Syndications: A shared perspective?
Another way of mobilizing finance is through syndications, whether with other impact investors, commercial banks, or other parties, all with the aim of maximizing impact through catalyzing third-party capital for emerging markets.
Syndicated facilities differ from bilateral facilities (in which there is one investor and investee) in that there is more than one lender involved, working together to pool funds for the borrower. Various co-financing arrangements are possible, such as an A/B loan program or a parallel loan program. There can be many reasons to undertake a syndicated facility, at least from the side of the lenders—from spreading or mitigating the risk, to diversifying the funding pool of the client. Within the sphere of development finance, syndications therefore function as a key factor when it comes to mobilizing capital, allowing lenders to attract investors more readily to their markets. That said, while all players in the realm of development finance can find common footing in regards the previous statement, a plethora of different views, experiences, and opinions bubble up when it comes to the actual nitty-gritty on how syndications are perceived. From fellow Development Finance Institutions (DFI) to impact investors, we peek behind the curtain to get a better understanding of the multi-faceted world of syndications, its evolution, and more.
Gonzague Monreal currently works at France’s DFI, PROPARCO, in the Financial Institution & Inclusion Department as the Head of Latin America and Asia. He has been in this role for the past 3.5 years, and prior to that spent 6 years as a Senior Investment Officer in Banking and Capital Markets.
In 2012, PROPARCO, FMO, and DEG—Germany’s DFI—created the Friendship Facility, a co-financing facility started with the aim of having all 3 DFIs unify their resources, mobilizing up to EUR 90 million, while only having one out of the three partners responsible for monitoring or project appraisal per facility. Two years later, 25% of PROPARCO’s deals were closed through syndications with DEG or FMO. “The original goal was to do a greater number of projects,” Gonzague says. “By sharing client portfolios and project leads, it led to more projects for us all.” But it extends beyond sharing deal information between the three DFIs, translating into benefits directly impacting both sides of syndicate facilities. Through the Friendship Facility, a great deal of redundancy was minimized, by funnelling it down to one point-of-contact and cutting down on endless processes. Whichever DFI was the leader would be almost exclusively in contact with the customer, through one project manager. “It made the process less cumbersome and costly for our clients,” Gonzague goes on, “and it was also far less time-consuming for us DFIs, from Due Diligence to legal work. Doing the process only once saves a lot of time for all.” In other words, the many years the three DFIs spent aligning processes such as standard credit agreements finally paid off; a syndicated facility essentially meant that only one “key” was necessary to unlock the “door” to a world of potential new projects. And since, at the time, FMO, DEG, and PROPARCO were going through rapid growth, the Friendship Facility was key to supporting that growth. So, what did the “day-to-day” rhythm look like down the road? Gonzague has worked on roughly 10 different Friendship Facility deals, and while within the Financial Institutions department it’s less likely to have all 3 DFIs working together simultaneously, it’s still common for 2 of the DFIs to work together. While most of the clients are usually already well-known, the Friendship Facility has helped make deals materialize that otherwise would not have been possible. As Gonzague says, “Being able to put together more money than other partners has helped make significant landmark transactions with sophisticated, high-profile parties, and sharing views with each other allowed to find comfort in riskier or more unusual transactions.”
“While most of the clients are usually already well-known, the Friendship Facility has helped make deals materialize that otherwise would not have been possible.”
