Leveraging Official Sector Capital
And Enhancing Financial
Governance
Local Debt Markets and Official Agencies
Enhancing Growth Opportunities
Sao Paulo, October 26/27, 2004
Table of Contents
1. Overview
2. Case Study: Mexico
3. Official Agency Solutions
A. Multilateral: IFC Partial Guarantee
B. Bilateral: FMO Partial Guarantee
C. Export Credit Agencies: Bank Financing
4. Shortcomings Of Official Agency Solutions
5. Next Steps
1
1 Overview
Topics for Discussion
It is important to continue to develop the role that Official Agencies play in local financial markets.
THE DEVELOPMENT OF LOCAL FINANCIAL MARKETS IS ONE OF THE MOST
SALIENT TOPICS TODAY IN INTERNATIONAL FINANCE.

The development of financial markets is an important stepping stone to achieving higher
growth rates. However, the necessary steps to executing this development are difficult
to define.

In recent years, some developing countries have been able to promote their local capital
markets (particularly the debt markets). These examples help us to identify some of the
key channels by which to further evolve a country’s economic potential.

Official Agencies have become active in local debt markets as they have witnessed the
benefits that utilization of these markets creates.

Nonetheless, despite their flurry of activity to date, we view a more active roll for these
Agencies in the local markets.
2
Advantages of Local Debt Market
Development
The benefits of financing debt through local markets are becoming clearly evident to all parties
involved.
Mexico is a useful example demonstrating both the advantages as they have unfolded and the
issues as they have developed.
THERE ARE SEVERAL ADVANTAGES TO THE DEVELOPMENT OF LOCAL DEBT
MARKETS:

Financing of Long-Term Projects

Extension of the Yield-Curve

Reduction of Pressure on Government Budgets

Improved financial conditions for issuers

Reduction of vulnerability to FX fluctuations for Borrowers

Portfolio diversification for investors
3
2 Case Study: Mexico
Ever Trending Upwards…
There is a clear trend indicating an ever increasing usage of the local debt markets in Mexico.
LOCAL DEBT MARKETS IN MEXICO IN US$ MILLION
Total issuances USD MM
$10,000
$7,759
$8,000
$6,000
$5,291
$4,492
$3,291
$4,000
$1,971
$2,000
$182
$583
1998
1999
$0
2000
2001
2002
2003
Aug-04
Outstanding amounts USD MM
$25,000
$20,620
$20,000
$14,731
$15,000
$8,245
$10,000
$4,744
$5,000
$182
$579
1998
1999
$1,953
$0
4
2000
2001
2002
2003
Aug-04
Underpinnings for a Local Market:
Stability, Investors, and Laws
Evolution of savings and investors in Mexico
USD $Bn
Peso Devaluation vs inflation
70.00%
$160
$140
$120
$100
$80
$60
$40
$20
$-
60.00%
50.00%
40.00%
FX dev
30.00%
Inflation
20.00%
10.00%
Dec / 2004
Dec / 2003
Dec / 2002
Dec / 2001
Dec / 2000
Dec / 1999
Dec / 1998
Dec / 1997
Dec / 1996
Dec / 1995
Dec / 1994
Dec / 1993
Dec / 1992
Dec / 1991
Dec / 1990
Dec / 1989
0.00%
-10.00%
Dec 96
March 04
Bank
Deposits
Securities
Pensions
Investment
Funds
Insurance
Date

