Banco de Crédito del Perú faced a near impossible task early last year when it needed to raise medium-term financing during the country’s worst political crisis in a decade. Alberto Fujimori, Peru’s president, had fled the country. Vladimir Montesinos, his feared intelligence chief, was on the run and threatening to ruin political careers with his catalogue of compromising videotapes. A caretaker government and presidential elections due later in the year created too much uncertainty for most investors.
But Banco de Crédito, Peru’s largest private-sector bank, was able to raise $100 million in January with its first-ever bond backed by securitized electronic transfer payment instructions. “It is a very good funding mechanism for banks in below investment-grade countries in the emerging markets that receive large amounts of foreign remittances electronically,” says Pablo Miñan, head of the credit risk division of Banco de Crédito del Perú and formerly head of corporate finance.
Banks from Brazil and even Mexico, an investment-grade country, have since raised medium-term financing using a similar structure. “This is going to become a standard type of financing for financial institutions in Latin America,” says Gordon Kingsley, managing director of ING Baring’s Latin America debt products group, arranger of the Banco de Crédito transaction.
BCP, which has assets of $5 billion, first securitized assets to raise money in 1998 after the Russian financial crisis when it set up a master trust backed by future flows of credit card receivables. In the 1990s, several Latin American and Caribbean financial institutions securitized credit card merchant vouchers to raise financing, but BCP was the first bank to introduce electronic tranfers as a new asset class to future flow securitizations.
“[BCP has] a history of using these structures at tough times and still getting pretty competitive funding rates,” says Kingsley. BCP did not disclose what it paid for the January transaction but Kingsley says the bank obtained seven-year money for lower rates than it pays on one-year trade financing.
Compared to plain vanilla bonds, it is more difficult for the issuer of a securitized bond to set up an additional issuance program once asset flows are securitized. For BCP to raise larger amounts of money more regularly, it needed to find new assets to securitize. “We started analyzing the possibility of securitizing our paper remittances but we found little interest from ratings agencies and investors as they were not considered a safe asset,” explains Miñan. Because paper remittances, or checks, are collected in Peru and sent offshore for payment they are vulnerable to sovereign interference in the event of a crisis.
BCP receives around $3 billion in electronic transfers each year and has correspondent relationships with 1,200 banks worldwide. BCP was able to convince its five main correspondent banks – JP Morgan, Citibank, Bank of New York, Bank of America and Standard Chartered – to redirect electronic transfers to an offshore account held in trust by Bank of New York. BCP is a recipient of these flows and cannot redirect them in the event of a crisis. As a passive agent, the bank has no prior knowledge or influence over flows and they could not be touched either by BCP or the Peruvian government.
If investors could be assured that they owned the rights to the flows in an offshore account, there would be no risk of either BCP or the Peruvian government confiscating them. ING structured the deal as a true sale of BCP’s existing and future rights to the dollar payments made with the electronic payments to BCP. With such a structure, the receivables are no longer owned by BCP but rather transferred to the trustee for the benefit of the certificate holders. The receivables are sold to a Bahamian offshore company CCR Inc, which in turn sells the receivables to CCR Inc MT100 Master Trust Receivables. Public insurer MBIA Insurance Rating Corporation guaranteed the timely payment of interest as well as payment of the principal on maturity.
Redirecting the flows through the master trust made the structure massively overcollateralized, with 150 times debt service coverage. The level of collateralization does not reflect the risk involved, but is based on the size of the flows. “The flows could drop by 90% or more and [investors] would still get paid,” says Kingsley. Even so, ING structured the deal to trigger early repayment within 11 months in cases where the debt service coverage ratio falls to six times interest payments, the Peruvian government intervenes with the private banking sector, the bank’s credit rating falls or remittances decline. The monthly, mortgage-style payments also keep the payments flowing to investors at reassuringly frequent intervals.
Other banks facing high country spreads quickly adopted the structure. Banco do Brasil issued a $300 million worker remittance-backed securities for Nikkei Remittance Trust led by Merrill Lynch. Even Mexican financial institutions that can raise financing at a premium to Mexico’s spread liked the structure. Banamex, which is owned by Citigroup, issued two securitizations of future flows of electronic remittances last year, a $150 million and $250 million six-year diversified Payment Rights Master Trust wrapped by MBIA.