Risk Mitigation for African Financings Workshop: Exploring Strategies for Investment Grade Ratings

1. Introduction to Workshop on Risk Mitigation for African Financings June 22, 2005 Mahesh Kotecha, President Structured Credit International Corp. (SCIC)

2. Objectives – Message

3. Workshop Objectives • To explore African risks and their mitigants using multilateral and bilateral guarantees mechanisms • For African debt and equity financings in local and international capital markets • Key role of structured finance in piercing the sovereign rating ceiling to achieve even triple A debt ratings • 19 African countries are rated but only 4 Investment Grade and 15 Non Investment Grade • To discuss how public-private partnerships can enhance risk mitigation capacity • Public sector guarantors can help achieve investment grade ratings • Private sector guarantors can help achieve triple-A ratings investment grade transactions • Could also foster equity flows • A key challenge is how to increase risk capacity for African financings (e.g., MIGA initiative recommended by Blair Commission)

4. B+ or Lower Rated African Countries

5. BB or Higher-Rated African Countries

6. A Key Message in a Nutshell • African ratings are low • Largely Non-Investment Grade or NIG • Non-Investment Grade markets are expensive and relatively small • More financing can be achieved with Investment Grade ratings • That requires • Risk Mitigation / Guarantees • Structured finance know how • And patience and persistence

7. Risk Mitigation – An Overview

8. Receivable Portfolio Government Seller/Servicer, Originator Project Risk Mitigation / Guarantees Special Purpose Vehicle Lenders / Investors ABS & Infrastructure Bond Structures Concession

9. Risk Mitigation Enhances Ratings • Credit ratings are an assessment of credit-risk by an independent rating agency, i.e., they assess the probability that principal and interest on bonds and other similar instruments will be paid on time • Credit ratings are divided between "investment grade" and "non-investment grade" AAA Prime Investment Grade AA Investment Grade A Risk Mitigation / Guarantees BBB- BB+ Near Investment Grade Non-investment Grade B

10. Forms of Risk / Mitigation Private Financial Guarantee Second Loss Protection Bank LOCs, puts, etc. Recourse to originator Public Sector Credit and PR Guarantee Senior/Subordination Cash Collateral First Loss Protection

11. Sources of Risk Mitigation / Guarantee

12. The Issues • What are the guarantee / risk mitigation products available? • To what extent can each institution help raise the rating of an African financing to investment grade so as to facilitate entry of private sector financial guarantors such as the triple-A rated monolines? • To what extent has each institution leveraged off the guarantee capacity of other official and private sector guarantors through co-guarantees, reinsurance, etc.? • Potential /. actual use of such instruments in international and local capital markets, local currencies, in the SME sector, in bank financings • Increasing cost efficiency and guarantee capacity • Reducing complexity in use of guarantees / risk mitigation instruments • Potential for public – private partnerships such as African EXIM Bank, ATI and GuarantCo • In sum, the costs and benefits of the guarantee / risk mitigation instruments • Their future role in enhancing credit ratings of actual financings (potentially piercing the sovereign rating ceiling)

13. Risk Mitigation – The Panel

14. Knowledgeable Workshop Panel • Moderator - Mr. Mahesh Kotecha, President, Structured Credit International Corp • Ms. Maureen Miskovic, COO, The Eurasia Group • Provides an investor’s risk assessment framework • Ms. Ileana Boza, Head Global Finance, MIGA • Presents MIGA products, aggregate public sector claims data, and interesting African case studies • Mr. Jean-Louis Ekra, President, African Export-Import Bank • Presents an African experience in risk mitigation • Mr. Kenneth Tinsley, Vice-President Credit Underwriting, U.S. EXIM • Presents EXIM products and experience

15. Appendix

16. Role of Public Sector Guarantors • Multilaterals have been active as triple-A credit enhancers for nearly a decade but volume of activity is relatively modest • World Bank Group and regional development banks • OPIC, EXIM, SIDA, etc. • Rating agencies rely on the umbrella provided by the multilateral lender’s “preferred creditor” status to pierce the sovereign ceiling • The umbrella concept becomes less convincing with increasing volume of issues benefiting from the multilateral’s preferred creditor status • Utilizing products to support securitization • A/B loan structures • Preferred creditor status structures • Full wrap in domestic issues ? • Combination of political risk guarantees and private sector guarantees to achieve top ratings (constrained by costs of two guarantees)

17. Role of Monolines and Multilines • Instruments • Full guarantees of principal and interest are most common • Partial guarantees have been provided, especially for such ABS as those backed by home equity (second mortgage loans) • Maturity guarantees (to provide certainty on maturities) • counterparty guarantees • “Supply guarantee” to cover export performance risk • Requirements vary • Monolines require a investment grade rating before the guarantee (Foreign currency rating for FX transactions; LC for domestic transactions) • Multilines can go to lower rated transactions and prefer high non-investment grade transactions before the guarantee

18. For More Financing, African Risk Mitigation Must Grow