The European Bank for Reconstruction and Development is preparing its first securitization, its president Odile Renaud-Basso has told GlobalMarkets.
She said the transaction would be launched to private investors in 2025. “The first step is to assess the market appetite, what kind of portfolio, and to structure the product with different countries and different tranches,” she said.
She said this was more of a focus for the EBRD than public or private issuance of hybrid capital.
Meanwhile, the International Finance Corp is developing a new securitization platform to reach institutional investors, with an inaugural issue targeted before the end of the year.
Once the platform is well established, the IFC will share the technology with other development finance institutions.
“What we are working on is more to facilitate private sector mobilisation,” Renaud-Basso said. “We are increasing our targets in terms of co-financing, B loans, and risk sharing with insurance companies and so forth.” The securitization is another technique in that suite.
Renaud-Basso said an EBRD securitization would be in line with the originate-to-share strategies followed by other multilateral development banks including the Inter American Development Bank, which announced a $1bn synthetic risk transfer securitization on Wednesday, freeing up capital for further lending. GlobalMarkets reported in detail on that deal yesterday.
IDB Invest, the private sector lending arm of IDB, transferred a layer of mezzanine risk on a portfolio of 100 corporate, project finance and financial institution loans to Newmarket Capital Group, an investment firm in Philadelphia, and a more senior layer of risk in unfunded form to insurance companies Axis and Axa.
The investor profile would be broadly similar in the EBRD’s case, Renaud-Basso said.
“For us the objective mainly is to create space on our balance sheet — but it’s also to create appetite and to familiarise investors with our countries of operation, so they have a better understanding of what is the risk attached, in the hope that this will contribute to attracting private investors in our countries of operation.”
Multilateral development banks are keenly conscious that their loan portfolios perform very well, but this is not well understood by private investors, who tend to see emerging markets and development finance as high risk.
“Our track record as a lender is very good, when you look at the default rate, which is very low, and the recovery rate, which is very good,” said Renaud-Basso. “The risk is much lower than the perception by the market. It’s because we work very heavily on projects, we prepare them very seriously, and we are selective. Securitization is another way to have investors involved in these markets and to better understand them.”
Capital not getting through
Renaud-Basso said that although asset owners had a lot of capital to invest, very little of it ended up in the EBRD’s countries of operation, because borrowers there tended to want fairly small loans, and in banks’ case because of regulatory capital requirements.
Securitization would give investors a way round those problems, by giving them exposure to a large, diversified portfolio.
“When you buy a slice of securities you can have better aggregation, better scale to attract private investors,” she said.
The asset pool, nevertheless, will focus more on bigger EBRD countries such as Poland and Turkey. It may also have an important climate finance component.
She said the intention was to make securitization a regular tool. “For us it will be a first experience and then we will see how it works. We will learn by doing, but the objective is not to have [just] one.”
Securitization by MDBs began in 2018 with the $1bn Room 2 Run deal by the African Development Bank, but then went cold, as the Trump administration was opposed and MDBs focused on Covid. But in the interval the three major rating agencies have made it easier by establishing specific methodologies for how they treat MDB securitization.
Meanwhile, the commercial risk transfer securitization market has also been thriving. MDBs that lend to the private sector are more likely to use securitization at this stage because private sector assets carry more yield, that can cover the cost of the risk transfer.
A year ago, Renaud-Basso said the EBRD would issue a pilot, benchmark-sized hybrid capital deal to investors, to test the market.
But she said this was now less urgent, as the EBRD’s shareholders had provided a €4bn capital increase late last year. Governments are subscribing to the shares this year. Cost was also a factor in private sector hybrids, she said.
“We remain open to hybrid capital, and we are looking at what is going on in this space,” Renaud-Basso said. “We are looking at what the World Bank is doing, what the African Development Bank is doing. For us, for the time being, the priority is the implementation of our capital increase subscription. In the very short term, we don’t see a need for hybrid capital, but we continue to monitor this and to see what could be possible whenever we need it.”