amerms course 4: obtaining funds from new financial instruments - ppt 1
DESCRIPTION
FULL TITLE: Obtaining Funds from New Financial Instruments and New Tools for Managing Asset and Liabilities ROOM: Aberdare Hall FACILITATED BY: MFX Solutions Mr. Howard Brady Mr. Brian Cox Ms. Sonia MukhiTRANSCRIPT
Making African drums inColombiaPhoto Johan Sauty © BlueOrchard
Obtaining Funds from New Financial Instruments and New Tools for Managing Assets and Liabilities.
BlueOrchard Finance SA
10 April 2010
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Workshop schedule
9:00 9:20 20 Introduction to course and Expectations
9:20 9:30 10 Introduction to BlueOrchard Finance
9:30 10:20 50 Financing: evolution, options and actors
10:20 10:30 10 BO system demonstration
10:30 10:50 20 Coffee break
10:50 11:30 40 Financing: the specifics of loans
11:30 12:00 30 Mock loan negotiation
12:00 12:30 30 Questions and answers/conclusion
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BlueOrchard is a leading commercial microfinance intermediary, providing loans to microfinance institutions through its subsidiary BlueOrchard Finance S.A. and investing in the equity of microfinance institutions and microfinance network funds through its subsidiary BlueOrchard Investments Sàrl.
Our missionBlueOrchard’s mission is to empower the poor world-wide and improve their quality of life by promoting income-generating activities through private investments in microfinance
Our philosophyWe are convinced that microfinance investments can simultaneously produce social progress and financial returns. This is what makes microfinance a powerful tool to sustain economic development and alleviate poverty; as well as an attractive asset class, worthy of inclusion in any diversified investment portfolio strategy.
Our approachWe provide innovative financial instruments and solutions for placements in microfinance , bridging the gap between capital markets and microfinance institutions. We generate profitable returns on investments while supporting the development of millions of promising small enterprises.
We believe in creating value through solid long-term relationships by providing debt and equity to microfinance institutions in all stages of their development. We share their mission to provide financial services to those who have few resources and excluded from mainstream financial services. We regard our cooperation with them as the primary means to support financial and social integration worldwide.
Our valuesWe believe in establishing trust through transparency. We attach high importance to our capacity to innovate. We treasure our integrity and professionalism. We work with zeal and enthusiasm.
About BlueOrchard
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Total investment portfolio: as of 31 December 2009, over USD 1 billion invested in more than 40 countries and over 125 MFIs (both loans and equity investments)
Robust track record: over 800 loans made to MFIs since inception in 2001, without any defaults to date
Qualified, motivated staff over 40 with presence in Geneva, New York, Lima: 10 nationalities, 10 languages spoken, vast field experience in microfinance
Wide product range: debt funds, collateralized debt obligations (CDOs), private equity fund and advisory to MFIs
Targets top 300 MFIs world-wide
Investors: institutional investors, private banking clients
Swiss company specialized in microfinance investment products and services
Stable, committed shareholders' base and board
BlueOrchard – world leader in commercial microfinance
We are convinced that microfinance investments can simultaneously produce social progress and financial returns. This is what makes microfinance a powerful tool to sustain economic development and alleviate poverty;
as well as an attractive asset class, worthy of inclusion in any diversified investment portfolio strategy
Total Assets under Management in Mio USD(as of 31 December 2009)
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
2001 2002 2003 2004 2005 2006 2007 2008 2009
Equity
Fixed Income
Structured Products
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Situation as of December 2009, figures include both debt and equity placements
BlueOrchard office
Countries where our exposure is less than 2% of aggregate managed portfolios
Countries where our exposure is between 2% and 7% of aggregate managed portfolio
Countries where our exposure is over 7% of aggregate managed portfolio
BlueOrchard’s global reach
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• Evolution and options for financing• Types of lenders• Lender due diligence process• Loan documentation• Loan negotiation
Key discussion points
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DEBT
SUB-DEBT
EQUITY
Tier 2
Tier 1
DEPOSITS
MFI « XYZ »
MFI « XYZ »
MFI « XYZ » MFI « ABC »
MFIs - Evolution in Financing needs as they grow…
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Various options for financing
Senior Unsecured Debt
Subordinated Debt
Senior Secured Debt
Deposits
Debt Preferred Shares
Common SharesEquity
Risk to investors
Cos
t to
MF
I
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Choosing financing: what type of loan?
