Introduction to Workshop on Risk Mitigation for African Financings

1. Introduction to Workshop on Risk Mitigation for African Financings June 22, 2005 Mahesh Kotecha, President Structured Credit International Corp. (SCIC)

2. Objectives – Message

3. Workshop Objectives • To explore African risks and their mitigants using multilateral and bilateral guarantees mechanisms • For African debt and equity financings in local and international capital markets • Key role of structured finance in piercing the sovereign rating ceiling to achieve even triple A debt ratings • 19 African countries are rated but only 4 Investment Grade and 15 Non Investment Grade • To discuss how public-private partnerships can enhance risk mitigation capacity • Public sector guarantors can help achieve investment grade ratings • Private sector guarantors can help achieve triple-A ratings investment grade transactions • Could also foster equity flows • A key challenge is how to increase risk capacity for African financings (e.g., MIGA initiative recommended by Blair Commission)

4. B+ or Lower Rated African Countries

5. BB or Higher-Rated African Countries

6. A Key Message in a Nutshell • African ratings are low • Largely Non-Investment Grade or NIG • Non-Investment Grade markets are expensive and relatively small • More financing can be achieved with Investment Grade ratings • That requires • Risk Mitigation / Guarantees • Structured finance know how • And patience and persistence

7. Risk Mitigation – An Overview

8. Receivable Portfolio Government Seller/Servicer, Originator Project Risk Mitigation / Guarantees Special Purpose Vehicle Lenders / Investors ABS & Infrastructure Bond Structures Concession

9. Risk Mitigation Enhances Ratings • Credit ratings are an assessment of credit-risk by an independent rating agency, i.e., they assess the probability that principal and interest on bonds and other similar instruments will be paid on time • Credit ratings are divided between "investment grade" and "non-investment grade" AAA Prime Investment Grade AA Investment Grade A Risk Mitigation / Guarantees BBB- BB+ Near Investment Grade Non-investment Grade B

10. Forms of Risk / Mitigation Private Financial Guarantee Second Loss Protection Bank LOCs, puts, etc. Recourse to originator Public Sector Credit and PR Guarantee Senior/Subordination Cash Collateral First Loss Protection

11. Sources of Risk Mitigation / Guarantee

12. The Issues • What are the guarantee / risk mitigation products available? • To what extent can each institution help raise the rating of an African financing to investment grade so as to facilitate entry of private sector financial guarantors such as the triple-A rated monolines? • To what extent has each institution leveraged off the guarantee capacity of other official and private sector guarantors through co-guarantees, reinsurance, etc.? • Potential /. actual use of such instruments in international and local capital markets, local currencies, in the SME sector, in bank financings • Increasing cost efficiency and guarantee capacity • Reducing complexity in use of guarantees / risk mitigation instruments • Potential for public – private partnerships such as African EXIM Bank, ATI and GuarantCo • In sum, the costs and benefits of the guarantee / risk mitigation instruments • Their future role in enhancing credit ratings of actual financings (potentially piercing the sovereign rating ceiling)

13. Risk Mitigation – The Panel

14. Knowledgeable Workshop Panel • Moderator - Mr. Mahesh Kotecha, President, Structured Credit International Corp • Ms. Maureen Miskovic, COO, The Eurasia Group • Provides an investor’s risk assessment framework • Ms. Ileana Boza, Head Global Finance, MIGA • Presents MIGA products, aggregate public sector claims data, and interesting African case studies • Mr. Jean-Louis Ekra, President, African Export-Import Bank • Presents an African experience in risk mitigation • Mr. Kenneth Tinsley, Vice-President Credit Underwriting, U.S. EXIM • Presents EXIM products and experience

15. Appendix

16. Role of Public Sector Guarantors • Multilaterals have been active as triple-A credit enhancers for nearly a decade but volume of activity is relatively modest • World Bank Group and regional development banks • OPIC, EXIM, SIDA, etc. • Rating agencies rely on the umbrella provided by the multilateral lender’s “preferred creditor” status to pierce the sovereign ceiling • The umbrella concept becomes less convincing with increasing volume of issues benefiting from the multilateral’s preferred creditor status • Utilizing products to support securitization • A/B loan structures • Preferred creditor status structures • Full wrap in domestic issues ? • Combination of political risk guarantees and private sector guarantees to achieve top ratings (constrained by costs of two guarantees)

17. Role of Monolines and Multilines • Instruments • Full guarantees of principal and interest are most common • Partial guarantees have been provided, especially for such ABS as those backed by home equity (second mortgage loans) • Maturity guarantees (to provide certainty on maturities) • counterparty guarantees • “Supply guarantee” to cover export performance risk • Requirements vary • Monolines require a investment grade rating before the guarantee (Foreign currency rating for FX transactions; LC for domestic transactions) • Multilines can go to lower rated transactions and prefer high non-investment grade transactions before the guarantee

18. For More Financing, African Risk Mitigation Must Grow