Political Risk Insurance for Securitizations Challenges and Solutions

Political Risk Insurance for Securitizations Challenges and Solutions WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 1

Contents § Introduction § How credit rating works § Role of political risk insurance in improving transaction ratings § Key features of structured finance transactions insured by MIGA – MSF Funding (Brazil) October 2000 – BALAEF mortgage securitization (Latvia) December 2004 – BTA Ipoteka mortgage securitization (Kazakhstan) February 2006 – Autopistas Del Nordeste project (Dominican Rep. ) February 2006 WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 2

Who is MIGA? § Multilateral Investment Guarantee Agency § Member of World Bank Group § Founded 1988 § 167 Member Countries Mission Encourage Foreign Investment through issuance of Political Risk Guarantees WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 3

INTRODUCTION What Assets Can Be Securitized? Domestic assets Domestically issued securities Consumer loans and leases Credit card receivables Trade receivables Hard assets: leases, residential mortgages etc. Off shore assets Internationally issued securities Future flows Workers remittances WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 4

INTRODUCTION What Assets Can Be Securitized? Domestic assets Leases, SME loans, residential and commercial mortgages, infrastructure assets etc. Internationally issued securities PRI most relevant • Domestic “hard” assets: leases, residential mortgages etc. • Internationally issued securities WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 5

CROSS-BORDER SECURITIZATION The Issue of the Sovereign Ceiling Credit enhancements for systemic risks • Payment waterfall • Excess spread and over collateralization • Tranching and subordination • Cash deposits and reserve accounts • Currency and interest rates hedges Convertibility, expropriation Systemic: Macroeconomic/legal Structure Assets Source: Moody’s “Securitization in New Markets” WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 6

CROSS-BORDER SECURITIZATION The Issue of the Sovereign Ceiling § How rating agencies analyze risk § Risk layers affecting securitization in new markets Convertibility, Expropriation Systemic: Macroeconomic/Legal Structure Assets Source: Moody’s “Securitization in New Markets” WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 7

CROSS-BORDER SECURITIZATION The Issue of the Sovereign Ceiling Aaa Wrap Intrinsic Value is higher than Sovereign Ceiling § § PRI makes sense when the “local currency rating” (intrinsic value) of the underlying pool of assets is higher than the foreign currency rating of the sovereign. PRI can bridge gap to desired rating WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY Local Currency Guidelines Rating PRI Sovereign Structural Credit Ceiling Enhancements Assets Credit Quality Country Foreign Currency Rating Systemic risk Legal risk Source: Moody’s “Securitization in New Markets” 8

Economic Benefit of PRI Benefit to issuer/originator Coupon without PRI MIGA Premium WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY Coupon with PRI 9

MIGA’S ROLE Political Risk Insurance The coverage requirements will vary § Risks Related to currency flows, assets, government regulations or breach of contract § Amount How much? For Interest or Principal? Or for both P and I? § Tenor How long? WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 10

Types of Political Risk Coverage Protect against losses arising from § Currency transfer restriction and inconvertibility – inability to convert local currency into forex for transfer outside the host country – excessive delays in acquiring forex § Expropriation – nationalization and confiscation – creeping expropriation, partial expropriation (limited coverage) – expropriation of funds only is a possibility – non-discriminatory measures of general application not covered § War and civil disturbance – damage/disappearance of tangible assets due to war or civil disturbance (including revolution, insurrection, coups d'état, sabotage, and terrorism) – business interruption when investment is a total loss § Breach of Contract – inability to enforce an arbitral award against the Host Government WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 11

The Parties Issuer/ arranger Rating agency MIGA works with the arranger, according to the rating agency view of the rating to customize political risk insurance coverage WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 12

Key Points Timely payment § MIGA works to customize policy § Waiting periods § Liquidity facility to bridge gap Rating agency Ability and willingness to pay § MIGA explains coverage to Rating Agency § MIGA’s status as a multilateral: Developmental goals WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 13

EXAMPLE 1 Securitization of Lease Receivables MSF Funding BRAZIL CLOSED OCTOBER 2000 WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 14

Project Summary § Securitization of loan and lease receivables from financing of medical equipment in Brazil MIGA solution § $90 M coverage for principal and interest § Transfer restriction and expropriation of funds Results § Notes lifted 6 notches above sovereign rating B 2/B+/BB- A 2/A/A § Lower all-in financing costs WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 15

