Political Risk Insurance
for Securitizations
Challenges and Solutions
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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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
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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
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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
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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
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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
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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
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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”
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Economic Benefit of PRI
Benefit to
issuer/originator
Coupon without PRI
MIGA Premium
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Coupon with PRI
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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
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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
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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
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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
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EXAMPLE 1
Securitization of
Lease Receivables
MSF Funding
BRAZIL
CLOSED OCTOBER 2000
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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
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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
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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
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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 B2
Brazilian country ceiling because of the presence of the
MIGA guarantee.
Moody’s
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EXAMPLE 2
Securitization of
Residential Mortgages
LATVIA
CLOSED DECEMBER 2004
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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
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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TRANSACTION STRUCTURE
SENIOR NOTES
Institutional Investors
from US (Senior Notes), IFC
(US$5 M)
US$60.5M
Baltic American
Mortgage Holdings
Equity
US$0.1M
SUBORDINATED
EQUITY
Baltic American
Enterprise Fund
(equity)
MEZZANINE NOTES
IFC
(mezzanine)
Principal &
Interest
US$2.1M
US$0.9M
Baltic American Mortgage Holdings
Trust 2004 – 1 (Issuer)
US$10 million,
18 months of Interest
USA
LATVIA
Baltic American
Mortgage Company
(Originator-Servicer)
Mortgage
Payments
$63.5M
THE PROJECT
Mortgage
Portfolio
Mortgages
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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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
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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
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EXAMPLE 3
Securitization of
Residential Mortgages
BTA Ipoteka
Kazakhstan
CLOSED FEBRUARY 2006
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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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
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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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
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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
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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$150m 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”.
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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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
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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
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FINAL STRUCTURE
$4.5 M
$103 M
Equity and
Sub Debt
Institutional
Investors
International
Sponsors
Grupo Odinsa
Odinsa Holding
Grodco
Grodco Panama
Bond:
$206 M
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
Dominican Republic
WORLD BANK GROUP MULTILATERAL INVESTMENT GUARANTEE AGENCY
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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
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STRUCTURING CHALLENGES
Non-Political Risks Affect Rating
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
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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)
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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 FitchRatings
web site from the Pre-Sale report for this transaction.
www.fitchratings.com
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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

Confidential

Can be withdrawn at any
time
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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
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