Political Risk Insurance for Securitizations: Challenges and Solutions

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. INTRODUCTION What Assets Can Be Securitized?

5. INTRODUCTION What Assets Can Be Securitized? • PRI most relevant • Domestic “hard” assets: leases, residential mortgages etc. • Internationally issued securities

6. 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”

7. 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”

8. CROSS-BORDER SECURITIZATION The Issue of the Sovereign Ceiling • PRI makes sense when the “local currency rating” (intrinsic value) of the underlying pool of assetsis higher than the foreign currency rating of the sovereign. • PRI can bridge gap to desired rating 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 Legal risk Source: Moody’s “Securitization in New Markets”

9. Economic Benefit of PRI Benefit to issuer/originator Coupon without PRI MIGA Premium Coupon with PRI

10. MIGA’S ROLE Political Risk Insurance 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 • MIGA’s status as a multilateral: Developmental goals

14. EXAMPLE 1Securitization ofLease Receivables MSF Funding BRAZILCLOSED 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 MSF Funding Investors (institutional investors, pension funds) 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 (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”

18. 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

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

21. TRANSACTION STRUCTURE SUBORDINATED EQUITY Baltic American Enterprise Fund (equity) MEZZANINE NOTES IFC (mezzanine) SENIOR NOTES Institutional Investors from US (Senior Notes), IFC (US$5 M) Principal & Interest US$60.5M US$2.1M US$0.9M Baltic American Mortgage Holdings Trust 2004 – 1 (Issuer) Baltic American Mortgage Holdings Equity US$0.1M US$10 million, 18 months of Interest USA Payments LATVIA THE PROJECT $63.5M Mortgage Payments Baltic American Mortgage Company (Originator-Servicer) 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 Moody’s Investors Service web site from the Pre-Sale report for this transaction. Note: Coverage is for transfer restriction and expropriation of funds.

24. EXAMPLE 3Securitization ofResidential Mortgages BTA IpotekaKazakhstanCLOSED 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 MIGA PRI Issuer: First Kazakh Securitization Company BV USDRepayments ABN Amro Bank Mortgage Certificates Netherlands Kazakhstan Conversion & Transfer of Repayments ShareholderLoan Purchase Price ABN Amro Kazakhstan Originator: BTA Ipoteka 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.

28. 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”.

29. EXAMPLE 4Supporting Structured Financing for Toll Road Project Autopistas Del Nordeste in Dominican RepublicCLOSED 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%)

31. 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. 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 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. STRUCTURING CHALLENGES Non-Political Risks Affect Rating • 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 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

36. 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 MIGA PROCESS MIGA Application Process

37. 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