Securitization of Future Remittance Flows A Global Overview Suhas Ketkar, Royal Bank of Scotland Dilip Ratha, World Bank Inter-American Development Bank Washington D.C. June 30 th, 2005
Outline 1. Rationale for Securitization 2. Principal features 3. Potential size 4. Constraints 5. Policy Issues
Rationale for sovereigns Cost of crisis too high -- need to maintain investment and employment Information externalities---as in the aftermath of Brady deals Capital market development
Rationale for issuers [Use El Salv, Bra example] ability to escape sovereign ceiling lower costs -- longer maturiry Table 3: Spreads on Pemex Finance Ltd. Securitized Debt Issue Size Avg. life Final life Spread Coupon Issue Date Rating $ Mn. (yrs) (yrs) (bp) (%) Date Pemex Finance A AAA 500 3 5 125 5.720 12/4/9 Pemex Finance A BBB 350 7 8.5 350 7.000 12/4/9 Pemex Finance A AAA 400 10 11.5 175 6.300 12/4/9 Pemex Finance A BBB 250 18 20 412.5 9.150 12/4/9 Pemex Sr. Unsecured BB 600 10 462.5 9.375 12/2/9 UMS* BB 1500 10 571 9.875 12/4/9 Source: S&P
Rationale for investors Good credit rating -- No defaults to date Less spread volatility Chart 6a: Spreads on Pemex 7-year and UMS 2026 basis points 600 550 500 450 400 350 300 250 200 1/29/99 3/29/99 5/29/99 7/29/99 UMS 2026 9/29/99 11/29/99 1/29/00 3/29/00 Pemex 7-yr
Securitization of Remittances Chart 1: Structure of BdB Remittance Securitization Banco Do Brasil, Japan Remittance payments via consent agreement New York citybased Trust Cayman Island based SPV: Nikkei Remittance Rights Finance Company $250m + Collection Excess Rights Collateral Banco do Brasil Proceeds of $250m Excess Collection Processed $250m Investors P&I Source: Standard and Poors (S&P)
Securitization of remittances has increased in recent years US $ M 3000 2500 2000 150 0 1000 50 0 0 Chart 2: Remittance Securitization 65 206 350 115 540 1,175 1,170 1,600 1,690 2,837 1,055 1994 1996 1998 2000 2002 2004 to July
Led by Brazil, Mexico and Turkey Chart 3: Securitization - 1994-2004 24% 1% 1% Brazil 6% 31% 2% 35% Peru Turkey Panama Mexico El Salvador Kazakhstan But the potential is yet to be exploited
Remittances have become a key source of development finance $ billion 1995 2004 FDI 105 165 Debt and port. equity 151 44 ODA 59 69* Workers remittances 51 126 Remittances are larger than official and private flows in 36 developing countries
Remittances are stable, and may be counter-cyclical $ Billion 175 150 125 Capital market flows FDI 100 75 Remittances 50 25 0-25 Official flows 1990 1992 1994 1996 1998 2000 2002 2004
20+ 17.0 11.4 8.1 6.1 5.7 5.0 4.6 4.1 3.9 India Mexico France Philippines Spain Germany U.K. China Pakistan Belgium Top 10 recipients of remittances, 2004 ($ billion) $ billion
Top 10 recipients of remittances, 2003 (as percent of GDP) 41 30 25 24 % of GDP 22 20 19 17 16 15 Tonga Haiti Lesotho Moldova Jordan W Bank&Gaza Vanuatu Bosnia&Herz Jamaica Nepal
Potential Remittances: $8 billion/year Table 6: Remittances by Region, 2004est. Billion US$ East Asia and the Pacific 20.3 Europe and Central Asia 12.9 Latin America & Caribbean 36.9 Middle East & North Africa 17.0 South Asia 32.7 Sub-Saharan Africa 6.1 Low and Middle-Income 125.8 Countries
Constraints Paucity of high-rated entities Long lead times High fixed costs (legal and others) Issuers reluctance for full disclosure Inadequate legal structure Lack of liquidity not a big deterrent
Constraints Table 10: Number of investment grade entities in below investment grade developing countries (local currency ratings) Country Inv. Grade Entities Country Inv. Grade Entities Argentina 15 (6) Mexico 19 (10) Brazil 3 (3) Malaysia 11 China 2 Nigeria 1 Colombia 2 (2) Pakistan 0 Croatia 2 Panama 3 (2) Czech Rep. 12 Peru 1 (1) Egypt 9 Philippines 4 (1) El Salvador 2 (2) Poland 8 Estonia 1 Slovenia 1 Hungary 6 Thailand 6 India 5 Tunisia 3 Jordan 0 (1) Turkey 0 (5) Korea 6 Uruguay 2 Lebanon 0 South Africa 13
Improve migrants access to banks Banks are cheaper than MTOs Improve banking access of migrants Involve credit unions, microfinance institutions, and post office savings banks Remove exchange controls Improve access to payment and settlement systems
Strengthen financial infrastructure Improve competition Harmonize bond, net worth requirements Avoid over-regulation banking license is not necessary know your client requirement may be too hars Avoid exclusivity contracts
Strengthen financial infrastructure Harmonize electronic transfer systems Take advantage of technology Increase transparency
Public policy issues Encourage remittance flows through formal channels. Overcome the size issue via Master Trust arrangement. IFIs can provide Seed money for contingency financing facilities. Expertise in deal structuring and developing legal & institutional framework framework. Counter-party risk assumption as in Unibanco. Help in resolving conflicts with the negative pledge provisions.
Improve data on remittances Conduct surveys of remittance senders and recipients
Thank you