IDB Invest, the private sector arm of the Inter-American Development Bank, is looking to increase lending in Latin America and the Caribbean through a synthetic securitisation plan. This move comes after the success of the African Development Bank’s Room2Run, a $1bn transaction that saw a riskier slice of credit risk transferred to private investors, thus reducing regulatory capital requirements for the originating lender. IDB Invest plans to build on this model and will receive funding from the Bill & Melinda Gates Foundation, the Rockefeller Foundation, and Open Society Foundations as part of the Multilateral Development Banks Challenge Fund.
Synthetic securitisations allow lenders to pay a fee to a third party to transfer part, or all, of the credit risk of a portfolio while keeping the actual loans on their balance sheet. By doing so, the lender reduces the regulatory capital it must hold to cover potential losses, which frees up capital for new lending. Synthetic securitisations also make the transaction’s risk more palatable for investors in the safer senior portions of the deal.
IDB Invest’s Chief Risk Officer, Rachel Robboy, acknowledges that synthetic securitisations are complex and challenging transactions to execute. However, the grants provided by the Multilateral Development Banks Challenge Fund will be used to finance the costs of putting the deal in place rather than being an investor.
Despite the potential benefits, synthetic securitisations are more complex in emerging and frontier markets such as Africa and Latin America due to insufficient credit risk databases and higher political and financial risks. However, Robboy is optimistic that IDB Invest is up to the task and will be moving forward in the next year to implement the securitisation. She added that “we need to build our asset class in the market.”
The Room2Run transaction was a first-ever portfolio synthetic securitisation between a multilateral development bank and private sector investors. A fund run by Mariner Investment Group, a global alternative asset manager, was the lead investor in the portion of the transaction that was marketed to private investors.
The European Investment Bank also won EU approval to issue a €1.4bn synthetic securitisation product amid the global Covid-19 pandemic in 2021. This was done in a bid to push commercial banks to lend to small firms rather than shifting to lower-risk assets.
Robboy noted that there’s a reason why there has only been one transaction of this kind. She added that “it’s hard to do,” and that IDB Invest needs to build its asset class in the market. However, with the support of the Bill & Melinda Gates Foundation, the Rockefeller Foundation, and Open Society Foundations, IDB Invest is optimistic that it can successfully execute this complex transaction and increase lending in Latin America and the Caribbean.
In conclusion, IDB Invest is looking to increase lending in Latin America and the Caribbean through a synthetic securitisation plan. While these transactions are complex and challenging, IDB Invest is optimistic that it can successfully execute this transaction with the support of the Multilateral Development Banks Challenge Fund. With the success of Room2Run and the European Investment Bank’s synthetic securitisation product, it is clear that synthetic securitisations are a viable option for lenders looking to free up capital and increase lending.
