While these transactions bear a resemblance to traditional securitizations, which capture payment streams from credit cards, car loans or mortgages, the MFI securitization is backed by cash flows from loans for looms, handcarts, cows and pigs. Because these assets are not creditworthy in the traditional sense, the BlueOrchard sponsors secured a $30 million guarantee from the Overseas Private Investment Corp. (OPIC), a U.S. government export-finance agency. OPIC’s backing made three-quarters of the instruments issued as safe as U.S. Treasuries. Institutional investors and individuals willing to take a gamble purchased the rest.
| The currency risk of these transactions is
so thorny that it put off even such a philanthropically
inclined risk taker as George Soros. |
The bonds paid their first interest at the end of January. The OPIC-backed bonds yielded 55 basis points over U.S. Treasury bills. The bonds without an OPIC backing fell into three groups, each with a higher level of risk, which yielded Treasuries plus 100 basis points, Treasuries plus 200 basis points and Treasuries plus 400 basis points.
MFIs boast a 95 percent loan repayment history. This represents a lower default rate, over microfinance’s 30-year history, than credit cards, student loans and even U.S. corporate bonds. MFI officials claim that microcredit recipients diligently repay their loans even in war-torn countries. McKinley claims that when Indonesia experienced its economic meltdown in the late 1990s, Bank Rakat Indonesia saw its loan business succeed in its core market of low-income borrowers, while large and midsize businesses defaulted in large numbers.
Yet without a long track record of default data verified by independent third parties such as ratings agencies, investors will remain leery. Damian von Stauffenberg, founder and CEO of MicroRate, the first rating agency for microlenders, says they are right to worry. “Whenever anybody talks to you about repayment rates, be suspicious,” he advises, noting MFIs can manipulate the figure by various means, which include simply reissuing delinquent loans. Von Stauffenberg says the figure investors should heed is how much of a portfolio’s loans are more than 30 days in arrears. Five percent or less is favorable.
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