Reaching the targets of the Paris Climate Agreement is not easy by any means. According to the United Nations Development Program, Mexico aims at lowering greenhouse gas emissions by 35% (and 40% if external support is secured) by 2030.

This requires a major overhaul in some of the highest greenhouse gas-producing industries, particularly the energy sector, which ranks first, contributing  68% of emissions, followed by the agriculture sector, which represents 16%. 

Addressing this issue in the agriculture sector is essential, given its pivotal role in economic contribution, employment, emissions reduction, food security, and public policy. 

The most recent agricultural census in Mexico (2022) indicated that the workforce related to these activities represents almost 21% of the Mexican population (roughly equivalent to 27 million people), the bulk of which is integrated by small-scale farmers, making them essential contributors to the economy. 

An Asymmetric Relationship

While, according to Statista, the sector has grown annually at a pace of close to 11% (2015-2022,), access to financing and other challenges are yet to be surmounted.    

FIRA (Fideicomisos Instituidos en Relación con la Agricultura), a Mexican development finance institution and one of the major financial players in the agribusiness sector, estimates that the domestic primary sectorcontributes around 3.2% of GDP, while financing for it represents only 2.5% of the total financing from commercial banks to the non-financial private sector. 

Moreover, access to financing still comes from informal sources, particularly in rural areas, “access to financial services represents one of the main barriers for the country’s producers to achieve sustainable development” (Diario Oficial de la Federación). 

Although access to financing has improved, small-scale producers still face challenges, with only 5.3% of them (265,508 producers) receiving any type of financing in 2022.

The Road Ahead

If the traditional banking system has limited exposure to the agribusiness sector, which financial intermediaries are doing the heavy lifting of underwriting loans to micro, small, and medium-scale farmers in the country? 

Some of the primary financial participants are non-bank financial institutions such as Sociedades Financieras de Objeto Múltiple or SOFOMs (Multiple Purpose Financial Institutions), cooperatives, and credit unions, among others. 

Beyond the challenge of increasing financing to the sector, there is an additional hurdle: providing stable, reliable funding sources for Mexican non-bank financial institutions, specifically SOFOMs.     

Not so long ago, we dived into a deep and insightful discussion regarding the Mexican SOFOMs to better understand the context and benefit from all the learned lessons (ex-post) from the confidence crisis in the sector.

The collapse of some of the major players triggered a sector-wide funding outage resulting in massive collateral damage for those that survived. A crude awakening that still lingers.    

This brings up another key question: is there a way to solve 

1. funding challenges for small and medium SOFOMs, 
2. channel much-needed funding into the agribusiness sector in the country, and 
3. enlarge all efforts under a sustainable framework? 

Short answer: yes. Long answer: through financial innovation, we can develop viable options to solve multi-tiered, complex issues.   

One and Only

The joint-issuance, an asset-backed security, was Mexico's first public issuance of its kind, with the bond backed by loans from multiple originators (Program Participants). 

The Program Participants are small and medium-sized financial intermediaries focused on providing loans and credit facilities to MSMEs in the agribusiness sector, which incumbent financial institutions typically underserve. 

Due to balance sheet restrictions, limited or inexistent track record in public market issuances, and a challenging funding environment, the Program Participants face limited opportunities to access public capital markets for institutional funding individually. 

Capital markets, as the primary platform for accessing institutional funds, represent a viable funding source to prospective issuers that intend to place “large” tickets (issuance amounts). 

Transaction and maintenance costs, legal fees, and other associated issuance expenses can be a relatively expensive endeavor, especially for first-time issuers. It can also prove to be an operationally complicated and time-consuming process that is not for the faint of heart.   

Financial Innovation           

IDB Invest acted as the lead investor of the inaugural joint-issuance program of up to MXN 1,500 million (approximately US$75 million).

This operations is a testament that financial innovation can break down longstanding access barriers and provide a path for non-bank financial institutions ready to become public market issuers or participants. 

The four Program Participants are now tasked with abiding by higher corporate and ESG governance standards, financial reporting, corporate accountability and alignment to sustainable bond framework driving current and future investments in social and green projects. 

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The underlying structure of the securitization, designed and created by Inteligencia Capital, consists of a dual-layer trust system (individual and master trusts). 

This structure enables both risk homologation (first layer) and risk mutualization (second layer) among participants, providing two layers of investor protection. 

A third protection layer, in the form of a partial guaranty (up to 20% of the issuance amount) provided by FIRA, ultimately complements this structure. 

The issuance reached the highest local credit quality rating AAA(mex) by two credit agencies (HR Ratings and PCR Verum).        

In other words, financial innovation scales impact and improves lives. 

Ripple Effect

A major, positive impact multiplier effect is embedded in the joint-issuance, bringing about financial and non-financial additionality, from many different angles. 

The positive ripple and demonstration effect of this innovative financial structure could extend to many of the stakeholders in two key sectors, financial and agribusiness.

It also paves the way for smaller non-bank financial institutions to access domestic capital markets and provide continuity in promoting and supporting sustainable investments, particularly in the primary sector. 

As ambitious as the Paris Climate Agreement's national targets may seem, financial solutions like these are needed to continue the right path toward completion.