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Leveraging emerging markets through loan securitization
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n international impact asset manager called ResponsAbility Investments AG has recently closed deals on securitization of loans to microfinance and finance institutions catering to small and medium enterprises (SMEs) worth US$175 million.
According to the company, the proceeds will be used to fund financial intermediaries providing capital to 30,000 small businesses and 5.6 million microfinance borrowers. The company also keeps the women’s empowerment agenda in mind in setting out the deal as 81 percent of the borrowers are women.
The transaction pools the borrowing needs of 26 micro and SME finance organizations, thereby allowing them to achieve the scale necessary to access global capital markets. At the same time, the transaction enables investors to contribute to financial inclusion in developing countries, earn a commercial return and diversify their exposure across multiple borrowers and geographies.
Denominated in US dollars with an expected maturity of three years, the securitization provides investors a choice of three different risk return profiles (senior, mezzanine and junior) in a listed, transferable bond format.
The senior and mezzanine notes earn fixed interest rates and junior note returns will depend on performance of the underlying loan portfolio. Key investors in this transaction include the Overseas Private Investment Corporation (OPIC), the United States government agency, providing the initial capital necessary to mobilize the private institutional investment in the deal, and Alecta, the fifth largest occupational pension provider in Europe, and investing in the essential risk capital. Impact investing firm Calvert Impact Capital also brings US private capital into the deal.
ResponsAbility Investments AG is the originator and servicer of the loan portfolio. JP Morgan acted as arranger and placement agent. Latham Watkins and Paul Hastings acted as legal advisors to JP Morgan and ResponsAbility Investments AG respectively.
“This securitization shows that the fast-growing microfinance and SME finance space in emerging markets has now reached a maturity that allows it to access financing from mainstream capital markets,” commented Thomas Müller, co-head of Financial Institutions Debt at ResponsAbility.
The securitization also helps leverage investments in emerging countries more effectively.
“This is an area of increasing focus for fund managers globally and applying capital markets technology to traditional impact investing creates the potential to open this sector to a wider range of investors,” added Eric Wragge, managing director of the Securitized Products Group at JP Morgan.
“We are very pleased to have helped facilitate this flow of investment to emerging economies, where financial inclusion can make such a difference in the lives of small-scale entrepreneurs and their communities,” Eric said.
Many companies that partner with ResponsAbility also say that the latter helps them advance their business while boosting their partners at the same time.
“OPIC is proud to partner with ResponsAbility to expand access to the financing of micro-entrepreneurs and small business owners—especially women—who need to grow their businesses, create jobs and help their communities thrive,” said Tracey Webb, OPIC vice president for Structured Finance and Insurance.
Another partner, meanwhile, lauds the company’s effective budgeting system.
“Alecta actively manages approximately US$100 billion at an extremely low management cost. To meet our high sustainability standards and really make an impact with maintained low costs, these are the kind of partners and product we’re looking for. This type of security allows Alecta to invest capital extremely efficiently,” said Magnus Billing, CEO of Alecta.
Meanwhile, ResponsAbility’s other partners – Calvert Impact Capital and ESG Investing at Zais Group – feel that working with the company helps them do good for the society as a whole by helping emerging markets to develop in a collective effort to attain global wealth.
Songbae Lee, director of investments for Calvert Impact Capital noted that “this deal has great potential to serve as a template for making microfinance – and other impact investing deals - more accessible to a range of investors in the future. We’re excited to help scale ResponsAbility’s microfinance platform and, ultimately, get more capital flowing to the communities that need it most.”
“This transaction reopens the impact securitization market and paves the way for further issuance in pursuit of the 17 Sustainable Development Goals”, commented Desire Fixler, senior consultant to ResponsAbility and managing director of ESG Investing at Zais Group.
Meanwhile, some of the emerging markets concerned have felt the benefits of working with the company.
Henry Surya as CEO of Indosurya Finance said that "this collaboration is part of Indosurya’s strategic plan that we will carry out consistently and continuously to support the development of SMEs in Indonesia, since ResponsAbility is one of the world's financial institutions incorporated in the big mission of the International Finance Corporation – the sister organization of the World Bank – to support the development of SMEs in Indonesia."