But having DFIs closely mobilize funds through syndications goes beyond more business—it helps them do better business. “We can confront our different strategies, the issues most important to us. We can ask ‘Why are we doing the project this way?’ It leads to different views, long-term learning, idea generation that goes beyond the initial knowledge sharing.” In this light, the more syndications we complete, the more aligned the DFIs become on topics such as investment criteria and priorities, better positioning us to make more impact down the road.” The result of alignment on all levels? It becomes easier to convince partners to get onboarded. So what was his favorite Friendship Facility deal that we worked on? Despite Financial Institutions not particularly having the “flashiest” or high-profile cases, a personal recent favorite was an FMO-led mobilizing transaction in Panama which—at least on PROPARCO’s side—had a relatively unique financial structure with a revolving line. If it had not been for FMO, PROPARCO most likely would not have done the deal for various reasons, one being that it was in a sector less familiar to PROPARCO (the housing sector). Having FMO onboard and knowing it was a trusted client of FMO, as well as joining the transaction through an unfunded risk participation, made it possible for PROPARCO to take part; conversely, having PROPARCO as a follower in the facility, in a way, “helped to confirm FMO’s analysis of the project and client, in a difficult macro-economic context.” For Gonzague, this deal hearkened back to the early days of the Friendship Facility, when the facility was forged almost out of necessity. Both DFIs were critically complementary to the other and having the joint facility in this case made a transaction that otherwise would not have come to fruition take place. Almost a decade after its creation, it seemed as if the Friendship Facility became less relevant, with all three DFIs having a solid understanding of their own markets, as opposed to in 2012 when knowledge-sharing was more crucial. In ways, it was as if fewer syndicates were being done between the three. Over the last 18 months, that all seems to have changed. Even without DEG, PROPARCO, or FMO always doing new deals—with much of the emphasis being on supporting existing customers—interaction and communication has increased. “When the market environment became difficult, the DFIs all circled back together to have a common ground and look for solutions in a very difficult time for their clients in the Financial Institutions space.” The way Gonzague sees it, the fundamentals of the syndication process between development finance institutions is strong - it’s proven to have worked. Yes, there is room to trim down, simplify, condense aspects such as legal templates, ways to really highlight what the red thread is to further accelerate the efforts. But overall, following the pandemic, he is confident the relationship the Friendship Facility has sparked will continue to bud and generate new opportunities, possibly even more than in recent years. “Commercial syndications won’t fully eliminate us,” he says. “What we do, I believe, goes beyond the joint transaction, and into the general spirit of cooperation.”
“While most of the clients are usually already well-known, the Friendship Facility has helped make deals materialize that otherwise would not have been possible.”
Enrique Hurtado Torrez
Enrique Hurtado Torrez is responsAbility’s Regional Director for the Latin American region and Head of Financial Institutions Debt LATAM. responsAbility is an impact investor active in fields such as climate finance, financial inclusion, and sustainable food, having invested over USD 11 billion across the globe.
Enrique explains that syndication was not part of the original strategy of responsAbility when it started in 2003. “We had limited funds back then in Latin America. But our funds grew rapidly, and by 2013 we managed over USD 1 billon in assets. And at that size, we saw that syndications began to work.” Microfinance was how responsAbility grew, and as it became more regulated, their eyes turned to funding SMEs. But it was also DFIs that responsAbility noticed that were working with the SME sector; therefore, syndications were the logical next step to not just look at smaller MFIs, but also mid-size or larger institutions and DFIs. What made responsAbility choose to partner with FMO and start the syndication process? “Now you have several DFIs in the region, from IFC, to FinDev, to FMO. But we started with FMO because they actually approached us first.” When Investment Officers brought forward the idea of doing a syndication, responsAbility was curiously optimistic—and to great results on all sides. “There have been many benefits in the syndication process,” Enrique explains. “Since you partner with larger investees, they aim to be more efficient and take larger tickets in one go, creating more impact.” There are also reputational benefits as well: when institutions garner the attention of DFIs which are willing to do a syndication, regulatory institutes and rating agencies can look at the investors more favorably. As more syndications started to happen with microfinance players, responsAbility was able to leverage its expertise—of having local offices and speaking the language—when it came to mobilizing funds. DFIs such as FMO or IFC could give the “seal of approval” to responsAbility when looking at a list of potential investees, and responsAbility would do the same in turn. One of Enrique’s favorite deals closed with FMO underlines the benefits of the syndication: when they closed a green climate fund in El Salvador with the Global Climate Partnership Fund together with FMO, it was a mobilizing transaction with a substantial ticket, with FMO and responsAbility additionally providing technical assistance to the customer. “It was quite nice since it was a green fund, which can be difficult for us to finance with quantifying carbon offsets. But with FMO often having the first relationship with larger banks, it was able to work.” That said, there can be challenges. “Providing local currencies in the region can be difficult,” Enrique explains. “Syndicated loans are usually in USD, and investees would prefer local currency. But there are many currencies without much market, making hedging costs expensive.” And although it is not something particularly factored into the equation—due to the larger ticket size—the syndication process takes two to three times longer than bilateral deals, which can be closed and disbursed in under three months.
“It was quite nice since it was a green fund, which can be difficult for us to finance with quantifying carbon offsets. But with FMO often having the first relationship with larger banks, it was able to work.”
