Financial Cooperation in Asia Pacific Region June 2005

Financial Cooperation in Asia Pacific Region June, 2005 An Asian Investment Fund: What it will do and Why needed? Yung Chul Park Research Professor And Director Center for International Commerce and Finance Seoul National University 1

2 I. Asian Investment Fund Asia Investment Fund (AIF) is a multilateral financial institution to be created for the promotion of financial cooperation and financial market integration in Asia Objectives of AIF - Development of SMEs in Asia ▪ Guarantee of SME bonds ▪ Lending ▪ Equity investment ▫ pooling SME assets for securitization ▫ creating a fund of private equity funds

3 - Financing Physical infrastructure by guaranteeing project bonds ▫ Required amount in Asia is estimated to be US$ 20 – 30 trillion over the next ten years - Other Guarantee Business ▫ ABS ▫ municipal bonds These activities of AIF will help foster deep and liquid regional bond markets in Asia

4 II. Organizational Characteristics ▪ A market driven institution in terms of business scope, pricing, and meeting the needs of its clients ▪ A Regional Financial Institution with AAA Credit Rating ▪ An organization independent from major shareholders or the government of the country where it will be located ▪ Professional management

5 III. Shareholder Structure ▪ AIF could be structured as a multilateral development institution supported by the participating Asian countries as shareholders ▪ Alternatively, it could be organized as a public- private partnership with multiple share holding. ▫ Ownership Structure of European Investment Fund EIB (59. 15%), European commission (30%), and other private financial institutions (10. 85%)

6 IV. Target Markets ▪ AIF is in principle expected to operate in all member countries ▫ A fair and equitable allocation of its guarantees and investment resources ▪ Different Geographical Focus ▫ guarantees in countries with developed domestic bond markets ▫ loans and equity investment in other economies ▫ participating in reinsurance in other advanced economies to reduce its geographical risk concentration

7 V. Capital Requirement ▪Securing enough capital to acquire AAA ratings from both local and global rating institutions ▫ A proposal for AIF’s authorized capital: US$ 3 to 5 billion* ▪ Ready and Timely injection of callable capital during periods of high stress * EIF’s authorized capital € 2 billion

8 VI. Product Offering Credit Enhancement and Guarantee Services ▪ Guarantees in both local and major currencies ▪ Credit guarantees for securitization of debts of SMEs and infrastructure projects ▫ A scheme for Two-Tier securitization for SME financing (Figure 1)

9 Figure. 1* Country A SME Loans Senior Junior Country B Senior SME Loans Junior SPC in Country D (Capital Senior Junior Abundant Country) Credit guarantee Government Country C SME Loans Senior Agency (GA) Junior *This figure draws on internal studies of Korea Institute of Fixed Income Securities

10 SME Loans ▪ AIF-Local Financial institution partnership ▫ Providing SME loans through local financial institutions ▫ Establishing a local financial institution as a subsidiary of AIF ▫ Providing loans to local financial institutions for SME securitization

11 Equity Investment ▪ Investing in selected private equity funds with private investors providing 50 percent of the capital ▫ A fund of funds structure ▫ private equity funds include venture capital, corporate restructuring and corporate byout funds

12 ▪Establishing Collateralized Fund Obligations (CFOs) to securitize cash flows from investment in private equity funds (Figure 2) ▪ Co-investment agreements with other multilateral agencies

13 Figure. 2* Investment Exit/Realisation Fund of Funds Drawdown Distribution Transaction Structure Principal & Interest (SPV) Note Proceeds Underlying Partnership Portfolio Company CFO Investor *This figure draws on internal studies of Korea Institute of Fixed Income Securities

14 Guarantees for Infrastructure projects ▪ project bonds ▪ bonds issued through securitization based on the cash flows from the project ▪ guarantees in local currency Advisory and Structuring services ▪ Regulatory improvements for bond market development, securitization, and financial guarantees, and venture capital funds ▪ Advisory, structuring and auxiliary financial services for cross-border securitization