Synthetic securitization unlocks capacity for further lending in Emerging Markets

Room2Run

Context

• The African Development Bank (AfDB) is mandated to drive social and economic development in Africa through multiple project types including infrastructure
• AfDB set a goal to raise USD 3B by 2021 from the private sector for infrastructure development

Problem

• The AfDB carried significant mezzanine risk on approx. 40 loans across 16 countries
• With no regulatory body for MDBs, credit ratings on the AfDB's loans proved a significant challenge to accessing capital markets

Innovation

• Room2Run is a synthetic securitization program1, wherein the bank transfers risk to buyers for a fee, decreasing capital requirements and unlocking additional capital for future loans
• The Room2Run program transferred USD 1B of mezzanine risk to private investors, unlocking an additional USD 650M worth of lending capacity without having to directly grow its financial resources

Stakeholders Involved

• Mariner Investment Group – Lead Investor to the transaction (accompanied with other investors incl. Africa50 Infrastructure Fund)
• AfDB – Developed Room2Run program to unlock further capital loan

Results/Impact

• The AfDB unlocked USD 650M of lending capacity (for projects that include infrastructure) while reducing its exposure to mezzanine risk and maintaining its credit rating
• Through Room2Run, AfDB developed its own Risk Adjusted Capital Framework in conjunction with S&P, and developed new methodologies to rate the securities sold on capital markets
• Given the synthetic securitization, AfDB remained the lender for 50 loans and maintained its relationship with its borrowers

Key lessons learnt

• At the institutional level, synthetic securitization is a useful tool to align the treasury and project development departments in a development bank; however the effectiveness of the headroom created is entirely dependent on the availability of a viable pipeline of projects, attractive to investors
• The development of credit ratings for loans in emerging countries is critical for accessing capital markets; however, when project data is scarce rating agencies and development banks can still leverage legitimate qualitative sources to inform
  investors of risk