Enrique has a slightly different view towards (the future of) syndications than Gonzague. “Syndications can take away some bilateral funding opportunities. There is more access to mid-size options with the maturity in the market, so syndications aren’t always necessary.” While in the Global North, countries are transitioning into a “new normal” following the pandemic, Latin America is still battling to get COVID-19 under control. This means impact investors do not see ample loan demand recovery yet, and that banks remain quite liquid and therefore cautious. “Still, we always enjoy partnering with FMO,” he muses. “It helps us to understand the market—and the challenge—much better, such as markets under political duress.” Impact investors and DFIs may have different perspectives, but through blending finance, it’s possible to get a new perspective: one that is not just fresh, but possibly even shared. And that, in and of itself, is extremely valuable.
Sandro Valladares is a Senior Manager/Trader at London Forfaiting Company, which specializes in custom-tailored trade finance solutions for importers, exporters, and financial institutions. Forfaiters are third-party/intermediary entities focusing in export finance that purchase receivables (the amount an importer owes the exporter) from exporters. Importers will pay the receivable amount to the forfaiter, virtually eliminating risk from the exporter’s side, helping the forfaiter’s client to better manage liquidity and hedge risk. In London Forfaiting’s case, they aim to provide forfaiting solutions that traditional banks may not offer due to their structure, or because of risks associated with emerging markets.
For Sandro, syndications were originally seen as a more complementary strategy in his portfolio management, with the emphasis lying more in various trade finance products. However, this shifted over the years, with more traditional forfaiting and trade-related products and opportunities becoming less popular with non-banking financial institutions (NBFIs). “What did remain was competitive,” Sandro explains, “was due to issues such as the increasing roles of private insurer, governmental support, export credit agencies, and more advanced correspondent banking activities.” To keep up with the times, loan syndications were adopted into the company’s overarching strategy. “It was further nudged along by other factors,” Sandro goes on. Overall supply/demand in the market, as well as the general regulations and guidelines played a significant role. Through optimizing standardized documentation and procedures along the entire syndication structure (which includes Legal Opinions to the agents responsible for overall transaction management such as KYC, interest rate fixing, or collection) investors did become more comfortable and willing to take on syndicated facilities.
“To keep up with the times, loan syndications were adopted into the company’s overarching strategy. It was further nudged along by other factors.”
As Enrique and Gonzague noted, there are reputational benefits from participating in syndications with FMO, due to its reputation and expertise, as well as its leverage with borrowers. On a more technical level, customers also could receive benefits such as the Preferred Creditor Status, which minimizes the risks of transfer and convertibility, as member governments grant FMO preferential access to foreign currency should there be a foreign exchange crisis. Overall, Sandro’s perspective of the syndication partnership is positive: “We exchange ideas of risk perception and pricing expectations. If both meet, we are willing to collaborate with FMO and participate in its syndications.” The mission between DFIs such as FMO and London Forfaiting Company often overlaps when it comes to DFI’s providing investment opportunities and supporting social and economic green projects to mobilize funds for, particularly in emerging markets. And while Sandro overall sees little to change in the overall syndication process (“It works really well, in my humble opinion” he emphasizes), he does have ideas on how the partnership could evolve over the upcoming years. “Seeing more feasible opportunities, where the offered pricing to private investors is more aligned to the market, could be interesting.” The way Sandro sees it, this would help to attract more private investors, leading to larger volumes and tickets. However, with many DFIs having a longer tenor exposure period, he realizes this may not always be possible. He also comments on the possibility of implementing secondary market distribution, which could lead to borrowers and projects receiving new facilities. Still, the overall sentiment of satisfaction with the syndication process is clear. “Banco Continental SAECA in Paraguay was my favorite deal to work on,” he says. “Not only was it my first deal in Paraguay, but coming from South America, I really do have a soft spot for the country.” The customer was a leading SME and corporate bank, and the funding provided from the syndicated facility helped Banco Continental offer its clients long tenor USD loans, something which is extremely scarce in Paraguay. In addition to the funding, the customer was assisted in implementing its environmental and social risk management system. “I was delighted to help assist in its development,” Sandro says.
Arriving to a shared perspective Today, whether from impact investors, DFIs, commercial banks, or trade financers, syndicated facilities are an integral part of mobilizing finance when it comes to promoting private sector participation. Once we look beyond that, it remains clear that how they are approached, viewed, and even executed can vary widely between the different players occupying the same space. But by engaging in the spirit of cooperation, challenging each other, and arriving at new, exciting, and shared perspectives, we can truly unlock the possibility of accelerating how we blend finance and mobilize funds.