Standard Chartered and IFC announced today (April 21) a deal for a US$1 billion unfunded risk participation arrangement that will increase the availability of trade finance in emerging markets.
In a statement, StanChart said it would originate a portfolio of up to US$1 billion from banks in emerging markets, with a particular focus on the world’s poorest countries.
In turn, local banks will then extend trade financing to their importer and exporter clients, stimulating an essential service that was badly hit during the global financial crisis.
StanChart CEO Peter Sands said: “This arrangement will help to boost trade finance in Asia, Africa and the Middle East, which has been sharply curtailed by the global financial crisis, and will support domestic businesses, job creation and private sector development.”
Explaining more about the deal, Paul Hare, StanChart’s global head of portfolio management, told asiamoney.com: “We call it risk participation because IFC is sharing risk with us in trade finance loans that we are making to our clients.
“Through their participation we are able to increase our appetite and increase the financing we can make available to clients in these specific emerging markets.
“Risk participation is key from the perspective of an investor such as IFC. They want to know how the clients are being managed, how the assets are being selected, how the credits are being extended.”
For its part, IFC, a member of the World Bank Group, is guaranteeing a mezzanine tranche of the portfolio, providing credit protection and capital relief over three-and-a-half years.
StanChart also noted the innovation of the structure, which is applying synthetic securitisation techniques to financing in many of these countries for the first time.
Hare said: “Synthetic securitisation is a capital markets concept which enables banks or other issuers to take a large, diverse portfolio of assets and instead of selling the assets individually, essentially split the portfolio into horizontal tranches that allocate losses based on the first ‘x’ percent, the second ‘y’ percent, and then the senior piece, which is always the largest part of the portfolio and would be very highly rated.
“It is synthetic because the assets remain on our balance sheet and we continue to fund and manage them, but we are essentially creating a part of the transaction in which IFC is taking the credit risk. We share the risk so there is appropriate alignment of interest.
“Because we take the first losses on the portfolio up to an undisclosed amount, the IFC’s mezzanine tranche is everything over first losses up to a maximum amount. We then retain the entire senior tranche.”
Both IFC and StanChart have been working to promote trade finance arrangements that maintain and expand financing lines for developing economies.
The two organisations, along with other development finance institutions and banks, launched the Global Trade Liquidity Program (GLTP) in 2009, a trade finance initiative that supports the Group of 20’s call to support emerging market exporters and importers and to get global trade moving again.
Hare notes that the GTLP was fully funded, offering liquidity for specific trade finance names, but said that today’s transaction was very different.
“By applying synthetic securitisation technology, we are effectively able to separate the funding of the portfolio, or the liquidity issue, from the risk management and capital management,” he said.
“Because of the diversity of the portfolio, it is enabling us to apply this structure to a broader list of names than traditional funded structures in different countries, the poorer countries.”
But Standard Chartered is evidently not doing this out purely out of the goodness of its heart. “What this transaction enables us to do is increase our financing capacity with these clients. It is about creating a sustainable lending base, and expanding our capacity obviously creates growth potential for us.”
Undoubtedly IFC is also looking at the transaction in terms of market pricing and risk-return. At the same time, stimulating trade finance particularly in poorer countries after the global crisis would also have been one of its objectives in initiating this deal.
Lars Thurnell, IFC executive vice-president and CEO, said in a statement: “This innovative structure will significantly increase the supply of trade finance in emerging markets, and in particular the world’s poorest countries where it is needed most and will have the greatest impact.
“We are expanding our trade finance solutions and Standard Chartered has been a valuable partner in our initiatives.”