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| Lee Meddin |
EUROMONEY'S FINANCE MINISTER of the year award usually goes to an emerging-market official, and for good reason. Finance ministers outside the OECD might not be smarter or more sophisticated than their G7 counterparts (although many are) but they certainly have a much harder job to do when it comes to managing their countries' debt.
The problem is known as "original sin" – the fact that countries and companies in emerging markets, when they can borrow, can usually only raise money in foreign currency, or at short tenors, or both. Emerging-market borrowers, then, inevitably have levels of currency, interest-rate and rollover risk that their developed-market counterparts would never dream of having to deal with.
The problem is well known, and the solution has long been known in theory: emerging-market economies have to develop liquid domestic capital markets, with well-defined yield curves and the ability to fund a wide range of credits.
That's easier said than done, though, so the International Finance Corporation has decided to step in and help out, with the aid of a few hundred million dollars in World Bank capital.
The man at the IFC in charge of making this happen is Lee Meddin, a former structured-products expert at ABN Amro in Singapore, who was tapped to set up a new structured products group in Washington at the end of 2000. Since then, his group has helped to mobilize more than $2.5 billion, while putting up only $500 million of its own money. Moreover, Meddin assures Euromoney, that $500 million generated very impressive returns for the Bank.
Meddin has set himself a highly ambitious goal: to create whole new asset classes in emerging-market economies around the world. If he is successful, these asset classes will require zero involvement from the IFC once the first few deals have been done.
The initial conditions are certainly in place. Structured products in general – asset-backed and mortgage-backed securities – are now a $7 trillion market in the US, accounting for 31% of the total size of the bond market. Treasury bonds, by contrast, are just 24%.
Europe, too, has posted impressive growth in structured products: the market there grew tenfold, from $50 billion to $500 billion, in the five years between 1998 and 2003.
An ideal market
The success of structured products in Europe and the US should be repeated in good measure in emerging markets. For one thing, emerging-market economies are far more crisis-prone than those in developing nations, and structured products usually have much lower ratings volatility than similarly rated plain-vanilla corporate issues.
Emerging-market pension and mutual funds with long time horizons, then, should love to invest in these deals. Even in cases of multi-billion-dollar fraud, such as with Parmalat in Brazil, many structures have held up perfectly, with no loss to investors.
Emerging-market institutional investors certainly have cash – Meddin estimates that both Latin America and emerging Asia have about $500 billion in domestic savings looking to be put to work – not including the money that residents of those countries have held offshore and that might be repatriated if local investments started looking attractive enough.
The problem is that there are severe constraints on permissible investments for most of the funds, especially in Latin America. A lot of Latin countries have only a very small number of big blue-chip companies with the sort of credit ratings that the government regulators require – and those companies can usually get cheaper funding from local banks than they can from the domestic capital markets.
With securitization and partial guarantees, however, any issuer can get the kind of credit rating that will allow it to market securities to domestic institutional investors. Now that most emerging-market economies have low nominal interest rates, along with a relatively solid legal and regulatory framework for such issuance, there's really nothing preventing structured issuance from constituting the lion's share of the domestic non-sovereign capital markets in some countries.
Meddin's goal isn't simply to increase the quantity of structured-product transactions in the emerging markets, however: he wants the issuers that he is sponsoring to return at some later date with plain-vanilla issues as well.
"With a partial guarantee, you're having the investors do due diligence on the underlying credit," he says. "So the borrowing paves the way for them to borrow in their own name without further enhancement."
Those credits do not need to be classical issuers, either. In August, the IFC provided a 34% partial credit guarantee to a bond deal from Financiera Compartamos, a microfinance institution in Mexico. Compartamos is based on the hugely successful Bangladeshi model: 94% of its customers are women, the average loan is $300, and most of the loans go to small groups of between 15 and 50 women, making repayment in full extremely likely.
Once the IFC got involved, the deal, for just Ps190 million ($16.5 million), received an investment-grade double-A local-scale credit rating from both Standard & Poor's and Fitch. The lead manager, Citigroup/Banamex, then distributed the bonds to more than 13 institutional investors. "Just as many as any deal of any size," says Meddin.
"We need good distribution," says Meddin. "We follow the bookbuilding process very closely," making sure that as many real-money investors as possible are introduced to the credit and to the asset class.
With an AA rating, that's possible. Mexican pension funds are only allowed to invest 5% of their assets in single-A rated assets, which is what Compartamos is, and they generally save that allocation for fallen angels – AA-rated corporations which, for whatever reason, have been downgraded. Now they are comfortable with the credit, however, they will probably happily take up the rest of Compartamos's Ps500 million borrowing programme, and maybe even find entities that could be willing to lend to it directly.
Occasionally, a few hedge funds will even be allowed into the deal, in countries where domestic hedge funds are active, such as Brazil and India. "Sometimes a small allocation to a hedge-fund investor base is helpful because it provides liquidity in the secondary market," Meddin says.