Unpacking the World Bank Group’s first securitization deal and what’s next

When the World Bank Group announced its first securitization transaction – bundling and selling a share of loans from the International Finance Corporation, its private sector arm — it marked both a historic first for the institution and the culmination of years of effort. Shareholders have pushed IFC to rethink its model: shifting from holding loans on its own books to originating and then distributing them to the private sector. This securitization reflects that pivot and responds to the World Bank Group leadership’s call to deepen engagement with the private sector. While the transaction does expand IFC’s lending capacity, the driving motivation was to bring more private investors into development projects across IFC’s markets. “The ultimate objective is to really create a new asset class for emerging markets so that institutional investors can really get into that space as well,” said Mahfuza Afroz, who is the securitization project lead at IFC. The transaction officially closed last month, but it was more than two years in the making — a “labor of love,” according to Kruskaia Sierra-Escalante, senior manager and head of co-investor solutions at IFC. Getting there required identifying the right model, finding the right partners, engaging with investors, building legal frameworks, and consulting credit rating agencies. “We probably would have wanted to do this much faster, it took its time. But when the moment crystallized it was really great to see that all along the capital stack we got interest,” she said, noting that some parts of the deal were oversubscribed. Though no immediate follow-up is planned, IFC views this as a pilot that will inform regular securitization transactions, potentially on a quarterly basis. The details The IFC securitization, in the form of a collateralized loan obligation, or CLO, is backed by a portfolio of $510 million in loans to 57 borrowers spanning multiple regions and sectors. The top industries include food and beverage, telecommunications, construction, banking, and health care. Turkey represents the single largest country exposure, with Eastern Europe the most prominent region overall. The CLO is structured in three tranches – a senior AAA-rated tranche purchased by investors, a mezzanine tranche protected by insurance retained by IFC, and a junior equity tranche also largely retained by IFC. The senior tranche makes up about 62.7% of the structure, with those investors receiving priority on interest and principal payments from the underlying loans. IFC retains a portion of each loan and continues to manage and oversee the investments. All loans in the CLO are U.S. dollar-denominated with relatively short maturities. Although many are in subinvestment-grade, higher-risk countries, the mezzanine and junior tranches provide credit enhancement: Holders of junior notes absorb initial losses, followed by mezzanine investors, making the senior tranche more attractive to investors. “What makes a CLO a really elegant structure for our ambition of crowding in private capital is the fact that it allows each investor to come into a tranche that’s commensurate with their risk return profile,” said Afroz. What’s new This is not the first securitization by a multilateral development bank. Both the African Development Bank and IDB Invest, the Inter-American Development Bank’s private sector arm, have done securitizations. But IFC’s approach differs. Rather than opting for a synthetic securitization — where the underlying risk is sold — IFC chose a funded transaction, bundling and selling the actual assets. “We reviewed what some of our other MDB colleagues have done with the synthetic securitizations and that was an option,” Sierra-Escalante said, adding IFC could consider it in the future. “When they entered into that, it was really a capital relief conversation. We had the luxury of stepping back a little bit and saying yes, we want to relieve capital, but at the same time our primary goal is around mobilizing the private sector.” IFC’s motivation was somewhat different from that of other MDBs that have done securitizations. “Some development banks are doing risk transfer for balance sheet optimization purposes” to free up resources. But it’s also to satisfy ratings agency demands of how much capital the institutions must keep on hand, a finance expert told Devex. The World Bank’s approach has changed in the past two years, the securitization expert said. “Their approach has always been very conservative,” the expert added, noting that most innovation has come from other MDBs under pressure to maintain their AAA ratings. “The World Bank went from being a laggard to having the ambition of being a leader in balance sheet optimization,” and the IFC securitization fits into that effort, the expert said. Because this deal is funded, IFC not only transfers risk, but also receives new capital. That makes it “more powerful,” Mahesh Kotecha, president of Structured Credit International Corp., told Devex. “It’s great to have risk transfer, but it’s good to have funding as well.” And while it is a “potentially very powerful new avenue to bring investors in,” challenges remain. IFC can do more of these transactions but they need to originate more loans to “keep running this machine like a treadmill,” Kotecha said. “The benefit to them of doing this is that they free up capital so they can make more loans. But if the loan-making pace is not outstripping their loan-selling pace, then that's going to not be possible.” What’s next For IFC, this transaction is intended to be the first of many and seeks to bring the private sector into the sector more broadly, including potentially through other financing instruments. Other development finance institutions are also exploring this avenue for private capital mobilization. The European Bank for Reconstruction and Development is working on a securitization, several sources told Devex, and bilateral development finance institutions are considering them too, according to a new report out from British International Investment this week. In future iterations, IFC could consider pooling loans from other DFIs, especially those with smaller or less diversified portfolios. Questions Still, questions remain about the broader rationale. “Why are we mobilizing? Is it to achieve a number, or because capital is scarce and then securitizing works efficiently,” Paul James, a research manager at Publish What You Fund, told Devex. “If the aim is to encourage institutions to engage with certain economies, then securitization might do that but it's one step removed.” While securitization might encourage private investment to enter poorer and riskier countries through diversified exposure, it may not directly build local economies. Another concern is whether the drive for mobilization could skew investments toward larger economies such as Turkey or India, where mobilization potential is high, rather than in poorer countries where individual projects — such as building a power station — might have significant development impact but limited investor appeal. “Transparency can help answer questions on how additional investments are and if you could be doing more to bring other private actors in,” he said. Some also wonder whether the World Bank might securitize loans from its public sector operations. That would be more complex, given thinner margins, uncertain investor appetite, and the potential impact on the bank’s relationship with its clients.