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Financing MF

Financing MF. Securitization Evaluation Investors and intermediaries Recent updates. Publications Portfolio Review Tool (Robert Christen, CGAP) Evolution of Specialized Rating for MFIs (Todd Farrington, IADB). Websites Websites & publications of featured organizations NextBillion.org

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Financing MF

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  1. Financing MF Securitization Evaluation Investors and intermediaries Recent updates

  2. Publications Portfolio Review Tool (Robert Christen, CGAP) Evolution of Specialized Rating for MFIs (Todd Farrington, IADB) Websites Websites & publications of featured organizations NextBillion.org DevelopmentGateway.com Resources

  3. Evaluation: Overview • 1. Documentation and reports (eg financial statements) • 2. Due Diligence (on-site) • 3. Rating (credit and/or fiduciary) • 4. Regulation clearance and forex hedging mechanisms are set up

  4. Evaluation: Due Diligence Purpose • To ensure that reported financial condition reflects true health of the MFI • Questions answered: • Does the portfolio, as it is reported by the financial institution, reflect its true value? • Have adequate provisions been made for possible losses? • Do management and staff have the proper skills to originate, monitor, and collect loans? Characteristics • On-site • Different degrees of scrutiny Example: CGAP’s 3-tier system

  5. Evaluation: Due Diligence • Tier 1: General study • User: donor agency considering making a small donation • 2-day field review, at head office • Qualitative assessment of credit policies and general documentation

  6. Evaluation: Due Diligence • Tier 2: Moderate study • User: Donor considering a sizeable grant or investment • 2-5 day field review, at branches • Qualitative assessment of credit policies, procedures and practices, and verification of management information system reports

  7. Evaluation: Due Diligence • Tier 3: Most rigorous study • User: Equity investors and regulators • 2-4 week field review; of branches and individual loans • Evaluate, measure and quantify asset quality through statistical sampling and detailed analysis

  8. Evaluation: Due Diligence • Stages of evaluation are progressive:

  9. Evaluation: Due Diligence

  10. Evaluation: Due Diligence

  11. Evaluation: Due Diligence • In each Tier, “penalty cards” are issued when results show that reported conditions are different from actual or optimal circumstances • Yellow card: significantly different • Recommendation: more investigation needed • Red card: egregiously different • Recommendation: Critical problem area; necessary to factor into final investment decision • Penalty card example: Go to Appendix A, B

  12. Evaluation: Ratings • 6 major rating agencies • Planet Rating • Microfinanza • CRISIL • S&P • M-CRIL • MicroRate

  13. Evaluation: Ratings • Planet Rating (1999) • Locations: HQ in Paris, with regional offices in Lima (Peru), Dakar (Senegal), Kampala (Uganda) • Methodology: • GIRAFE • Scale: A+ to E (11 grades)

  14. Evaluation: Ratings More details: Refer to Handout 1 (Planet Rating Corporate Presentation)

  15. Evaluation: Ratings More details: Refer to Handout 1 (Planet Rating Corporate Presentation)

  16. Evaluation: Ratings • Microfinanza (2001) • Locations: HQ in Italy; regional office in Quito (Ecuador), others planned • Methodology • 2 main categories: • fiduciary risk (governance and mgmt; trustworthiness) • credit risk (ability to repay obligations) • Scale: AAA to D (10 grades)

  17. Evaluation: Ratings

  18. Evaluation: Ratings

  19. Evaluation: Information Gateways Rating Fund (2001) • Overview: • What: partially sponsors rating assessments • Who: IADB ($877,000), CGAP ($1,800,000), EU (€ 1,850,000 ) • Explore online: ratingfund.org • Comparison of rating agencies (see App C) • Rating reports (completed under Rating Fund since 2001) • Co-financing table (80/60/40%)

  20. Evaluation: Information Gateways MIX Market (2002) • Overview: • What: microfinance information platform; link MFIs worldwide with Investors and Donors • Who: CGAP, Citigroup Foundation, the Open Society Institute, the Rockdale Foundation, other pte foundations • Explore online: mixmarket.org • MFIs • Funds • Partners • Environment • My MIX Market

  21. Fund B Investors & Intermediaries Investors: • Funds • Fund of Fund (“Fund B”)

  22. Investors & Intermediaries Funds • General institutional funds, eg pension funds Fund of Fund (or mixed) • MicroVest • Oikocredit • Gray Ghost • Omidyar Network* • Citigroup • Deutsche Bank Microcredit Development Fund

  23. Investors & Intermediaries MicroVest • 2 Products • MicroVest I, LP (fund of fund) • Instruments: debt, loan guarantees, equity (with an exit strategy), and quasi-equity sub-debt • Target: gross portfolio yield of 10% -11% • $22,570,000 (Sept 06) • mPower (fund) • Choose your return: for 1 and 3-year notes, returns are 0%-2%; for 5, 7, and 10-year notes, returns are 0%-3%; principle is reinvested and returned with interest at maturity • Partner: Calvert Foundation

  24. Investors & Intermediaries Oikocredit (1976) • Locations: The Netherlands (HQ); 12 regional offices; 16 country offices • Types of capital instrument • Debt (EUR50k-2m), equity, credit lines • Hard local currency, flexible interest rates; longer term loan (5-10 years) • EUR163m o/s; disbursed EUR71.6m in 2005 • Note: Oikocredit does not specialize in MF funding

  25. Investors & Intermediaries Financial Intermediaries • Developing World Markets • BlueOrchard • iShares • Emerging Markets

  26. Investors & Intermediaries Developing World Markets (1994) • World’s first socially-oriented investment bank • Has raised ~$250m for MF • June 2006: • Launched MFS-XXEB, the first cross-border securitization of loans to microfinance institutions • Mix of debt and equity tranches in USD, EUR, GBP • Senior notes rated A1 by MicroRate, making it the world’s first MF CDO to be rated • Sept 2006: Advised ProCredit in TIAA-CREF’s* $43m equity investment

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