MSF BRAZIL Project Structure MSF Holdings US 100% Ownership Investors MSF Funding Interest and principal payments Payment flows (institutional investors, pension funds) US Brazil MSF Brazil Loans and leases Borrower Loan payments (local hospitals) WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 16

Structuring Solutions § First cross-border hard asset securitization in Brazil § First example of MIGA and IFC both supporting a capital market transaction (IFC bought a mezzanine tranche). § First PRI supported transaction to be rated by all three agencies (Moody’s, S&P and Fitch IBCA) § Unprecedented upgrade of 6 notches above the sovereign ceiling § Awarded Structured Finance International “Best Securitization of Emerging Market Assets” WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 17

Industry Opinion § This is the first transaction securitizing existing assets rated by Standard & Poor’s where the assigned rating is higher that the sovereign ratings (both local and foreign currency ratings) of the country where the underlying contracts were originated. Standard & Poor’s § The ratings assigned to the Notes exceed the B 2 Brazilian country ceiling because of the presence of the MIGA guarantee. Moody’s WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 18

EXAMPLE 2 Securitization of Residential Mortgages LATVIA CLOSED DECEMBER 2004 WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 19

Project Summary § $63. 5 M mortgage securitization in Latvia § 1 st RMBS in Central/Eastern Europe MIGA Solution § $10. 5 m coverage for interest only on the senior tranche § Transfer restriction and expropriation of funds Results § Senior notes lifted 3 notches above sovereign ceiling (A 2 Aa 2) § Improved pricing, tenor, capacity WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 20

TRANSACTION STRUCTURE SENIOR NOTES Institutional Investors from US (Senior Notes), IFC (US$5 M) US$60. 5 M Principal & Interest US$2. 1 M US$0. 9 M Baltic American Mortgage Holdings Trust 2004 – 1 (Issuer) Baltic American Mortgage Holdings Equity US$0. 1 M US$10 million, 18 months of Interest USA LATVIA SUBORDINATED EQUITY Baltic American Enterprise Fund (equity) MEZZANINE NOTES IFC (mezzanine) Payments Baltic American Mortgage Company (Originator-Servicer) Mortgage Payments $63. 5 M THE PROJECT Mortgage Portfolio Mortgages WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 21

Structuring Solutions § 18 months of interest coverage only was sufficient to upgrade the Senior tranche by 3 notches § Timeliness of payment is key – the total claim process reduced to 87 days to meet the rating agency requirements WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 22

Pre-sale Report Note: This information has been copied from Moody’s Investors Service web site from the Pre-Sale report for this transaction. Note: Coverage is for transfer restriction and expropriation of funds. WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 23

EXAMPLE 3 Securitization of Residential Mortgages BTA Ipoteka Kazakhstan CLOSED FEBRUARY 2006 WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 24

Project Summary § $150 M cross-border mortgage-backed securitization in Kazakhstan MIGA Solution § $75 M coverage of principal and interest for the warehouse facility § Transfer restriction and expropriation Results § Credit enhancement necessary to preserve the rating of the multi-seller conduit (rated A 1+) § 1 st cross-border mortgage-backed securitization in Kazakhstan and the CIS WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 25

TRANSACTION STRUCTURE: WAREHOUSE FACILITY Commercial Paper Investors Commercial Paper Issued USD Proceeds Netherlands Issuer: First Kazakh Securitization Company BV Mortgage Certificates USD Repayments MIGA PRI ABN Amro Bank Conversion & Transfer of Repayments Purchase Price Shareholder Loan Kazakhstan ABN Amro Kazakhstan Originator: BTA Ipoteka New Mortgages USD/Local Currency Repayments New & Existing Mortgages Pool of Mortgages (Customers) WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY Obligation to pay mortgage principal and interest 26

Structuring Solutions § Coverage for full expropriation including inability to exercise collateral (foreclose on mortgages) § Coverage applied to a warehouse facility and designed/sized to preserve the rating of a multiseller conduit which is funding the facility. § The coverage uses a flexible revolving mechanism to account for the facility drawdown and potential fluctuations. WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 27