Legal Framework
Stability at Systemic Level


Enforcement of Property Rights
and Minority Interests




Expeditious and Transparent
Issuance Process
5


Central Bank Independence
Modern Bank Deposit Insurance
Financial modernization through foreign investment
Amendment to Securities Law
New Bankruptcy Law
Facilitation of bankruptcy remote schemes
Shelf- Registration
Disclosure requirement at international standards
Facilitation for Foreign issuers registration
Visible Benefits of a
Local Capital Market
Mexican Yield Curve
Mexican Public Debt
USD Billions
19%
300
17%
250
15%
200
13%
150
11%
100
9%
50
7%
0
1993
1994
Foreign Debt
2003
5%
-
Domestic debt
5
2000
Municipal and State issuances
USD MM
USD MM
2002
2003
2004
$2,500
$500
$400
$300
6
2001
$3,000
$600
$2,000
$1,500
$200
$1,000
$100
$500
Number of issuers
20
$3,500
$700
Total amount USD MM
15
Housing (Sofoles)
$800
$-
10
Tenor
2001
2002
2003
2004
$33
$538
$742
$272
3
7
10
3
$Total amount USD MM
Number of issuers
2001
2002
2003
2004
$1,221
$913
$3,066
$1,950
4
2
4
3
Important Challenge:
Limited Number of Issuers
One of the key difficulties in sustaining the momentum currently behind the development of the
local financial markets is a distinct lack of issuers in the market.
OUTSTANDINGS AS OF SEPTEMBER 2004
Total amount issued Amount (USD MM)
% of outstanding
PEMEX
$
2,841.04
14.0%
América Móvil
$
1,282.61
6.3%
Cemex
$
1,184.99
5.8%
Ford Credit
$
1,147.78
5.7%
GMAC
$
956.09
4.7%
Coca Cola Femsa
$
869.57
4.3%
Hipotecaria Fed.
$
846.31
4.2%
CFE
$
770.87
3.8%
Telmex
$
647.83
3.2%
Bimbo
$
565.22
2.8%
Volkswagen
$
473.11
2.3%
Outstanding Sep 2004 $
20,291.00
57.1%
Issuance by rating
4%
5%
25%
57%
9%
AAA
7
AA+
AA
AA-
Others
The Evolution of Structured
Debt in the Local Markets
Clean and Structured issuances USD MM
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$-
Clean
Structured
Structured Issuances by type (2002-2004)
2000
2001
2002
2003
10%
2004
27%
12%
4%
16%
6%
25%
Existing Assets
Construction Loans
Accounts receivable
Municipal
Thi rd Party Guarantee
Mortgage
Roads
8
3 Official Agency Solutions
A. Multilateral: IFC Partial
Guarantee
Compartamos: The First Partial Guarantee
by the IFC in the Mexican Capital Markets
In July 2004, Citigroup, acting as Sole Lead Arranger closed the first tranche of a $50 million Mexican
Peso local bond partially guaranteed by the IFC, to finance the expansion efforts of the company.
Financiera Compartamos
$500 million Mexican Peso Local Bond
9
Borrower:
Financiera Compartamos, S.A. de C.V.
(“Compartamos”)
Facility:
A MXN 500 Million local bond program,
partially guaranteed by the IFC.
Purpose:
To fund the expansion needs of the
company’s microfinance portfolio
Closing Date:
July 30, 2004Citigroup
Role:
Sole Lead Arranger
Transaction Highlights
 Citigroup, through Banamex, was selected to arrange the financing for
Compartamos’ request to structure a capital markets program that would
fund the entrepreneurial efforts of thousands of Compartamos clients – 94%
of them women – primarily in rural communities throughout Mexico.
 A 34% guarantee from International Finance Corp (IFC), the private sector
arm of the World Bank Group, enabled the five-year bonds to receive a AA
local rating by the local affiliates of Standard & Poor’s and Fitch Ratings.
 The first tranche of the program, for $190 million, was closed on July 30,
2004.
 The financing was the first Mexican Peso transaction supported by the IFC.
 The structure of the partial guarantee was designed to attract Mexican
institutional investors including mutual funds, pension funds, and insurance
companies. More than 10 institutional investors participated, which is
comparable to other investment grade issuers.
 The placement of bonds for Compartamos was arranged by Acciones y
Valores de Mexico, S.A. de C.V. (Accival), the brokerage arm of Banamex.
 The transaction had a tenor of 5 years, which was unprecedented for a
micro-finance company in Latin America.
Market Reaction
 The availability of IFC support for this transaction in local currency has
attracted widespread recognition within the Mexican business community.
Innovations
 First IFC partial guarantee supported deal in Mexican Pesos.
 Milestone transaction for the micro-financing industry.
 Citigroup/Banamex and the IFC helped Compartamos diversify
funding sources as Compartamos focuses on achieving its growth
plans, which include growing its customer base to one million clients
by 2008.
Compartamos (cont.)




