Surprising resilience: DFIs take stock of their COVID-19 response

A year ago, development finance institutions braced for losses due to the COVID-19 pandemic and expected to focus on providing liquidity support to existing clients. But as parts of the world shift into economic recovery mode, DFI leaders tell Devex they’ve been surprised at the resilience of their portfolios. 

When the pandemic struck, many DFIs reevaluated their strategies and quickly worked to adapt to virtual due diligence processes. Last year they told Devex how they intended to respond to the crisis, including through closer collaboration on due diligence as travel stopped.

But has the cooperation continued? Have they followed through on their plans?

Devex spoke to leaders at the U.S. International Development Finance Corporation, the CDC Group, Netherlands Development Finance Company, and Development Finance Institute to find out.

Surprising resilience

As they planned, many DFIs focused on supporting their existing clients through the crisis rather than finding new clients. Investing has been more challenging, but concerns that their balance sheets would take a hit didn’t materialize, nor did the type of demand they expected for liquidity support.

FMO, the Dutch development bank, had 31 payment deferrals and three restructurings — a rather average number that is lower than expected. While it reported a loss because it had to reevaluate its equity investments, its loan portfolio had a lower nonperforming loan ratio than in 2019, said Linda Broekhuizen, FMO’s interim CEO.

CDC Group, DFC, and FinDev Canada all reported that their portfolios were holding up well despite the pandemic.

“Our survival analysis is fairly positive. Our portfolio has been resilient,” said Yasmin Saltuk Lamy, the Deputy CIO at CDC Group. While CDC thought it might have to make a lot of investments to preserve its portfolio, it only spent about 10% of the capital it expected to spend.

DFC likewise expected a big demand for liquidity support. It launched a $4 billion Rapid Response Liquidity Facility in May 2020. But since then, it has only made three investments totaling $644 million through the facility — none in low-income or lower-middle-income countries.

Several institutions saw increased demand for guarantees, finding that even if client banks had necessary liquidity, they needed a risk-sharing agreement to protect against possible losses and continue investing.

Unlike some of the other DFIs, DFC adopted a more deliberate approach to investing in health. Last year, it launched the Health and Prosperity Initiative to invest $2 billion over three years. DFC thought it would get an influx of interest in response to a call for proposals for innovations in vaccine manufacturing, diagnostics, and therapeutics — it did not. Instead, DFC found that many of these projects need more than financing alone, said Nafisa Jiwani, the managing director of health initiatives at DFC.

Still, it made some investments that are different from anything the agency had done before, including working with an Indian manufacturer to increase vaccine production capacity, supporting the creation of vaccine shipment insurance policies, and helping private health clinics improve their level of care, Jiwani said.

FinDev Canada has a small portfolio as a young DFI, and without an extensive network, it relied on partners and other DFIs. During the pandemic, it slowed its equity investments and did the majority of deals through financial intermediaries because they were easier to find and approve, said Paulo Martelli, FinDev Canada’s chief investment officer.

CDC also shifted its priority to debt instruments and did a number of deals through financial intermediaries early on in the pandemic, Lamy said.

“We weren’t looking to increase leverage for companies. We were thinking about working capital and bridging liquidity when supply chains were seizing up,” she said.

CDC, for its part, took a three-pronged approach: preserve, strengthen, and rebuild. It has moved through those stages more rapidly than expected, approving double the investments anticipated in the “strengthen” pillar so far — nearly $1 billion of transactions have been approved — and more quickly getting to the “rebuild” pillar and relaunching its equity investment work, Lamy said.

In addition to financing, FMO also provided grants to some of its clients to help with business continuity, digitalization, managing the crisis, and safeguarding health. FMO has maintained its focus on financial institutions, renewable energy, and agribusiness.

Increased cooperation

While DFIs have increased their coordination and cooperation in some ways during the pandemic, it is unclear if it will continue or if they will return to a more competitive environment.

The Association of European Development Finance Institutions, or EDFI, FinDev Canada, and DFC held weekly working group meetings during the pandemic to share information and coordinate on investments and policies. While they previously often invested in the same deals and worked together in some capacities, the crisis pushed DFIs to collaborate more closely.

With travel restricted, DFIs turned to one another to share due diligence, including relying on agencies with staff in specific countries. That enabled the DFC to move more quickly to approve deals, Jiwani said.

A task force of chief investment officers looked at how to support clients, Broekhuizen said. There was particular coordination on how to deal with payment deferrals or restructure loans so that DFIs shared a similar approach, she said.

“The collaboration between DFIs was really powerful in terms of setting principles in collectively how we consider debt moratoria, waivers, deferrals,” CDC’s Lamy said.

They also shared ideas about remote due diligence models, though each institution designed its own, she said.

“I hope that’s one of the things that stays, that degree of collaboration on transactions,” Martelli said.

Broekhuizen said she would like to see even further collaboration, such as via a platform to better share information for monitoring and due diligence between multiple DFIs and their clients.

Looking ahead

The pandemic has forced DFIs to change for the better in some ways. Still, several leaders warn that the pandemic’s end is still years away in most of the countries where they invest. While their portfolios have been resilient, there could still be struggles or losses to come as some central bank policies, and relaxed regulations return to normal, increasing the strain on their clients.

“We saw an increase in the risk profile of many countries as a result of COVID but that has not translated into more trouble in the portfolio yet,” Lamy said. “It’s not clear if that’s structural or not. We will have to see.”

Development experts and critics have long questioned whether DFIs take enough risk and have argued that they should take more. Especially as portfolios hold steady, those questions will remain or be amplified as financing needs grow due to the pandemic.

“Our threshold for risk has shifted a bit in a good way,” Jiwani said. “That has to happen for us to do some transactions in the global health space,” which is inherently risky.

Another criticism of DFIs is that they have historically not invested countercyclically when they are most needed. How much they can be depends on how they’re structured.

FMO is prepared to be pre-cyclical and scale up quickly as economies start to grow, Broekhuizen said.

But that’s not the case for FinDev Canada. “For us, it doesn’t change our posture,” Martelli said. “We’re a brand new DFI created to be countercyclical and go to markets where people are not comfortable.”

Update 4/21/21: This article has been updated to clarify a statement from FMO about its investment strategy.