As the insurance take-up of major world economies reaches saturation, large re/insurers have been looking further afield for expansion opportunities. Latin America, Eastern Europe and South-East Asia have all attracted the gaze of large industry players keen to develop their international reach and be early participants in emerging markets. On the other hand, many of the governments in these regions are keen to encourage overseas investment, and the re/insurance community has been playing a major role in providing cover for a variety of projects.
One of the latest offerings is a new investment grade emerging markets collateralised debt obligation (CDO), put together by Centre Group, Morgan Stanley and TCW Asset Management, believed to be the first to use investment grade emerging market debt as collateral.
The three organisation started developing the $304m transaction a year ago, with Centre providing $30m capacity. “Centre's role in the transaction was twofold,” explained Richard Timbrell, who led the Centre team. “We supported the equity and mezzanine tranches by putting up capital, and acted as an advisor.” Centre is working alongside Moscow Narodny Bank and other members of the CDO advisory board to recommend transactions, such as project finance loans, future flows bonds, sovereign debt, asset-backed securities and investment grade corporate bonds, all US dollar denominated.
The CDO facility will be used to back a globally diversified set of assets, said Mr Timbrell. There are restrictions on the amount of assets held in certain regions, for example, Asia will account for a maximum of around 30%, while Eastern Europe will account for up to 40%. “Centre focuses on identifying value in markets globally,” he explained. “We put capital to work where we can earn attractive rates of return relative to the risk.”
TCW is a highly rated emerging market manager that specialises in emerging market credits. “TCW has a good understanding of value in the sector,” said Mr Timbrell, while Morgan Stanley placed the CDO's securities and obtained ratings from Moody's, Standard & Poor's and Fitch. “The ratings agencies deserve a lot of credit for taking the time to understand this innovative structure,” he said. “There hasn't been much done with investment-grade debt from emerging markets because the sovereign debt ceiling is below investment grade. But companies that operate in emerging markets find ways to finance themselves at investment grade rates.”
Insurance wraps from highly rated companies can often boost the attractiveness of financial instruments that otherwise would be shunned by investors because of sovereign rating ceilings.
This facility is by no means the first time Centre Group has been involved with the emerging market sector. In 1999 it insured Asian Recovery CBO1 Ltd for $25m of issued mezzanine securities, bringing an otherwise unrated offering up to AA grade. The collateralised bond obligation deal was arranged by Morgan Stanley and was set up to buy a diversified portfolio of Asian corporate bonds. “In a sense, what we have done is provide a catalyst to create a more active market in Asian corporate debt securities,” Bryan Bowers, Centre's managing director, said at the time. “In the longer term, bond issuers will see a more active market which will bring down pricing levels and ultimately reduce their cost of borrowing.”
More recently, Centre has provided a payment undertaking for Eastern Europe, enabling the development of a galvanising plant in Tallin, Estonia. These types of project finance loan wraps are critical for infrastructure development, and international credit agencies, both private and government-owned, have for years been providing support for both project finance, political risk and export credit exposures.
Centre's parent, Zurich, is also a player in the political risk insurance game. In July, Zurich North America's emerging market solutions group issued a second political risk insurance policy supporting a bond issue by Petrobras International Finance Co Ltd (PIFCO), a subsidiary of the Brazilian oil and gas company. By providing a typical political risk cover – including currency inconvertibility, transfer and expropriation of funds – Zurich boosted the bond rating, and noted that the take-up of the $600m, 10-year bond was swift, despite Petrobras' recent $500m rig loss.
Most recently, a new political risk insurance agency, Africa Trade Insurance Agency (ATI), has been set up by the Common Market for Eastern and Southern Africa (COMESA) and the International Development Agency (IDA), part of the World Bank, to provide political risk insurance and other financial instruments to support trade with and investment in Africa. Headed by former Lloyd's underwriter Bernie de Haldevang, ATI is expected to issue its first policy any day now. Seven African governments, including Tanzania, Malawi, Rwanda, Uganda, Zambia and Kenya, have joined forces to underwrite the agency, which has $105m in funds.
The ATI launch followed hot on the heels of the Overseas Private Investment Corp (OPIC) issuing its first political risk insurance for Nigerian power plant development. OPIC agreed to provide up to $200m in coverage for AES Sirocco Ltd, a subsidiary of AES Corp of the US, to construct a 270MW power plant near Lagos. “This project will help Nigeria meet a critical demand for electrical power generation, and at the same time enable the Nigerian government to demonstrate to US investors its commitment to provide investment opportunities,” commented OPIC president and CEO Peter Watson. “OPIC is pleased to make this important contribution to Nigeria's first independent private power project and to Nigeria's ongoing economic development.”
Earlier this year, the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, issued its 500th guarantee for investment in a developing country, bringing its total guarantee level to over $7.7bn. “This symbolises our unflagging commitment to reducing poverty by facilitating foreign direct investment into the world's developing economies, which are often ignored by investors,” commented MIGA's executive vice president, Motomichi Ikawa. Since issuing the $61m guarantee for the upgrade of investments of three electricity companies in Moldova, MIGA has entered into a series of memoranda of understanding with export insurance bodies to promote international investment in developing countries. Among recent arrangements, the Korean Export Insurance Corp (KEIC) has agreed with MIGA to provide coinsurance and reinsurance for each others' projects. “We believe this collaboration will play a strong role in increasing the capacity of the political risk insurance market to provide coverage to Korean investors,” commented KEIC chairman and president Tai-Jin Lim. “We look forward to collaborating with MIGA in this endeavour.”
In recent weeks, MIGA has also signed memoranda of understanding with the Greek Export Credit Insurance Organisation and PROPARCO, the development finance institution and a member of the French Development Agency, bringing the number of these arrangements up to 19. “We continue to collaborate with our public and private sector counterparts globally to really leverage our role in promoting foreign investment into developing countries,” said MIGA's vice president for guarantees, Roger Pruneau, at the PROPARCO signing in Paris, at the same time as both agencies reconfirmed their commitment to work closely with the French export credit agency COFACE.
The private sector, which often works alongside public agencies in coinsurance or reinsurance arrangements, is continuing to develop in this sector, despite concerns about a global economic slowdown. Broker Willis has recently created a new trade finance team within its structured financial solutions division to arrange finance, minimise risks (particularly credit and political risks) and accelerate cash generation for clients involved in the import/export sector. Willis COO Richard Bucknall described the sector as a “growth area”. Certainly, demand seems to be on the rise; whether supply will continue at the current level in changing market conditions remains to be seen.