Issuer: Compartamos, Microfinancing Company
Amount: US$ 18 MM
Rating Agencies: Fitch and Standard and Poor´s
Tenor: 5 years amortizing
 3 years grace period
Issuer Benefits
 Achieve longer tenor
 Diversify funding away from retail investors and
banks
 Position the Microfinancing industry with
institutional investors as a promising sector
Investor Benefits
 Diversify portfolio
 Microfinancing Sector
 Multilateral Agency Risk
 IFC will monitor the transaction
 Partial Guarantee provides correct incentives for
Compartamos to pay
10
“AA(mex)”
Partial
Guarantee
“A(mex)”
66%
“AAA(mex)”
34%
B. Bilateral: FMO Partial
Guarantee
FMO Partial Guarantee
The FMO partial guarantee is a useful tool to take advantage of local market resources.
BELOW ARE THE CHARACTERISTICS OF THE FMO PARTIAL GUARANTEE:





FMO provides unconditional and irrevocable partial credit support
The coverage represents 9% of the outstanding AAA class
The total amount of coverage decreases according to the amortization plan of the securities
In case the guarantee is ever used, the notional amount of the credit support freezes.
The total amount drawn is then converted into USD obligations
 The Originators can be affected since they are subordinated to the FMO
Benefits to the Issuer
 Match funding for long-term assets
 Able to tap institutional investors without being an investment grade company.
 Capital relief from a mezzanine investor allows for continuous expansion of the business
 Multilateral Agencies involvement provides international expertise and know-how
Benefit to Investors
 Diversify portfolio by investing in a AAA rating transaction
 Obtain long-term assets to match long-term liabilities (insurance companies)
 FMO Guarantee freezes in case the portfolio underperforms
 AAA investors do not carry any currency risk since they are in a Senior Position
11
Use of Partial Guarantees in
Structured Transactions (MBS)
Pool of Mortgages
Payments
Servicer/Originator:
Su Casita/GMAC
Payments
AAA
Security
Trust
Multilateral
Agency:
FMO
Partial
Guarantee
Guarantee
Equity
Residual
12
Investors
C. Export Credit Agencies:
Bank Financing
ECAs: Guarantees of Locally
Funded Bank Loans
THE AEROMEXICO TRANSACTION PROVIDES AN EXCELLENT EXAMPLE OF ECA
PARTICIPATION IN A LOCAL CURRENCY LOAN.
Exporter
Offshore
Onshore
Cotracting Loan
Guarantee
Payments
Peso payments
Parts and Maintance Service

First US Exim Bank supported deal in Mexican Pesos: USD 40 MM

Exim offered a discount in its Exposure Fee
 The transaction was structured as a Bank loan, not as a bond issuance
13
4 Shortcomings of Official
Agency Solutions
Shortcomings of Official Agency
Enhancements for Local Currency Debt
Despite the attractiveness of Official Agency solutions and their desire to help develop local capital
markets, there are several issues which have contemplated the full implementation of local
currency strategies.
THERE ARE A NUMBER OF AREAS WHERE OFFICIAL AGENCY PROGRAMS NEED TO
BE ENHANCED IF LOCAL MARKETS ARE TO DEVELOP FURTHER.




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Local Currency Reimbursement:
 Official Agencies are limited in the currency risks they can take. In the absence of hedge
alternatives, reimbursements eventually become hard currency liabilities.
Pricing of Guarantees is not favorable for local transactions:
 Local rates are usually higher than US rates and issuers prefer to run the FX risk.
 Pricing seems to be based on internal risk rating hurdle rather than market conditions.
 Even if investors have an international AAA risk from Agencies, they will want to receive a
premium.
 Structuring costs are very high (e.g. use of international lawyers) for small and medium
companies.
Governing Law
 Official Agencies prefer to issue the guarantees under US or European law, but this is not always
possible under local regulations.
Coverage
 ECAs offer a higher portion of coverage than Multilaterals, but the eligibility criteria is far narrower.
 Full coverage under Multilateral solutions should be sought.
5 Next Steps
Next Steps
If Official Agencies are able to act on certain crucial points in the near future, local markets will
being to develop at a much faster pace.
THE FOLLOWING ARE AREAS THAT DESERVE THE IMMEDIATE ATTENTION OF
OFFICIAL AGENCIES IN ORDER TO MOVE LOCAL CURRENCY FINANCING
INITIATIVES FORWARD.

Official Agencies have to reflect their awareness of the importance of local currency
markets in the development of :
 New Products (e.g. derivatives, commodities, asset-based transaction)
 Favorable Pricing Schemes
 Broader Eligibility Criteria

Agencies need to have a deeper interaction with local government officials to:
 Promote Pension Funds Investments
 Facilitate use of US or European Law in the Guarantees
 Facilitate the access of Official Agencies to the local capital markets by adjusting local
legislation (Securities Laws, Bank regulation, etc)
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