Fintech Solutions as a Vehicle to Expand Financial Inclusion in Latin America and the Caribbean
Fintech solutions and digital banking services offer a unique opportunity to serve previously underbanked individuals and SMEs. Though most commercial banks are adopting these solutions, there is an opportunity to deepen the collaboration with Fintech firms in order to close financial inclusion gaps in the region, while promoting responsible finance practices.
What is a future flow securitization and what are the benefits?
Imagine that you represent an operationally strong company in a small or island country. You have helped it grow a business line specifically linked to the export of an essential product (oil or copper, for example) or the processing of financial transfers from abroad (credit cards, remittances, etc.), and see promising projections for the future. In addition, you want to diversify your current funding sources, which come from more traditional sources like commercial banks or nonfinancial institutions. Did you know that the existing and future cash flows of your business could be used to obtain another source of financing? This is how the securitization of future flows works, a little-known alternative with multiple benefits for the companies of Latin America and the Caribbean. A future flow securitization allows an enterprise (bank or corporate) to monetize existing and predictable cash flows expected to continue over the ordinary course of your business. The flows generated by the company are used to pay the debt service to the investors on the financing. Some examples of future flows from assets that are used in capital markets include: 1) Future financial flows like payments on receipts from international credit cards (Visa, MasterCard, American Express, among others), family remittances, and payments of foreign direct investment; and 2) Future flows of companies such as payments for exports of aluminum or zinc, or dollar-denominated payments from the sale of airline tickets, and other items. Generally, future flow securitizations in foreign currency involve the creation of a special purpose vehicle (SPV) in a jurisdiction different from that of the company that is the originator of the flows. The originator, through a true sale, backed by a legal opinion from an accredited law firm, sells ownership of the future flows to the SPV. The establishment of an SPV outside the country of the originator company allows the investors to mitigate some risks such as convertibility and transfer risks. In many cases, this reduced risk materializes when an international risk rating is obtained for future flow financing that is higher than the rating for the company itself (which entails a reduction in the cost of financing). In other words, both companies and investors benefit. The following graph presents a diagram of flows in a future flow financing transaction: What are the advantages of future flow financing? Long-term financing: The terms tend to be longer than the financing from commercial banks. They can be between five and ten years. Recently, IDB Invest approved the subscription of a note to be issued by the future flows program of the Federación de Cajas de Crédito y Bancos de los Trabajadores (Fedecredito) for $15 million with a seven-year term. Diversified funds platform: Facilitates the creation of a financing platform that allows multiple issuances, provided the minimum debt coverage and flow growth requirements are met. This allows for the participation of multiple institutional investors over time. Impact on development in small and island countries: The ability to mitigate certain sovereign risks in these transactions allows investors to invest with greater security in activities that produce an impact on the development of the region. In 2013, Banco Industrial Guatemala issued a ten-year bond, in which the IDB Group acquired $150 million, to increase access to financing for micro, small, and medium-sized enterprises, with a special focus on rural areas and women-led businesses in Guatemala. Securitizations of future flows are a source of alternative funding that can help to enhance your company’s growth, improve risk management in your company, and expand the base of funding sources to include international institutional investors. If you want more information, we invite you to visit our webpage on capital markets solutions. Subscribe to receive more content like this! [mc4wp_form]
How to attract more private capital to PPPs
