Political Risk Insurance

1
Political Risk Insurance for Securitizations
Challenges and Solutions
2
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

3
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

4
What Assets Can Be Securitized?
INTRODUCTION
5
What Assets Can Be Securitized?
INTRODUCTION

• PRI most relevant
• Domestic hard assets leases, residential
  mortgages etc.
• Internationally issued securities

6
The Issue of the Sovereign Ceiling
CROSS-BORDER SECURITIZATION

• 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 Moodys Securitization in New Markets
7
The Issue of the Sovereign Ceiling
CROSS-BORDER SECURITIZATION

• How rating agencies analyze risk
• Risk layers affecting securitization in new
  markets

Convertibility, Expropriation
Systemic Macroeconomic/Legal
Structure
Assets
Source Moodys Securitization in New Markets
8
The Issue of the Sovereign Ceiling
CROSS-BORDER SECURITIZATION
Aaa
Wrap
Local Currency Guidelines Rating
Intrinsic Value is higher than Sovereign Ceiling
PRI
Country Foreign Currency Rating
Sovereign Ceiling
Structural Credit Enhancements
Systemic risk
Assets Credit Quality

• 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

Legal risk
Source Moodys Securitization in New Markets
9
Economic Benefit of PRI
Benefit to issuer/originator
Coupon without PRI
Coupon with PRI
MIGA Premium
10
Political Risk Insurance
MIGAS ROLE

• The coverage requirements will vary
• RisksRelated to currency flows, assets,
  government regulations or breach of contract
• AmountHow much? For Interest or Principal? Or
  for both P and I?
• TenorHow long?

11
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

12
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
13
Key Points
Rating agency

• Timely payment
• MIGA works to customize policy
• Waiting periods
• Liquidity facility to bridge gap
• Ability and willingness to pay
• MIGA explains coverage to Rating Agency
• MIGAs status as a multilateral Developmental
  goals

14
EXAMPLE 1Securitization ofLease Receivables
MSF Funding BRAZIL CLOSED OCTOBER 2000
15
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
  B2/B/BB- ? A2/A/A
• Lower all-in financing costs

16
MSF BRAZILProject Structure
MSF Holdings
US
100 Ownership
Investors (institutional investors, pension funds)
MSF Funding
Interest and principal payments
US
Payment flows
Brazil
MSF Brazil
Loans and leases
Borrower (local hospitals)
Loan payments
17
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 (Moodys, SP and Fitch IBCA)
• Unprecedented upgrade of 6 notches above the
  sovereign ceiling
• Awarded Structured Finance International Best
• Securitization of Emerging Market Assets

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Industry Opinion

• This is the first transaction securitizing
  existing assets rated by Standard Poors 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 Poors
• The ratings assigned to the Notes exceed the B2
  Brazilian country ceiling because of the presence
  of the MIGA guarantee.
• Moodys

19
EXAMPLE 2Securitization ofResidential
Mortgages LATVIA CLOSED DECEMBER 2004
20
Project Summary

• 63.5 M mortgage securitization in Latvia
• 1st RMBS in Central/Eastern Europe
• MIGA Solution
• 10.5m coverage for interest only on the senior
  tranche
• Transfer restriction and expropriation of funds
• Results
• Senior notes lifted 3 notches above sovereign
  ceiling (A2?Aa2)
• Improved pricing, tenor, capacity

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TRANSACTION STRUCTURE
SUBORDINATED EQUITY Baltic American Enterprise
Fund (equity)
MEZZANINE NOTES IFC (mezzanine)
SENIOR NOTES Institutional Investors from US
(Senior Notes), IFC (US5 M)
Principal Interest
US60.5M
US2.1M
US0.9M
Baltic American Mortgage Holdings Trust 2004 1
(Issuer)
Baltic American Mortgage Holdings
Equity US0.1M
US10 million, 18 months of Interest
USA
Payments
LATVIA
THE PROJECT
63.5M
Mortgage Payments
Baltic American Mortgage Company (Originator-Servi
cer)
Mortgage Portfolio
Mortgages
22
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

