Suhas Ketkar

English

Research Papers in Economics

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 30th, 2005Outline
1.Rationale for Securitization
2.Principal features
3.Potential size
4.Constraints
5.Policy IssuesRationale for sovereigns
y Cost of crisis too high -- need to maintain 
investment and employment
y Information externalities---as in the 
aftermath of Brady deals
y Capital market developmentRationale for issuers [Use El Salv, Bra 
example]
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  12/4/98 
Pemex  Finance  A  BBB 350  7  8.5 350 7.000  12/4/98 
Pemex Finance A  AAA 400  10  11.5 175  6.300  12/4/98 
Pemex Finance A  BBB 250  18  20  412.5 9.150  12/4/98 
Pemex Sr. Unsecured BB  600    10  462.5 9.375  12/2/98 
UMS*  BB  1500   10  571  9.875  12/4/98 
Source:  S&P 
 
• ability to escape sovereign ceiling
• lower costs -- longer maturiryRationale for investors
•Good credit rating -- No defaults to date
•Less spread volatility
Chart 6a: Spreads on Pemex 7-year and 
UMS 2026
200
250
300
350
400
450
500
550
600
1
/
2
9
/
9
9
3
/
2
9
/
9
9
5
/
2
9
/
9
9
7
/
2
9
/
9
9
9
/
2
9
/
9
9
1
1
/
2
9
/
9
9
1
/
2
9
/
0
0
3
/
2
9
/
0
0
UMS 2026 Pemex 7-yr
basis pointsSecuritization of Remittances
Chart 1: Structure of BdB Remittance Securitization
Remittance payments
via consent agreement
Proceeds of
$250m 
Excess Collection
Processed P&I
$250m
$250m + Collection
Excess Rights
Collateral
Source:  Standard and Poors (S&P)
Banco Do Brasil, 
Japan 
 New York city-   
  based Trust
Cayman Island based SPV: 
Nikkei Remittance Rights 
Finance Company 
Investors
Banco do 
BrasilSecuritization of remittances has increased in 
recent years
Chart 2: Remittance Securitization
65 206 350 115
540
1,175 1,170
1,600 1,690
2,837
1,055
0
500
1 000
150 0
2000
2500
3000
1 994 1 996 1 998 2000 2002 2004
to
July
US$ M…Led by Brazil, Mexico and Turkey
Chart 3: Securitization - 1994-2004
31%
2%
35%
1%
24%
6%
1% Brazil
Peru
Turkey
Panama
Mexico
El Salvador
Kazakhstan
But the potential is yet to be exploitedRemittances 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-25
0
25
50
75
100
125
150
175
1990 1992 1994 1996 1998 2000 2002 2004
$ Billion
Capital market flows
FDI
Official 
flows
Remittances
Remittances are stable, and may be 
counter-cyclical3.9 4.1 4.6 5.0 5.7 6.1
8.1
11.4
17.0
20+
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Top 10 recipients of remittances, 2004 
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% of  GDP
Top 10 recipients of remittances, 2003 
(as percent of GDP)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 
Countries  
125.8 
 Constraints
y Paucity of high-rated entities
y Long lead times
y High fixed costs (legal and others)
y Issuers reluctance for full disclosure
y Inadequate legal structure
y Lack of liquidity not a big deterrentConstraints
Table 10: Number of investment grade entities in below 
investment grade developing countries (local currency ratings) 
Country Inv.  Grade  EntitiesCountry 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
y Banks are cheaper than MTOs
y Improve banking access of migrants
y Involve credit unions, microfinance institutions, 
and post office savings banks 
y Remove exchange controls
y Improve access to payment and settlement 
systemsStrengthen financial infrastructure
y Improve competition
y Harmonize bond, net worth requirements
y Avoid over-regulation 
– banking license is not necessary
– know your client requirement may be too harsh
y Avoid exclusivity contractsStrengthen financial infrastructure
y Harmonize electronic transfer systems
y Take advantage of technology
y Increase transparencyPublic 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
y Conduct surveys of remittance senders and 
recipientsThank you

Securitization of Future Remittance Flows: A Global Overview

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Securitization of Future Remittance Flows: A Global Overview

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