JPMorgan and HSBC Target New Business in $1.5 Trillion MDB Securitization Market

JPMorgan Chase and HSBC are among the major international banks positioning themselves to facilitate a growing market for structured financing transactions as multilateral development banks (MDBs) and development finance institutions (DFIs) turn to securitization to expand their lending capacity, Bloomberg News reported on Tuesday.

The shift follows an October 1 agreement by 30 MDBs and DFIs to make greater use of synthetic risk transfers (SRTs) and collateralized loan obligations (CLOs) as part of efforts to achieve capital relief and mobilize additional private investment.

The agreement represents a significant development in how multilateral lenders intend to manage their balance sheets and finance projects across emerging and frontier markets. It also creates opportunities for commercial banks, insurers, asset managers and institutional investors to participate in transactions involving development finance portfolios.

The move comes amid declining financial support from some traditional donors in advanced economies, increasing pressure on development institutions to identify alternative sources of capital for infrastructure, climate investment and economic development.

Faheen Allibhoy, head of JPMorgan’s development finance and advisory team, described the agreement as a major step for the sector. “It’s “quite a big leap forward” for the MDB sector, and it’s “created an opportunity for us,” Allibhoy said.

Himesh Patel, managing director and head of public sector banking for Europe, the Middle East and Africa at HSBC, said the development would create opportunities across transaction structuring, risk distribution, capital markets execution and investor placement.

Securitisation creates a new financing channel

The instruments being considered allow MDBs and DFIs to transfer portions of the credit risk associated with their loans or bonds to third parties, including insurance companies, hedge funds and other institutional investors.

Synthetic risk transfers enable lenders to transfer specified credit risks without necessarily selling the underlying assets. Collateralised loan obligations, meanwhile, involve pooling loans and issuing securities backed by the cash flows from those assets, with different levels of risk and return.

For development institutions, these structures can reduce the amount of capital required to support existing portfolios, potentially creating additional capacity for new lending.

The scale of the opportunity is significant. MDBs collectively hold approximately $1.5 trillion in development assets globally and had already completed several structured financing transactions before formally committing to expand the use of these instruments.

Bart Raemaekers, director for private sector mobilisation and blended finance at the Asian Development Bank, said attracting third-party capital serves two purposes: preserving the institution’s own capital and bringing private investors into markets traditionally financed by development banks.

“If we attract third-party capital, that preserves our own capital,” Raemaekers said. “But second, it’s a developmental objective in and of itself to bring private capital to our markets so that in the long run, private capital is able to fund our projects rather than MDBs.”

For JPMorgan, the growing emphasis on capital efficiency reflects the pressure on development institutions to expand their financing capacity relative to the resources available.

Commercial banks position for expanding transaction activity

The adoption of structured financing by MDBs is creating potential business opportunities for commercial lenders beyond traditional loan origination.

Banks can participate in arranging transactions, structuring risk-transfer instruments, distributing securities and connecting development finance institutions with institutional investors.

HSBC’s Patel said the instruments could help address some of the barriers that have historically discouraged institutional investors from allocating capital to emerging-market development projects.

Goldman Sachs has also highlighted the importance of MDB financing structures in attracting private investment.

Kara Succoso Mangone, head of the bank’s sustainable finance group, said development institutions could use catalytic capital to attract private investors, bridge market gaps and support the expansion of new technologies and solutions.

Deutsche Bank also welcomed the initiative, describing the emphasis on clearer methodologies and recognition of guarantees, risk-transfer mechanisms and capital-market funding programmes as a positive development.

However, commercial participation will depend on the availability of projects that meet investment requirements and the ability of development institutions to structure transactions that offer investors sufficiently transparent risk and return profiles.

Transparency could attract institutional investors

One of the historical constraints on institutional investment in development finance has been limited access to consistent information about portfolio performance, defaults and credit losses.

That situation is beginning to change as MDBs and DFIs provide more detailed information about their lending activities, potentially making their portfolios easier for external investors to assess.

Luca Paonessa, lead portfolio manager for credit risk-sharing investments at Dutch pension manager PGGM, said greater transparency could increase institutional investors’ willingness to participate in MDB securitisation transactions.

“The main problem was that development finance was considered kind of a black box from the point of view of institutional investors,” Paonessa said.

He added that greater disclosure of default rates, losses and loan origination data was making the sector more accessible to investors.

PGGM conducts detailed due diligence on potential partner banks before participating in transactions. Its assessment includes how institutions evaluate credit risk and monitor the performance of projects within their portfolios.

Paonessa said the pension manager relies heavily on quantitative analysis, internal risk assessments, rating models and historical data when pricing transactions.

For institutional investors, access to reliable performance information is essential to determining the risks associated with development finance assets and evaluating whether expected returns justify the capital committed.

Insurers could play a larger role

The growing complexity of structured development finance transactions is also creating opportunities for insurance companies and risk advisory firms.

Cecilia Tse, director for risk, climate and sustainability solutions in Asia Pacific at insurance broker Aon, said the firm was engaging with banks exploring MDB securitisation transactions to help them understand the risks associated with underlying projects.

Insurance can help address specific risks that affect the bankability of infrastructure and development projects. This includes supporting measures that make assets more resilient and insurable, potentially improving their attractiveness to lenders and investors.

Tse said the objective was to ensure that project owners build resilient assets that are more readily insurable and therefore more bankable.

The participation of insurers could become particularly relevant for infrastructure and climate-related investments in markets where physical, operational and environmental risks can complicate financing.

Concerns over risk allocation and development impact

Despite the potential benefits, the expansion of securitisation in development finance has raised questions about how risks and returns will be distributed between public institutions and private investors.

One concern is that transaction structures could allow private investors to capture relatively high returns while assuming a smaller share of potential losses, leaving public institutions more exposed to downside risks.

A recent paper by ODI Global, a London-based development think tank, argued that the amount of private capital mobilised should not be confused with the amount of private risk actually assumed.

The distinction is important because the development impact of these instruments depends not simply on how much private financing is attracted, but also on whether private investors take on meaningful risks and whether the transactions generate additional funding for development projects.

Source: Africaneconomyinc