MIGA (World Bank) – A New Boon for Emerging-Market Financing: Achieving Investment-Grade Bonds with MIGA’s Credit Enhancement
Many investors, lenders, and government officials are familiar with the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group. For 25 years, the agency has insured investments in developing countries against political risk. This insurance facilitates productive foreign direct investment that boosts development, creates infrastructure, and produces jobs.
Increasingly, MIGA is becoming known in banking circles for its ability to reduce the risk profile of a broad range of financing structures. This was made possible through the introduction of new products that protect investors and lenders against non-payment by a sovereign or sub-sovereign entity, or state-owned enterprise.
Until recently, the primary users of this credit enhancement have been commercial lenders that provide loans to public-sector entities for infrastructure and other investments that require large amounts of capital and project financing. The benefits of MIGA’s insurance accrue to the developing countries where these investments are made, in the form of reduced borrowing costs, longer tenors, and compliance with environmental and social standards that represent international best practices.
“The benefits of MIGA’s insurance accrue to the developing countries where these investments are made, in the form of reduced borrowing costs, longer tenors, and compliance with environmental and social standards that represent international best practices.”
But we wanted to go further and have been looking for more creative applications of our credit enhancement tools, in the knowledge that it has tremendous potential to bridge emerging-market financing gaps. This is now more important than ever, as countries need new financing options in the face of constraints faced by commercial lenders and reduced official development assistance from donor countries and entities.
The perfect opportunity presented itself toward the end of 2013. At the end of September, MIGA backed a EUR400-million bond issue by Hungary’s Export-Import Bank (Exim) that made big financial news. The bonds will expire in February 2019 and carry a coupon of 2.125 percent. The novelty was that MIGA’s non-honouring of financial obligations cover – which in this case protects investors should the Hungarian government not stick to its commitment to cover Exim’s debts – raised this bond issue from non-investment grade to investment grade.
The very positive results of this rating improvement were several. First, Exim achieved a savings of approximately $25 million that it will use to directly support Hungarian exporters. Second, the issue was significantly oversubscribed, garnering very strong interest from international investors. Bond buyers included investors from the Benelux countries, Germany, Japan, Norway, and Switzerland who would not usually have bought Hungarian or Exim bonds. Last, the issue introduced a new model for emerging markets to raise capital that harnesses the power of the private sector with the backing of an international development institution: A win-win-win situation indeed.
Why Do Hungarian Exporters Matter?
The answer is simple: They are a bright spot in Hungary’s economy – an important source of commerce and jobs. In fact, according to Exim’s head Roland Nátrán, 85-90 percent of the country’s GDP has its roots in the export sector which is dominated by small- and medium-sized enterprises. Even in the face of the global financial crisis, the country’s export sector stayed buoyant and credit demand remained robust.
But the crisis did exact its toll as lending for the Hungarian corporate sector declined sharply, mainly as a result of tighter credit allocation from the banking sector. In this context, exporters play an even more important role: As domestic consumption and investment fall, outward-looking sources of economic activity are more critical.
As an export credit agency, the mandate of Hungary’s Exim is to provide alternative or supplementary financial tools to fill gaps in trade finance created by commercial banks’ lack of capacity or willingness to absorb risk. Ultimately, this serves Exim’s mission to create and maintain jobs in the country and develop the national economy.
During the credit crunch, the Hungarian government mandated Exim to provide more affordable financing to Hungarian exporters. The agency was hard-pressed to deliver on a tough mandate in difficult market conditions – in short, to look for a creative solution.
And here is where MIGA’s search for new applications of its credit enhancement products and Hungary’s development priorities met. Covering this bond issue represented an important milestone for MIGA, representing the first time the agency used its non-honouring of financial obligations cover for a capital markets transaction.
An additional, indirect development effect of bolstering Exim’s lending ability deserves note. As it does not possess its own branch network, Exim closely cooperates with Hungarian commercial banks in order to reach small and medium enterprises through their distribution networks. This cooperation supports the stability of the Hungarian banking sector in general, as Exim provides long-term refinancing facilities, strengthening liquidity.
More MIGA Support to Capital Markets Transactions on the Horizon, but Selectively
In the wake of this successful bond issue, we have received significant interest from banks and issuers. Exim also reports that other institutions in Europe and Central Asia have been requesting information about how the transaction works.
But the path blazed by Exim was not always smooth. The bond investors to whom the offering was marketed were not necessarily familiar with MIGA and we had to spend time and effort explaining both our agency and its products. However, the work paid off and we now have every indication that investors will more easily understand the full implications of our guarantee the next time a MIGA-supported bond goes to the capital markets.
However, this by no means implies that MIGA will begin to insure a flood of bond issues. What this means is that – as with any investment the agency insures – there needs to be a strong development rationale. Why do Hungarian exporters matter? There was a strong answer to that question. Potential clients need to be prepared to convince MIGA that they have similar narratives to tell. Also, MIGA will conduct extensive due diligence on any project it is asked to insure.
The Post-International Financial Crisis World: How Emerging-Market Financing and Capital Markets Have Changed
The global financial crisis and its aftermath put the need for diversified financing options for developing countries in perspective. National governments that were traditional donors around the world reduced official development assistance as they tightened fiscal belts. This happened at a time when the overall aid landscape had shifted significantly.
While just over ten years ago development assistance was overwhelmingly provided by traditional donors, today other sources of funding continue to expand. These include less-concessional flows, and assistance from philanthropists and global funds. The use of private-sector instruments, blended with support from the public sector and multilateral institutions, is also increasing – and with good reason. Done well, investors can make their profits while public institutions can fulfil their mandates as industries create jobs. Research suggests that developing countries are welcoming this additional choice and the increase in the array of tools they can now use to meet their financing goals.
From the perspective of capital-markets investors and issuers, the financial crisis had an important impact as well. It resulted in a significant dearth of highly-rated capital market issues. This means that there is a market gap that needs to be filled, and instruments like MIGA’s credit enhancement products are very well-placed to help accomplish this.
About the Author
Olga Sclovscaia is MIGA’s Sector Manager for Finance and Telecommunications.