23
Pre-sale Report
Note This information has been copied from
Moodys Investors Service web site from the
Pre-Sale report for this transaction.
Note Coverage is for transfer restriction and
expropriation of funds.
24
EXAMPLE 3 Securitization ofResidential
Mortgages BTA Ipoteka Kazakhstan CLOSED
FEBRUARY 2006
25
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 A1)
• 1st cross-border mortgage-backed securitization
  in Kazakhstan and the CIS

26
TRANSACTION STRUCTURE WAREHOUSE FACILITY
Commercial Paper Investors
Commercial Paper Issued
USD Proceeds
Issuer First Kazakh Securitization Company BV
MIGA PRI
USDRepayments
ABN Amro Bank
Mortgage Certificates
Netherlands Kazakhstan
Conversion Transfer of Repayments
Purchase Price
ShareholderLoan
Originator BTA Ipoteka
ABN Amro Kazakhstan
USD/Local Currency Repayments New Existing
Mortgages
New Mortgages
Pool of Mortgages (Customers)
Obligation to pay mortgage principal and interest
27
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
  multi-seller conduit which is funding the
  facility.
• The coverage uses a flexible revolving mechanism
  to account for the facility drawdown and
  potential fluctuations.

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Press coverage

• Financial Times
• Kazakh bank's mortgage deal coup
• By Paul J Davies Published February 22 2006
  0200
• A mortgage bank in Kazakhstan has completed the
  country's first true sale of residential mortgage
  risk with a US150m deal arranged and sponsored
  by ABN Amro of the Netherlands.
• The deal from BTA Ipoteka, a subsidiary of Bank
  TuranAlem, 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.

29
EXAMPLE 4Supporting Structured Financing for
Toll Road Project Autopistas Del Nordeste in
Dominican Republic CLOSED FEBRUARY 2006
30
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)

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FINAL STRUCTURE
4.5 M Equity and Sub Debt
103 M
Institutional Investors
International Sponsors Grupo OdinsaOdinsa
HoldingGrodcoGrodco Panama
Bond 206 M
Morgan Stanley NYArranger
Autopistas del NorteCayman Islands
Sub. debt and equity 15 M
Astris FinanceFinancial Advisor
Local Sponsor Consorcio Remix
Autopistas del NorteDominican Republic
Dominican Republic
32
Fitchs Rating and Value of MIGA Insurance
STRUCTURING CHALLENGES
Rating with MIGA coverage
Ratification of the Concession (and amendments to
the Concession) by Congress 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
BBB-
Six notch increase
Subject to
B-
Sovereign rating
33
Non-Political Risks Affect Rating
STRUCTURING CHALLENGES

• Rating agency constraints
• Non-ratification of concession
• Economic constraints
• With no investment grade, cost/
• benefit analysis begin to play

• MIGA rating
• 2 notches lost (from BBB- to BB)
• Percentage of MIGA coverage
• 100 4 notch increase (costly!)
• Partial coverage 1, 2, 3 notches

34
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)

35
Fitch Pre-sale Report
February 10, 2006
Transportation Projects Autopistas del
Nordeste Presale Report (Cayman)
Limited (Preliminary Rating)
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 Fitchs 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 MIGAs coverage is
the governments commitment to provide the
minimum revenue guarantee, as well as broadly
defined termination payments.
Note This information has been copied from
FitchRatings web site from the Pre-Sale report
for this transaction. www.fitchratings.com
36
MIGA Application Process
MIGA PROCESS

• Preliminary application
• Submit preliminary application before the
  investment is made or irrevocably committed
• Available online
• Free
• Confidential
• Can be withdrawn at any time

• Definitive application
• Detailed form, with information on investment,
  developmental and environmental impact
• Application fee
• Confidential

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Thank you! Ileana Boza Global Head Financial
Sector iboza_at_worlbank.org t. 1.202.473-2807 Jor
ge Rivas Senior Underwriter jrivas_at_worldbank.org t
. 1.202.473.5698 Olga Sclovscaia Senior
Underwriter osclovscaia_at_worldbank.org t.
1.202.458.2823 For more information,visit
www.miga.org