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Development financing during a crisis : securitization of future receivables

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  • Ketkar, Suhas
  • Ratha, Dilip

Abstract

Mexico's Telmex undertook the first future-flow securitization transaction in 1987. From then through 1999, the principal credit rating agencies rated more than 200 transactions totaling $47.3 billion. Studying several sources, the authors draw conclusions about the rationale for using this asset class, the size of its unrealized potential, and the main constraints on its growth. Typically the borrowing entity (the originator) sells its future product (receivable) directly or indirectly to an offshore special purpose vehicle (SPV), which issues the debt instrument. Designated international customers make their payments for the exports directly to an offshore collection account managed by a trustee. The collection agent makes principal and interest payments to investors and pays the rest to the originator. This transaction structure allows many investment-grade borrowers in developing countries to pierce the sovereign credit ceiling and get longer-term financing at significantly lower interest costs. The investment-grade rating attracts a wider group of investors. And establishing a credit history for the borrower makes it easier for it to access capital markets later, at lower costs. This asset class is attractive forinvestors-especially buy-and-hold investors, such as insurance companies-because of its good credit rating and stellar performance in good and bad times. Defaults in this asset class are rare, despite frequent liquidity crises in developing countries. Latin American issuers (Argentina, Brazil, Mexico, and Venezuela) dominate this market. Nearly half the dollar amounts raised are backed by receivables on oil and gas. Recent transactions have involved receivables on credit cards, telephones, workers'remittances, taxes, and exports. The potential for securing future receivables is several times the current level ($10 billion annually). The greatest potential lies outside Latin America, in Eastern Europe and Central Asia (fuel and mineral exports), the Middle East (oil), and South Asia (remittances, credit card vouchers, and telephone receivables). One constraint on growth is the paucity of good collateral in developing countries. Crude oil may be better collateral than refined petroleum. Agricultural commodities are harder to securitize. Another constraint: the dearth of high-quality issuers in developing countries. Securitization deals are complex, with high preparation costs and long lead times. The ideal candidates are investment-grade entities (in terms of local currency) in sub-investment-grade countries (in terms of foreign currency). Establishing indigenous rating agencies can slash out-of-pocket costs. Developing standardized templates for certain types of securitizations might help. A master trust arrangement can reduce constraints on size. Multilateral institutions might consider providing seed money and technical assistance for contingent private credit facilities.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2582.

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Date of creation: 12 Apr 2001
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Handle: RePEc:wbk:wbrwps:2582

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Related research

Keywords: Financial Intermediation; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Banks&Banking Reform; Environmental Economics&Policies; Financial Intermediation; Banks&Banking Reform; Housing Finance; Environmental Economics&Policies; Economic Theory&Research;

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Citations

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Cited by:
  1. Nigel Andrew Chalk, 2002. "The Potential Role for Securitizing Public Sector Revenue Flows," IMF Working Papers 02/106, International Monetary Fund.
  2. Jose Antonio Alonso, 2011. "International Migration and Development: A review in light of the crisis," CDP Background Papers 011, United Nations, Department of Economics and Social Affairs.
  3. Giuliano, Paola & Ruiz-Arranz, Marta, 2009. "Remittances, financial development, and growth," Journal of Development Economics, Elsevier, vol. 90(1), pages 144-152, September.
  4. Suhas Ketkar & Dilip Ratha, 2009. "Innovative Financing for Development," World Bank Publications, The World Bank, number 6549.
  5. Ilene Grabel, 2008. "The Political Economy of Remittances: What Do We Know? What Do We Need to Know?," Working Papers wp184, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Taiwo Ajilore & Sylvanus Ikhide, 2012. "A Bounds Testing Analysis of Migrants Remittances and Financial Development in Selected Sub-Sahara African Countries," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 4(2), pages 079-096, December.
  7. Samuel Malone, 2005. "Managing Default Risk for Commodity Dependent Countries: Price Hedging in an Optimizing Model," Economics Series Working Papers 246, University of Oxford, Department of Economics.
  8. Alkhathlan, Khalid A., 2013. "The nexus between remittance outflows and growth: A study of Saudi Arabia," Economic Modelling, Elsevier, vol. 33(C), pages 695-700.
  9. Samuel Munzele Maimbo & Dilip Ratha, 2005. "Remittances: Development Impact and Future Prospects," World Bank Publications, The World Bank, number 7339.

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