Accelerating Securitization in Africa to Finance the SDGs

Milken Institute African Securitization Alliance Launch

• The Milken Institute Center for Financial Markets is convening the "African Securitization Alliance" to mobilize private capital for Sustainable Development Goals (SDGs) in Africa.
• Founding members include regulatory bodies from Kenya (Capital Markets Authority), Ghana (Securities and Exchange Commission), Uganda (Capital Market Authority), and the West African Regional Council for Public Savings and Financial Markets (CREPMF).
• The alliance aims to identify market barriers, educate stakeholders, and foster collaboration between governments, private issuers, rating agencies, and development partners.
• Future activities include a workshop with the Ghana Securities and Exchange Commission focused on a recently executed government securitization transaction.

Core Concepts of Credit Enhancement

• Credit enhancement is fundamental to securitization, serving to mitigate risk, improve credit profiles, and attract risk-averse institutional investors.
• Enhancement mechanisms are categorized into internal (structural) and external (third-party) instruments, which are often used in tandem.
• Internal mechanisms include:
  • Tranching: Subordinating cash flows to create senior, mezzanine, and junior tranches, allowing different risk appetites to be served.
  • Overcollateralization: Securing a bond with assets exceeding the debt value (e.g., $1 billion in assets backing a $500 million bond).
  • Excess Spread: Using the difference between asset yields and investor interest payments as a buffer.
  • Cash Reserve Accounts: Holding funds to cover principal or interest payments during liquidity shortfalls.
  • Trigger Mechanisms: Features that accelerate payments or reallocate cash flows upon specific adverse events.
• External mechanisms involve third-party providers such as guarantees, insurance, letters of credit, and partial credit enhancements.
• Guarantors like GARANTCo aim to provide "training wheels," allowing investors to gain exposure without bearing full risk, with the ultimate goal of investors assuming risk independently as markets mature.

Role of External Credit Enhancement in Blended Finance

• Convergence defines external credit enhancement as "blended" when provided by public institutions on concessional terms to catalyze commercial investment.
• Third-party guarantees allow assets with lower underlying ratings to achieve investment-grade status, unlocking access to regulated institutional investors.
• Key providers identified include GARANTCo (most frequent for guarantees), MIGA (World Bank), U.S. DFC (formerly DCA), Afreximbank, and various Export Credit Agencies (ECAs).
• Guarantors often target specific risks, such as sovereign non-honor or political risk, which internal structures cannot easily mitigate.
• The strategy involves using guarantees to bridge the gap between perception of risk and actual risk, facilitating "learning by doing" for local investors.

Case Studies of Credit Enhancement Application

• Bayfront Infrastructure Capital (Asia-Pacific/Middle East):
  • Securitization of $458 million in bank syndicated senior loans across 37 infrastructure projects in 16 countries.
  • Utilized a four-tier structure with a first-loss tranche held by the sponsor, plus external guarantees from the Singapore Ministry of Finance and MIGA to cover sovereign and political risks.
• Acorn Holdings (Kenya):
  • Issued a $41 million green bond for student housing, the first green certified bond in East Africa.
  • GARANTCo provided a 50% partial guarantee on principal and interest, enabling a rating above the Kenyan sovereign ceiling (B1) and allowing cross-listing in London and Nairobi.
• Renewable Energy Deal (India/Philippines):
  • Raised $60 million via synthetic tranches indexed to Indian Rupee and Philippine Peso, settled in USD.
  • GARANTCo provided a 100% guarantee, allowing the bond to carry the guarantor's A1 Moody's rating despite the underlying currency risk.
• NCIA Bank (Côte d'Ivoire):
  • A $40 million five-year ABS for SME loans where internal enhancement was preferred due to the local currency focus and lack of sovereign risk.
  • The structure employed seven internal layers: overcollateralization (35%), initial excess spread (4.79%), cash reserve accounts, cash trapping, originator commitment to replace non-performing loans, a 25% reserve portfolio for loan replacements, and a liquidity line.
  • The transaction was oversubscribed by domestic investors, proving the viability of internal-only structures in emerging local markets.

Market Dynamics, Challenges, and Forward-Looking Statements

• Replication over Cost: While upfront costs for structuring and enhancement are high, successful markets (e.g., South Africa, Mexico, Brazil) achieve cost reductions through the replication of similar transactions.
• Data Gaps: A critical barrier to securitization is the lack of performance data for novel asset classes (e.g., off-grid solar, digital lending); investors often rely on proxies from other jurisdictions.
• Enabling Environment: Successful securitization requires strong legal frameworks (e.g., Kenya's 2017 ABS law), standardized terms, and active regulatory engagement.
• Sector Opportunities: Growth is expected in asset-heavy sectors including renewable energy, affordable housing, healthcare, transportation, and small business loans.
• Local Currency Focus: There is a strategic shift toward local currency issuance to match local asset cash flows, reducing the need for external FX hedging guarantees.
• Market Development Strategy: Guarantors and DFIs are increasingly intervening early (6–12 months pre-issuance) to help issuers build bankable transactions and educate regulators, rather than waiting for ready-to-issue deals.
• Future Outlook: The IFC anticipates securitization will play a significantly expanded role in post-pandemic recovery, leveraging existing asset portfolios to expand the investor base.