The launch of Russia's maiden cross-border RMBS from Vneshtorgbank (VTB) ushers in another first: International Finance Corp.'s Guaranteed Offshore Liquidity Facility (GOLF). The new product seeks to mitigate some of the same hazards of dealing with emerging markets as political risk insurance does, but officials at the multilateral are loath to call it PRI.
"In our view it's more a credit facility," said Kevin Kime, senior financial officer at the IFC. "It's not providing insurance or a guaranty against an event, but rather a guaranty of the originator's obligation to provide dollars for debt service offshore during a transfer and convertibility event (TCE)."
All the same, it's clear that it works as a substitute for, and therefore a rival of, certain kinds of PRI. In fact, the IFC is touting the product as more streamlined than conventional PRI, especially regarding the period for evaluating whether a TCE has taken place.
"Because it's insurance, [traditional PRI policies typically] require a waiting period of six months to evaluate whether an event has met the policy conditions," Kime said. "Ours is automatically triggered if the servicer can't get the money to the offshore SPV account and the originator can't fund the necessary interest payments to bondholders. GOLF is designed specifically to integrate easily into a securitization structure."
In addition, sources have said that working with multilateral PRI providers like the Overseas Private Investment Corp. and Multilateral Investment Guarantee Agency (MIGA) can unduly delay the closing of a transaction.
Officials at OPIC didn't return calls for comment as of press time. MIGA, which, like the IFC belongs to the World Bank Group, did reply to questions by e-mail. MIGA's Director of External Research Moina Varkie wrote that the door-to-door time for MIGA to evaluate whether a TCE has taken place and make a disbursement is close to four months.
"PRI providers typically do less due diligence on projects than credit providers because of the more limited credit exposure they take," she added. "It is therefore unlikely that working with MIGA would require greater lead time."
As World Bank sisters, Varkie suggests the relationship between MIGA and the IFC is more complementary than competitive. "All the agencies of the Bank Group work to mitigate noncommercial risks to investments, with our products designed to meet diverse investor needs," Varkie wrote. the IFC's GOLF "complements the overall menu of risk mitigation products investors can choose from."
Whereas GOLF focuses on a particular risk, MIGA offers a broader range of risk mitigation products, including ones that cover expropriation; war, including sabotage and terrorism; and breach of host government contracts. Other PRI providers have a similarly varied focus.
An official at Zurich Emerging Market Solutions, a private sector provider of PRI, couldn't be reached for comment as of press time.
GOLF's features will be familiar to anyone with PRI experience. Put in place at a deal's closing, the unfunded guarantee is triggered if currency controls block payments on the collateral from being remitted to the offshore SPV that makes payments on the securitized bonds and if the originator is unable to fund the offshore payments itself. In such a TCE, the flow from the securitized assets accumulates in an onshore escrow account for the duration of the event.
The IFC guarantees will cover payments of interest to noteholders during the TCE to the extent that equivalent amounts are placed into this onshore escrow account. In the case of the VTB deal this coverage would last for 18 months, or three coupon payments, a standard time frame for PRI. The duration, however, can vary depending on the ratings boost that the originator is after. Once the TCE is over, the proceeds of the onshore escrow account would be used to repay any disbursements that the IFC has made under the guarantee. The IFC would also have recourse to the originator for any shortfall between the amount it had disbursed during a TCE and the amount repaid from the onshore collection account after a TCE ended.
If the collateral is in local currency then the local-currency equivalent of the foreign currency bond payments would be put in escrow. Given that the mortgages in the VTB transaction are dollar-denominated, that kind of conversion isn't necessary for GOLF's first transaction.
This coverage allows the transaction to pierce the sovereign ceiling. VTB, for instance, secured A1' and BBB+' from Moody's Investors Service and Fitch Ratings, respectively. Those ratings surpass each agency's sovereign ceilings on Russia by a notch (ASR, 06/12/06). The VTB transaction was on roadshow last week.
Kime at the IFC said that the multilateral has fielded queries over GOLF from originators in Russia, the Ukraine and Kazakhstan.
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