Press coverage Financial Times Kazakh bank's mortgage deal coup By Paul J Davies Published: February 22 2006 02: 00 “A mortgage bank in Kazakhstan has completed the country's first true sale of residential mortgage risk with a US$150 m deal arranged and sponsored by ABN Amro of the Netherlands. The deal from BTA Ipoteka, a subsidiary of Bank Turan. Alem, a Kazakh bank, comes against a backdrop of improving economic conditions, declining interest rates and a growing mortgage market in the country… …The BTAI deal allowed the bank to diversify its funding sources to international investors with the benefits of political risk insurance from the Multilateral Investment Guarantee Agency, a subsidiary of the World Bank”. WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 28

EXAMPLE 4 Supporting Structured Financing for Toll Road Project Autopistas Del Nordeste in Dominican Republic CLOSED FEBRUARY 2006 WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 29

Project Summary § § $211 M financing for construction, operation, & maintenance of 106 km toll road from Santo Domingo to the Samaná Peninsula under a 33 year concession No project financing available for 20 years in DR MIGA Solution § MIGA guarantee for $100 M § Four MIGA covers: transfer restriction, war, expropriation, and breach of contract § 20 year tenor Results § Project financing available with very long tenors § One notch rating increase (B- B) with partial coverage (51%) WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 30

FINAL STRUCTURE $4. 5 M $103 M Equity and Sub Debt Institutional Investors International Sponsors Bond: $206 M Grupo Odinsa Holding Grodco Panama Autopistas del Norte Cayman Islands Sub. debt and equity $15 M Local Sponsor Consorcio Remix Morgan Stanley NY Arranger Astris Finance Financial Advisor Autopistas del Norte Dominican Republic WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 31

STRUCTURING CHALLENGES Fitch’s Rating and Value of MIGA Insurance Rating with MIGA coverage Ratification of the Concession (and amendments to the Concession) by Congress BBBSix notch increase Subject to: BSovereign rating WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY Full coverage of principal and rolling interest Four point cover including breaches of government obligations under the toll-road concession Timely compensation by MIGA under all four coverages 32

STRUCTURING CHALLENGES Non-Political Risks Affect Rating agency constraints: MIGA rating: • Non-ratification of concession • 2 notches lost (from BBB- to BB) Economic constraints: Percentage of MIGA coverage: • With no investment grade, cost/ benefit analysis begin to play • 100% = 4 notch increase (costly!) WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY • Partial coverage = 1, 2, 3 notches 33

Structuring Solutions § First use of PRI with four covers on a private placement for an Infrastructure project. § Timely coupon payments ensured through a flexible insurance policy, including – special “fast track” arbitration anticipated in Concession – shortened waiting, claims determination, and payment periods § Agreement by Insurer to accelerate payout in the event of a claim resulting in “date-certain” payouts by MIGA in case of claims § MIGA coverage reduced to 51% of bond issuance (partial cover more than sufficient to attract investors, the issue was 40% oversubscribed) WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 34

Fitch Pre-sale Report February 10, 2006 Transportation Projects Presale Report (Preliminary Rating) Autopistas del Nordeste (Cayman) Limited Primary Credit Strengths MIGA Guarantee The transaction benefits from a PPRG (Partial Political Risk Guarantee) provided by MIGA in an amount to cover 51% of the face value of any loss. The PPRG is conditional and accessible to cover the specific risks of transfer and convertibility, civil disturbance and, most important from Fitch’s view, breach of contract. The breach of contract coverage is designed to help offset any loss that would be attributable to the government not honoring any of its contractual commitments to the toll road. Included in the spectrum of MIGA’s coverage is the government’s commitment to provide the minimum revenue guarantee, as well as broadly defined termination payments. Note: This information has been copied from Fitch. Ratings web site from the Pre-Sale report for this transaction. www. fitchratings. com WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 35

MIGA PROCESS MIGA Application Process Preliminary application Definitive application § Submit preliminary application before the investment is made or irrevocably committed § Detailed form, with information on investment, developmental and environmental impact § Available online § Application fee § Free § Confidential § Can be withdrawn at any time WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 36

Thank you! Ileana Boza Global Head Financial Sector iboza@worlbank. org t. + 1. 202. 473 -2807 Jorge Rivas Senior Underwriter jrivas@worldbank. org t. +1. 202. 473. 5698 Olga Sclovscaia Senior Underwriter osclovscaia@worldbank. org t. +1. 202. 458. 2823 For more information, visit www. miga. org WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY 37