Microfinance Loans Becoming More Mainstream

On May 4th, investment bank Morgan Stanley and BlueOrchard Finance announced the launch of the first microfinance structured deal rated by a major rating agency; Standard & Poor's(S&P). The Collateralized Loan Obligation (CLO) known as "BlueOrchard Loans for Development 2006-1", or BOLD, raised a total amount of $108 million-equivalent. The loans will be disbursed to 21 MFIs, in 13 different countries, using 5 different currencies. The MFIs recieving the loans are based in the following countries; Azerbaijan, Bosnia, Cambodia, Colombia, Georgia, Ghana, Kenya, Mongolia, Montenegro, Nicaragua, Peru, Russia and Serbia.

This deal offers promising funding news for the industry on several fronts:

BOLD represents the largest single commercial investment transaction in the history of microfinance and may lead the way to similar deals in the future.

Currency Exchange risk is a big issue for many MFIs accepting foreign investment. Approximately 20% of the BOLD portfolio was in local currency, Mexican peso, Colombian peso and Russian rouble (remainder in USD and EURO) with local rates fixed for a period of five years. BOLD uses currency swaps to hedge the risk for investors.

A Standard & Poor's rating of the deal increases the number of investors who are able to buy it, possibly boosting the amount of cash available for microfinance purposes.

The first involvement by a major investment bank, Morgan Stanley, bringing its know-how in structuring an investment product to the microfinance industry.

CLOs are a type of collateralized debt obligation that sell bonds backed by repayments on loans. Investors can buy bonds with different credit ratings depending on their exposure to any losses in the underlying portfolio.

Standard & Poor's has assigned preliminary ratings of AA and BBB to $58 million-equivalent of floating- and fixed-rate notes that will be issued by BOLD 2. BOLD 2 will also issue two tranches of unrated notes. The deal should close at the end of May. BOLD 2 will then issue the notes and lend the proceeds, in the form of unsecured loans, to the MFIs.

Comments

[Martha Mwangi]

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