IFC Closes First SRT With BBVA Mexico as It Eyes New Markets, Smaller Banks

The International Finance Corp., or IFC, has completed its first significant risk transfer, or SRT, transaction with BBVA Mexico, providing 1.795 billion Mexican pesos ($103.5 million) of credit protection on a MXN 14 billion reference portfolio of SME loans.

The SRT is structured as an unfunded financial guarantee, with IFC taking the mezzanine tranche and BBVA retaining both the senior and junior tranches. The guarantee has a six-year maturity, allowing the bank to efficiently reduce its regulatory capital requirements.

The transaction marks IFC’s fourth SRT in Mexico but its first in collaboration with BBVA.

“I think that now was the right time to have this transaction,” Vittorio Di Bello, global director of structured products, clients and innovations at IFC, told Octus. “This is the first SRT that we do with BBVA and that is why we are very proud to have this transaction. BBVA is an important partner for us, especially in Mexico, where it is one of the major lenders, especially for SMEs.” “SMEs for us are a super important aspect, and the asset class is at the core of the strategy, not only for IFC but for the World Bank Group,” Di Bello said. “SMEs are where jobs are created, and a job is not only income, it is dignity.”

He then pointed to the employment challenge facing developing economies, noting that over the next decade, 1.2 billion young people are expected to reach working age in developing countries, while current projections suggest only around 400 million jobs will be available to them.

“Closing that gap also through SRT is a specific priority of our work,” he said.

Under the Mexican transaction, 25% of the capital redeployed by BBVA Mexico will be directed towards SMEs owned by women, in full alignment with the development bank’s mission to support lending into the real economy.

Beatriz Muñoz, CFO of BBVA Mexico, commented, “This transaction represents an important step forward in BBVA Mexico’s active capital and risk management strategy. Our collaboration with IFC will strengthen our capacity to continue supporting SMEs, a segment that is essential for employment generation, productivity, and the country’s economic development.”

Regulation and Improving Market Infrastructure

While this transaction is bilateral, one of IFC’s longer-term objectives revolves around mobilizing private capital into emerging markets.

“The size of the gap that currently exists in the development world is huge, and we cannot fill that gap with the balance sheet of the IFC, nor the balance sheet of the World Bank. We try to make a difference by mobilizing other investors’ capital, such as institutional investors, asset managers, pension funds, even family offices,” Di Bello said.

“That is why my team is actively scoping the market with an innovation perspective, to see how we can change the traditional players in credit risk transfer,” he added.

IFC has already pioneered structures that bring new types of investors into SRTs, including recent transactions in Chile and Uruguay, where private market investors participated in the risk transfer.

With SRT frameworks still less refined in such emerging markets, IFC often shares its expertise with local governments to help build the conditions for the product to flourish. Through its Upstream initiative, it works to lower barriers for private investments and promote further growth.

“IFC Upstream is the ability for us to cooperate as a group, and to cooperate with local governments also, to make sure that certain regulatory frameworks are even improved as we go,” Di Bello noted. “In some other countries, we have even provided technical assistance to the authorities to show how important innovation is in this field. It is especially important to have a capital market that works well, efficiently, and allows these kinds of [credit risk transfer] products to be improved.”

In the case of Mexico, IFC said the jurisdiction is not new to credit risk transfer and that its previous transactions have significantly helped to establish a market.

The latest trade with BBVA brings IFC’s credit risk transfer activity to a total of $3.1 billion of investments across 21 transactions, covering protected portfolios of approximately $19 billion. The transactions include both single country deals as well as global portfolios.

The covered jurisdictions include Mexico, Uruguay, Chile, Brazil, Poland and Romania, although IFC is now looking to broaden its geographical footprint.

“Last year only, the IFC team worked really hard and we concluded six SRT or SRT-related transactions for investments that totalled $1.5 billion, involving protected portfolios of approximately $7 billion in US dollars,” Di Bello noted.

“We are now looking at expanding in Africa and other jurisdictions like Turkey and Asia. I believe that South Africa now is quite mature for an SRT-related credit risk transfer transaction.”

Tier-2 Banks and NBFC Opportunities

One of the next prospective opportunities that IFC is targeting sits with smaller banks, particularly in markets where banks have ample liquidity but might face pressure to optimise regulatory capital.

“We are also looking at going down to the level of banks, to go to even tier two banks and I can say that I see a huge demand coming from such banks, especially in those jurisdictions where you have an excess of liquidity,” Di Bello explained. “When you do not have much need of financing, but you need to have a request to have a capital optimization, especially for smaller banks. We are actively looking into that.”

The strategy could significantly widen IFC’s potential SRT counterparty universe beyond the large, established lenders that have historically dominated emerging market credit risk transfer. Moreover, a successful move at smaller banks could also open a new route into non-bank financial companies, or NBFCs.

“In India, for example, there are some NBFCs that are even bigger than banks. You will see more NBFCs present globally in all these [developing] countries. We will be going down the tier of banks, but also expanding geographically to include more countries and asset classes in our portfolio,” Di Bello said.

The market can also expect to see the IFC gunning at more thematic SRTs, particularly transactions that provide capital relief against asset classes aligned with its main objectives.

Di Bello said that such asset classes can include water, sanitation and waste management as these are areas where de-risking could help attract additional private capital to developing jurisdictions.