remain trapped in a cycle of poverty, it does not amass the big volumes seen as vital for publicly-offered securitization.
"Because of the lack of volume our first offerings are likely to be in the private placement market for no more than $10 million," explained Chu. "But our volume is growing and once we have a few small deals in the market we could do a public offering of around $50 million."
Accion is working with some leading investment bankers towards a securitization program for its affiliates. At this point, Bolivia and Argentina seem to be the most likely candidates for local deals.
"Bolivia is the first on the list because of the success of its microfinance institutions and the fact that the local economy is highly dollarized, which enables us to bypass some of the currency risks," said Chu. "Argentina is another good candidate for local transactions. The necessary legal framework is in place and the local market is used to these type of deals and is therefore more receptive to them."
Despite its potential, securitizing microcredit is not without its challenges. "From a rating agency's perspective, the problem with microcredit is the small balances, which are hard to service in countries where computer systems are not very developed," said Chris Donelly, head of structured finance at Duff & Phelps. "There is also the issue of industry exposure. A crisis in the type of activities that are financed by microloans could affect the borrowers and the loans's performance dramatically."
According to Donelly, securitization might prove to be a bumpy road for microlenders. However, he believes that an attempt by a global organization such as Accion could fare better than one by a local agency standing alone.
"A world-reaching organization can pool together loans from a variety of countries and address issues such as regional and industry concentrations," he said.
Undoubtedly, the most important component of a successful securitization is the loans' performance record. And Accion is confident that its microloans are good business. "For micro-entrepreneurs, the protection of their source of credit is crucial," explained Chu.
"When the alternative to obtain capital is going to a loan shark people will go to great lengths not to be late on their payments. During Hurricane Mitch, for example, there were people still covered in mud that came to pay their instalment because they felt that the bank was going to play an important role in their recovery."
According to Chu, Accion could be ready to launch local deals in the next six months, while international transactions could take between 12 and 15 months to structure.
"We are thinking of creating a specialized institution that can be seen by the financial world as a source of expertise in microfinance," explained Chu. The structure of the offerings, he added, is still to be decided.