Latin Finance - May 2008 - 102

idb private sector department Local Currency Extensions by James Crombie he IDB has taken a bashing over the last five years as borrowers, awash with liquidity, shunned the multilaterals. The institution seemed destined to become little more than an organizer of the region’s annual shindig, itself fast becoming an anachronism. But the bank has staged something of a revival, especially in its private sector group. “We’re strongly focused on Latin America and the Caribbean. We have a real cultural identity and affinity,” says Hans Schulz, head of the financial markets group in the private sector department of the IDB. “We’ve made a lot of progress in terms of how the market looks at us. We’ve shown we can deliver,” he adds. The global financial storm has caused some capacity constraint on the B-loan side, especially at US based banks, says Schulz, who sees European financial institutions in slightly better shape, as well as Asian institutions. There has been market flexing, reopening of deals as well as tougher covenants, but still no use of a MAC clause – at least as of midApril. Lenders are increasingly keen to stick to the obvious names, and Schulz notes more pushback than six months ago to new borrowers, who can only get capital at a price. Issuers hoping that this is only a short term move are postponing funding. “There’s a little bit of testing going on,” says Schultz. All of this is an opportunity for the IDB, particularly as the monolines retreat to lick their wounds. Where they were wrapping – BBB minus or better – is where the IDB might look to step up. “We may be experiencing a lot of demand in going a little higher, so that means for us getting ready to provide larger, more significant credit enhancement, combined with more T After a long struggle to define itself as a relevant institution, the IDB is proving its worth as a local currency innovator. It seeks to lend more and leverage guarantees. “You’ve got to be in for at least 10%15% of the deal to really have an impact, and that sometimes means $300-$400 million, so it’s very significant,” says Schulz. “We are going to participate in some of those when they are of strategic importance to the country,” he adds. Given rising needs for infrastructure funds from a shrinking pool of liquidity, Schulz predicts price and capacity adjustment that will generate business for the private sector department, which produces significant profit for the IDB. The IDB ended 2007 with $2.3 billion in commitments, up from $900 million in the previous year. “This year we are on stream to do at least $3 billion in new commitments. From a volume and relevance perspective, it is very significant,” says Schulz, who adds that the bank is more closely scrutinizing the development impact. “We are raising the bar a little bit because we think that given the demand we have, we can be a little more selective.” The IDB is also aiming to minimize the A loan and maximize the bang on any given dollar it puts into a project. “We are going to continue to innovate on the product side,” says Schulz. In April, the IDB approved a new framework for local currency lending that dramatically extends its reach. In theory, that could mean an IDB loan for $400 million in an exotic LatAm currency extending to 30 years. In smaller countries, the IDB will swap everything back to dollars using the Currency Exchange Fund (TCX), a global partnership of development finance institutions that promotes long- A new framework for local currency: Schultz skeptical investors and rating agencies that are under scrutiny and reviewing their rating criteria,” says Schulz. “By the time this plays out, we anticipate a lot more demand for our guarantee products, the risk mitigation credit enhancement aspect. We also anticipate that a lot more paper will be placed in local capital markets, even though there are a lot of issuers that are reluctant to do that because of the higher base rate,” he adds. Lending for Construction Another rapidly growing trend, infrastructure finance, also plays to the bank’s strength. Some 50% of the IDB’s total non-sovereign volume is in this sector, which is getting increasingly big ticket. 102 LATINFINANCE May 2008

Latin Finance - May 2008

Table of Contents for the Digital Edition of Latin Finance - May 2008