Safety in numbers

Sometimes insurers need to be reassured. That is especially the case since the implementation of the Solvency II directive, which calls for more scrutiny whenever they engage their money in risky trades. On paper, then, emerging markets are a tricky corner of the planet for such investors.

It is therefore remarkable that, less than nine months after launch, two of them have committed $500 million each to a platform dedicated to financing assets in developing countries pre-selected by the International Finance Corporation.

The latter is seeking to raise $5 billion for MCPP, as the structure is dubbed; it has now garnered about 10 percent of the sum from Prudential’s Asian asset management arm and Allianz Global Investors.

Prior to going to press, IFC documents showed AXA Group was considering a similar pledge, due to go before the organisation’s board in late September, which would push MCPP’s kitty to $1.5 billion.

The next $3.5 billion could be raised in various ways: either by bringing new players into the structure, or by accepting further commitments from initial backers. Either way, $1.5 billion is “enough for us to launch and cover the needs over the near-term”, says Bernard Sheahan, the IFC’s global director for infrastructure and natural resources. The IFC expects to be deploying this initial sum within 18-24 months, during which time it will raise the remaining $3.5 billion, aiming to reach its $5 billion target within about a year.

Once formally launched, MCPP’s assets will be generated through the IFC’s normal business, with transactions executed by the institution automatically picked up by the platform. Essentially, “the insurance companies are acquiring preferential rights to co-finance alongside the IFC”, Sheahan elaborates.

Crucial to the viability of the structure is a three-fold credit enhancement feature.

For one, investors benefit from the “implicit political risk mitigation that you get in a co-investment with an international institution”, Sheahan explains. “The IFC and the World Bank Group are able to [have a] dialogue with the government should issues arise in any way. For a normal bank it’s more difficult.”

MCPP also features a first-loss structure under which the IFC covers the first 10 percent of potential losses – approximately, as this varies depending on the investor – borne by each of the $500 million capital pools. This credit enhancement allows assets slightly sub-investment grade – typical of loans to infrastructure projects in most markets – to rank just above investment grade. “It becomes much easier for insurers to access those assets, which would otherwise be expensive from a due diligence and aggregation perspective,” Sheahan says.

The last piece of risk mitigation is internal to the IFC. The novelty of MCPP means its first incarnation is a costly endeavour that does not allow the institution to meet its usual return target. The government of Sweden, an IFC shareholder, thus created a further first-loss element, whereby the Swedish International Development Cooperation shares any potential losses with the IFC arising from the main credit enhancement structure.

Bottom-line? Insurers stand to collect returns commensurate with comparable investment-grade loans plus 20-50 basis points, Sheahan says. For its part, the IFC will typically receive returns usual to mildly sub-investment grade assets plus 50-100 basis points.

“Through MCPP, insurance companies can add diversification to their portfolios while generating slightly better yield. And it allows them to do that on the back of one IFC due diligence, as opposed to making the effort on individual assets,” Sheahan concludes.