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Development financing during a crisis : securitization of future receivables
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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 47.3billion.Studyingseveralsources,theauthorsdrawconclusionsabouttherationaleforusingthisassetclass,thesizeofitsunrealizedpotential,andthemainconstraintsonitsgrowth.Typicallytheborrowingentity(theoriginator)sellsitsfutureproduct(receivable)directlyorindirectlytoanoffshorespecialpurposevehicle(SPV),whichissuesthedebtinstrument.Designatedinternationalcustomersmaketheirpaymentsfortheexportsdirectlytoanoffshorecollectionaccountmanagedbyatrustee.Thecollectionagentmakesprincipalandinterestpaymentstoinvestorsandpaystheresttotheoriginator.Thistransactionstructureallowsmanyinvestment−gradeborrowersindevelopingcountriestopiercethesovereigncreditceilingandgetlonger−termfinancingatsignificantlylowerinterestcosts.Theinvestment−graderatingattractsawidergroupofinvestors.Andestablishingacredithistoryfortheborrowermakesiteasierforittoaccesscapitalmarketslater,atlowercosts.Thisassetclassisattractiveforinvestors−especiallybuy−and−holdinvestors,suchasinsurancecompanies−becauseofitsgoodcreditratingandstellarperformanceingoodandbadtimes.Defaultsinthisassetclassarerare,despitefrequentliquiditycrisesindevelopingcountries.LatinAmericanissuers(Argentina,Brazil,Mexico,andVenezuela)dominatethismarket.Nearlyhalfthedollaramountsraisedarebackedbyreceivablesonoilandgas.Recenttransactionshaveinvolvedreceivablesoncreditcards,telephones,workers′remittances,taxes,andexports.Thepotentialforsecuringfuturereceivablesisseveraltimesthecurrentlevel(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.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