As an engine of economic growth and poverty reduction, PPPs are on the rise in Latin America and the Caribbean (LAC). In the last decade, there were approximately 1,000 PPP infrastructure projects valued at $360 billion. Especially, in our current market of constrained fiscal budgets and deep social inequalities, PPPs have become more relevant than ever. Despite this historic uptick, many projects cannot mobilize sufficient private capital. PPPs crowd-in approximately one dollar of commercial finance for every dollar of public finance – a 1:1 ratio which has failed to close the infrastructure funding gap. On the supply side, institutional investors hold funds equivalent to 20 percent of the region’s GDP - a compelling figure when we seek an additional 2-2.5 percent of GDP to meet demand. Managing long-term assets like pensions and insurance is an ideal match for the long-term tenors of PPP projects. In addition, PPPs offer investors relatively predictable repayment schedules, promising financial returns and protection from inflation. In the past, private capital, namely from institutional investors, has been cautious. However the ability to mitigate certain risks is making projects more bankable and piquing investor interest. 1. Legal and regulatory risks Legal and regulatory risks span policies, regulations and institutions. Strengthening them to address market failures, incentivize risk-sharing and regulate consistently reassures investors. Countries are setting up government agencies and units with expertise to supervise PPPs. Advisory services to governments can further strengthen institutions, their regulators and supervisory mechanisms as well as long-term project programming. 2. Project preparation risk Capacity-building combined with the right incentives can mitigate project preparation risk. This can optimize project efficiency, predictability and investor-friendliness. Technical assistance can support project investment plans and share knowledge with public officials at PPP promotion agencies. Supporting investment planning can align PPP development with nationally- determined contributions. This fosters more climate-resilient, sustainable projects. Advisory also allows governments to determine optimal delivery models by conducting value for money assessments to ensure each asset brings value to government agencies, investors and end-users. 3. Foreign exchange risk Most PPPs, except for many in the energy sector, where they are often dollar-denominated, rely on local currency. For a PPP to succeed, avoiding foreign exchange risk is key. Governments are limited in the amount of dollars they can guarantee. Mobilizing local currency allows local borrowers to repay in the currency they are generating cash flow, avoiding mismatches. Currency risk can be mitigated by investors setting up local treasuries to issue debt in local currencies or by providing local currency guarantees project-by-project. 4. Construction risk Construction risk includes expropriation, geological and additional exposures to loss during the construction phase. Investors prefer to invest in PPPs only once construction is complete. However, de-risking projects through liquidity facilities, blended finance, subordinated debt and completion guarantees, which cover construction risk and up to the first 24 months of operation, can bring further comfort and incentivize early entry. Multilateral development banks are uniquely positioned to offer many of the solutions that address legal, regulatory and project preparation risks. IDB Invest (formerly known as Inter-American Investment Corporation), on behalf of the IDB Group, recently mitigated risks and attracted institutional investors in the Reventazón hydropower project in Costa Rica and Campo Palomas and Colonia Arias wind farms in Uruguay. The next phase seeks to bring institutional investors to PPPs and at construction phase. Besides, we can lend in local currency, as we are currently doing in Paraguay, Brazil, Colombia and Mexico, and we can also deploy guarantee and debt instruments to mitigate construction risk. Our in-house experts analyze infrastructure pipelines, support country planning and deploy financial and non-financial products that enhance infrastructure project risk profiles. IDB Invest, on behalf of the IDB Group, recently mitigated risks and attracted institutional investors in the Reventazón hydropower project in Costa Rica and Campo Palomas and Colonia Arias wind farms in Uruguay. The next phase seeks to bring institutional investors to PPPs and at construction phase. As the region’s PPP pipelines continue to grow, we will deploy the solutions to maximize PPP bankability and mobilize more financing. The boost we see in PPPs brings benefits for governments, private firms and the citizens of the countries we serve. [gallery type="slideshow" link="none" size="full" ids="7775,7776,7777"] Subscribe to receive more content like this! [mc4wp_form]
Three Trends in Sustainable Finance across LAC
2017 could be another record year for green investment products as the issuance of green bonds globally is forecast to rise to $206 billion, twice the volume from 2016. This shows how in the last few years, the finance sector has taken serious interest in sustainability’s potential to deliver profit, even though the benefits of environmental and social management have long been understood.
How Argentina can attract the private sector
This week I had the opportunity to participate in the Argentina Business and Investment Forum in Buenos Aires. The world has been watching as the country took center stage to start the conversation with the private sector and discuss ways to open its markets to the world.
Why does the private sector need capital markets?
Across emerging markets, access to finance is one of the largest barriers to success for private enterprises. Business leaders cite scarcity of credit as their main concern for growth, outweighing issues like corruption, tax and political instability.