Conference Presentation, Panel, Webinar
Accelerating Securitization in Africa to Finance the SDGs
Milken InstituteAlison Harwood, Lade Araba, Samuel Chasia, Juan Pablo de Mollein, John Schellhaus, Sam Chasia
- The Milken Institute Center for Financial Markets intends to launch the "African Securitization Alliance," a convening body for regulatory bodies including the Capital Markets Authority of Kenya, CREPMF, the SEC of Ghana, and the Capital Market Authority of Uganda, to identify market barriers and implement solutions over the next few years while seeking funding partners.
- Approximately $2.5 trillion or more in private capital is required to finance Sustainable Development Goals (SDGs), a goal that currently faces investor hesitation due to perceived risks in new sectors, countries, and technologies.
- Credit enhancement strategies, including internal mechanisms like trenching and overcollateralization and external guarantees, are expected to mitigate risk, improve credit profiles, and attract risk-averse or mezzanine investors to the African market.
- Garanco plans to provide external credit enhancements in local currency to mitigate exchange rate risks and act as temporary "training wheels" to build investor capacity, with the long-term goal of phasing out guarantees as local capital assumes risk.
- Public third-party providers, including MIGA, US DFC, AFREXIM, and EXIM, are anticipated to continue playing critical roles in blended finance, with MIGA focusing on infrastructure guarantees and DFC offering specialized risk insurance to catalyze private investment.
- The focus on external credit enhancement is projected to be pivotal in scaling funding from billions to trillions by 2030 to close the SDG funding gap, particularly for investment-grade securities in emerging markets and transactions involving sovereign risks below BA3 ratings.
- Garanco intends to engage with issuers six months to one year before market entry to ensure regulatory frameworks and investor capacity are prepared, specifically targeting growth in local currency issuances within the off-grid solar and affordable housing sectors.
- Internal credit enhancement is prioritized for local currency transactions lacking FX or sovereign risks to foster local market development, whereas external mechanisms will be employed for specific risks or to broaden the investor base.
- Asset-heavy sectors such as renewable energy, off-grid solar, transportation, healthcare, and small business loans are identified as prime candidates for securitization in Africa, supported by the use of proxies from US and European markets to address historical data gaps.
- Securitization costs are expected to decrease progressively after the second or third transaction as legal and operational concepts are replicated and institutionalized, enabling future commercial real estate deals to proceed with domestic investors.
- Severe constraints on securitization market development may arise without strong regulations, governance frameworks, and standardized terms for underlying projects, while the role of securitization in post-COVID recovery is expected to be significantly more prominent than prior to the crisis.