Term Loans: Fixed maturity loan, often with an amortization schedule
Senior Secured: Medium term (~1-3 years), with collateral
Senior Unsecured: Medium term (~1-3 years), no collateral
Subordinated: Long term (~5-10 years), no collateral
Revolving Credit/Credit Lines: For seasonal demand/ liquidity crunch; ability to borrow and repay repeatedly up to the agreed limit
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• Evolution and options for financing• Types of lenders• Lender due diligence process• Loan documentation• Loan negotiation
Key discussion points
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Microfinance Investment Vehicles
MIVs
Development Agencies, Foundations & NGOs acting as investors in
microfinance
Regional Banks - local and second tier
Private local investors
International MarketsDomestic Markets
MFI Funding
Private, Social, Commercial, Institutional
Investors
Domestic vs. international markets
Source of Slide: MicroRate – Review of Microfinance Investment Vehicle Market(October 23, 2006)
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Microfinance institutions: different levels of maturity today - promising perspective for tomorrow
Tier1
Tier 2
Tier 3
Tier 1: solid, well managed, profitable, fast growing microfinance institutions
Tier 2: promising, transforming and growing microfinance institutions
Tier 3: Start-ups, NGO, small scale, niche player microfinance institutions
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• Evolution and options for financing• Types of lenders• Lender due diligence process• Loan documentation• Loan negotiation
Key discussion points
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Investment Process
Risk Management
STEP 2
Due Diligence
STEP 3
Risk ScoringSTEP 4
Portfolio Management
STEP 1
Qualification of new Investments
BlueOrchard’s 4-step investment process and risk management
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STEP1 & 2
Qualification of Invest.
& DD
Comprehensive data collection and on-site due
diligence visits
Audited financial statements of previous 3 yearsBusiness Plan
External rating reports
MFIs eligibility criteria
3 year track recordTotal assets > $1 MN
Operational self-sustainabilityProfitability
Acceptable credit risk
Investments are considered within the context of the
Country Risk Profile
STEP 3
Risk Scoring
STEP 4
Portfolio Management
BlueOrchard’s internal rating
24 quantitative and qualitative factors, including the following:
Quality of managementStrategy and business plan
Corporate governance Transparency
Staff and organizational infrastructure
Liquidity and funding Currency managementBalance sheet ratios
ProfitabilityLoan portfolio management
Social impact
BlueOrchard’s Credit Committee
Loan proposal submitted to credit committee:
Review of the MFI’s business strategy, financial record, past results and other critical factors relevant to the credit decision
Decision on interest rate and loan terms
Portfolio management
Loans to MFIs are considered within the context of appropriate
diversification limits and impact on overall portfolio return and risk
BlueOrchard’s 4-step investment process and risk management
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BlueOrchard’s reporting system
- What?Financial (Balance Sheet and Income statement) and Operational data (Portfolio, offices, staff…)
- When?Captures monthly, semi-annual and annual data
- What for?Analysis and monitoring of performance
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Borrower’ objectives
• Availability of funds• Favorable financial
terms• Minimal payment
burden• Ability to comply with
all terms of loan agreement
Balancing Borrower and Lender objectives
Lender’s objectives
• Conditions of disbursement• Ability to monitor and take action if necessary• Have enforceable claims if borrower defaults• Reputation/Liability
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• Evolution and options for financing• Types of lenders• Lender due diligence process• Loan documentation• Loan negotiation
Key discussion points
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Term sheet: preliminary document for negotiations which sets forth important terms of loan: interest rate, repayment period, etc = genetic code of loan agreement, but NOT binding agreement!
Negotiation is at term sheet stage
Loan agreement: most common form of contract
Promissory Note: only borrower signs (Note issuer) and only borrower undertakes obligation under it (pay loan, timing, etc).
Benefits the lender: more liquid (transferrable) and rights/obligations easier to enforce than for loan agreement
Understanding types of loan documentation
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• Interest rate: Fixed vs. Floating rate• Disbursement: Way in which loan is disbursed (availability, single
vs. multiple disbursements)• Repayment: Way in which loan is repayed (amortization, bullet,
grace period, etc)• Voluntary prepayment: often not accepted, but can be with a fee.• Overdue payments of principal or interest• Fees: arrangement fees, commitment fees • Covenants: promises from borrower about conduct and financial
situation after disbursement. Affirmative or negative.
Loan Agreement provisions
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• Evolution and options for financing• Types of lenders• Lender due diligence process• Loan documentation• Loan negotiation
Key discussion points
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MFI Lender
- MFI CEO - Lender’s representative
- MFI lawyer - Lender’s lawyer
Split in groups and discuss the arguments raised.
Mock negotiation of a commercial bank loan between
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• Commercial Loan Agreements: A Technical Guide for Microfinance Institutions
http://www.microfinancegateway.org/gm/document-1.9.28341/36554_file_36554.pdf
• MFI Capital Structure Decision Making:http://www.cgap.org/gm/document-1.9.2735/BR_MFI_Capital_Structure_Decision_Making.pdf
• How Should Microfinance Institutions Best Fund Themselves?http://www.iadb.org/sds/doc/intD4C.PDF
Additional reading
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Thank you!
BlueOrchard Finance S.A. 32 rue de Malatrex, 1201 Geneva, SwitzerlandTel.: +41 22 596 4777Fax: +41 22 596 [email protected]
BlueOrchard Finance USA, Inc. 1140 Broadway, #304, New York NY 10017, USATel.: +1 212 944 8748, Fax: +1 212 944 [email protected]
BlueOrchard Finance America Latina S.A.C. Pasaje Mártir Olaya 129Lima 18, PeruTel.: + 511 255 [email protected]
www.blueorchard.com
Raising cattle in MongoliaPhoto Johan Sauty © BlueOrchard