Washington, D.C., November 17, 2003
— The International Finance Corporation has executed a risk participation agreement that allowed Unibanco, Brazil’s third largest private sector bank, to raise 25 billion Japanese yen (approximately $230 million). The financing was accomplished last week through issuance of 10-year notes, via a structure where Unibanco securitized and then sold offshore U.S. dollar-denominated remittances arising from its international banking activities (so-called MT100 flows or Diversified Payment Receipts).
The transaction’s notes were placed by Nomura Securities with Japanese institutional investors, in conjunction with a cross-currency swap to hedge the mismatch between Unibanco’s U.S. dollar-denominated Diversified Payment Receipts on one hand and debt service associated with the yen-denominated obligations on the other hand. Under the agreement, IFC assumes a portion of the counterparty risk associated with the transaction’s cross-currency swap.
International credit markets cut exposure to Brazilian borrowers during a period of global risk aversion in the second half of 2002. IFC responded by – among other things – rapidly arranging financing for four leading Brazilian banks, including Unibanco, between September 2002 and March 2003. As a result, $740 million of short-term funding was obtained for these borrowers from IFC and 36 other international banks and financial institutions. “Now that Brazil’s access to short-tenor funding has returned to normal levels, IFC can reorient itself to activities that increase the availability of long-tenor funding for Brazilian borrowers. This includes financial sector issuers, as in the current Unibanco transaction,” said Bernard Pasquier, IFC’s director for Latin America and the Caribbean.
In recent years, the sale of U.S. dollar-denominated notes that securitize MT100 flows has become a cost-effective way for Brazilian financial sector borrowers to raise long-tenor funding in international capital markets. This will be Unibanco’s third securitization and sale of diversified payment receipts and the longest tenor transaction of this nature done to date by any issuer in Brazil. “We are very pleased to have executed this structured financing with the support of IFC and Nomura, as it has raised attractively priced, long-tenor funding for Unibanco,” said Luiz Mauricio Jardim, Unibanco’s director for International Treasury. “The transaction ultimately benefits our corporate and project finance clients, who are demanding longer-term credit from the country’s banks as Brazil’s economic prospects continue to improve.”
Unibanco’s current transaction also represents the first time that international investors have provided a Latin American financial institution with Japanese yen funding against MT-100 flows by using a securitization structure that includes a cross-currency swap. Its successful completion is likely to enable further access to this institutional investor base for other IFC clients, particularly since there are significant amounts of additional debt capacity inherent in Diversified Payment Receipts arising from the international banking activities of Brazilian financial sector entities, as well as other offshore U.S. Dollar-denominated remittances into Brazil.
Nina Shapiro, IFC’s treasurer and vice president for Finance, noted: “Due to the U.S. dollar nature of the assets being securitized, previous Brazilian MT100 transactions have been targeted only to U.S. dollar investors. However, there is also investor appetite for these securities in the non-U.S. dollar market. Access to such investors, including those in Japan, will help Brazilian banks increase their investor base and diversify their funding sources. But long-tenor cross-currency swaps are needed to hedge the currency risk. Since the market has hesitated to provide the hedge for such transactions, IFC has stepped in, structuring a partial credit enhancement for the cross-currency swap that allowed this innovative deal to be completed successfully.”
Declan Duff, IFC’s director of Global Financial Markets, underscored the market-opening aspect of the transaction, noting, “We will promote further placements from emerging markets issuers of this type of securities in non-U.S. dollar markets, now that we have demonstrated that the assumption of a portion of counterparty risk associated with cross-currency hedges is feasible. The innovative risk participation structure used in this deal makes very effective use of our balance sheet. Unibanco’s funding proceeds from the financing are several multiples of IFC’s total exposure to the transaction.”
IFC's mission (www.ifc.org) is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. Since its founding in 1956, IFC has committed more than $37 billion of its own funds and has arranged $22 billion in syndications for 2,990 companies in 140 developing countries. IFC's committed portfolio at the end of FY03 was $16.7 billion with an additional $6.6 billion held for participants in loan syndications.
