An IDB credit guarantee will help develop Central America’s markets and housing loans
The IDB is boosting the development of Central America’s capital markets by giving a partial credit guarantee to the region’s first ever mortgage-backed bond programme.
In a move seen as a first step toward the development of a region-wide mortgage securitization market, the Bank is providing a $20 million, partial credit guarantee to a $150 million three-year programme planned by El Salvador’s Banco de Comercio (BanCo).
BanCo will issue $50 million of 10-year bullet mortgage-backed bonds every year for the next three years at all-in costs of funding which, thanks to the IDB’s guarantee and the programme’s structure, will be low enough to provide cheaper housing loans in El Salvador. The bonds will also be the first fixed income securities to be listed in all three markets in Panama, Costa Rica and El Salvador.
“The idea is to sell it in Panama, Costa Rica and El Salvador, mostly to local investors, to help promote regional capital markets development,” says Juan Mario Laserna, the IDB team leader on the project.
Although one deal doesn’t make a market, the BanCo programme provides the legal framework and structural model upon which other mortgage-backed securitizations can be based in Central America.
Icebreaker
El Salvador was chosen as the icebreaker because of its fast-growing pension fund system and resulting increase in demand from local institutional investors for domestic securities. “Because of the pension fund reforms in El Salvador, it is a market with a lot of liquidity and some institutional investors,” says Laserna.
El Salvador, says Jose Carlos Castaneda, IDB executive director for Central America, “has introduced one of the most comprehensive reform agendas. It has a dynamic private sector that offers many opportunities in the areas of infrastructure and capital markets.” The IDB’s $20 million partial credit guarantee will help the deal (due for issuance in the next few months) to get a local rating as high as AA+.
Collateralizing
A portion of BanCo’s mortgage loan portfolio will collateralize the bonds. As well as the 10% partial guarantee by the IDB, the transaction will be over-collateralized by 15% and will include a debt service reserve account with up to two coupon payments in it.
Unlike US mortgage-backed securities, however, the mortgage receivables backing the new mortgage bonds will remain on BanCo’s balance sheet. “Although there is the legislative framework sufficient to make the transaction legally secure, it does not at this stage allow the assets to be taken off the balance sheet,” says Laserna.
Instead, the deal’s structure is similar to mortgage-backed bond programmes in Germany and Chile, where the assets stay on banks’ balance sheets and are only removed in the event of default.
Pricing of the deal will depend on its rating. BanCo will also look at the trading levels of El Salvador’s sovereign bonds in the US dollar market as a benchmark.
Other pricing comparables include so-called ‘MT100’ financial future flow securitized deals sold by a number of Central American banks to US private placement investors. The IDB is keen to foster the mortgage-backed market with more partial guarantee deals in Central America, and is keen to see how successful the BanCo offering is. “We will try, once this is placed, to originate a few more deals in the area that are structured similarly to this,” says Laserna.