The International Finance Facility for Immunization (IFFIm) is a rare example of the capital markets being used in a direct attempt to ameliorate health conditions. Its proponents suggest the IFFIm will dramatically boost money provided to meet the much-vaunted Millennium Development Goals.
Officially unveiled in mid September, the initiative finances a programme of large-scale immunization against disease in developing countries. It uses a securitization vehicle, IFFIm, which is backed by part of its expected future income stream – mainly a series of future conditional annual donations by various governments.
This scheme will front-load aid to the Global Alliance for Vaccines and Immunization (Gavi) by leveraging long-term donor commitments. Principal and interest payments on the bonds will be repaid by future donor payment streams.
It will go to the capital markets within the next three to five months for its first deal and borrow as much as $4 billion over the next two to three years. "The timing will be subject to finalizing the few outstanding technical issuers and the negotiations with potential donors," says a UK Treasury spokesperson.
It is clear that the most likely method of selling the bonds will be a syndication. However, the Treasury would not be drawn on this nor did it reveal what currency bias the treasury manager of the IFFIm would have.
Legally binding commitments
The UK has pledged 35% of the total resources required for a $4 billion IFFIm, which equates to $130 million each year. France has offered 25%, Italy 10%, Spain 3% and Sweden a total pledge of $27 million. These government donations are supplemented by a $750 million donation by the Bill & Melinda Gates Foundation over the next 10 years.
It is clear that the UK government has been the driving force behind the scheme, and it mirrors the International Finance Facility that UK chancellor of the exchequer Gordon Brown has been pushing.
To their credit, bankers at Goldman Sachs have structured the IFFIm on a pro bono basis.
The key issue the IFFIm seeks to address is how can an increase in aid be achieved given fiscal constraints among the majority of donors. Eurostat cleared the way by allowing the bonds issued by IFFIm to be considered as the debt of a non-government unit and not as part of the donor governments'. Also, and perhaps more important, the donations to IFFIm will only be recorded as government expenditure when actually made to Gavi.
But as the commitments are legally binding, IFFIm will be able to borrow on the capital markets using those donor pledges as collateral.
In a similar way to a mortgage securitization, IFFIm's debt will be rated triple A because the net present value of its debt will be below a certain portion of its liabilities. This advance rate will be determined following discussions with rating agencies. The advance rate is expected to be in the region of 70%.
Gavi will be the first beneficiary of the funds. Instead of annually having to go to donors to get funds, Gavi will get upfront payments and more on a continuing basis, making it easier for it to plan capital expenditure. If Gavi has a project, it can use the cash when appropriate and not have to wait for donations in 12 months' time. Also procurement of vaccines will be more straightforward, because GAVI will be able to provide vaccine producers with the comfort that it has access to the necessary funds.
So how will the success of IFFIm be measured from a purely capital markets perspective? It would be surprising if the architects would want to pay spreads in line with typical securitizations. So the issue will likely be marketed as a top-tier issuer of the supranational/sovereign/agency type.
Related:
IFFIm: a supra new borrower? September 2006
Debt market round-up: Iffim prices first deal December 2006