Remittance securitisation could offer better terms and rates for borrowing country: ICRA Lanka

• Says such arrangements widely used by Latin American countries to fix their BoP troubles 
• Cites Brazilian case where securitisation arrangement received higher rating than their sovereign 
• But says can’t rule out potential risks of such arrangements to stakeholders 
• CB currently reviewing 7 responses received from int’l banks and investment arrangers 

ICRA Lanka Limited said raising foreign funding via securitising remittance inflows would give the borrowing country a better deal by way of relatively favourable terms and lower rates, particularly when the borrower has a weak credit rating. 
An analysis carried out by the Colombo-based rating agency on the Central Bank’s move announced in November to securitise part of the country’s remittance income, said remittance securitisation is not a novel concept as several Latin American nations have done similar securitisations against their remittance inflows during 1990s when they were confronted with Balance of Payment (BoP) troubles, and such moves received better credit ratings than their sovereign ratings. 
“One of the biggest advantages of this form of financing is the ability of the countries to borrow at better terms and rates to what lenders would usually offer under the weaker sovereign rating,” said Shevinda Thilakaratne, an analyst at ICRA Lanka Limited in a recorded video on the arrangement currently in the works. 
Thilakaratne delving into the proposed arrangement by the Central Bank cited the case of Banco do Brasil, a State-owned bank in Brazil, which raised about US$ 250 million in 2002 by way of securitising the remittances inflows from Brazilian workers in Japan via an offshore Special Purpose Vehicle (SPV) created to carry out the transaction.
Elaborating the arrangement followed by Banco do Brasil, Thilakarate said the SPV issued the remittance backed bonds to investors and then the bank sold the right to collect remittances to the SPV in return for receiving the proceeds from investors. 
The SPV then directed the bank’s Japan branch to transfer remittances to the New York city- based trust. The trustee was tasked with settling principal and interest payments to the investors and sending the surplus back to the originator, which is the Banco do Brasil via the SPV. 
At that time the transaction received a higher credit rating of BBB+ when Brazil’s sovereign rating was at a weaker BB-. 
“The reason is that the SPV structure ensured that the funds needed for repayment are collected in advance and ring fenced from the borrowing country, thereby minimising potential default,” Thilakarate said. 
On November 12, the Central Bank as part of its multiple avenues to shore up the dwindling foreign exchange reserves called for proposals from international investor community for the arrangement of a medium-term foreign currency financing facility by securitising the foreign currency receipts of the Central Bank under the mandatory sale of 10 percent of workers’ remittances converted into Sri Lankan rupees by licensed banks.

But the announcement soon gave rise to misleading claims by certain factions to the effect of forcible conversion of worker remittances into rupees under the proposed securitisation arrangement.
Weighing in on the matter Thilakaratne further said the biggest misconception surrounding the remittance securitisation is the loss of money repatriated by the migrant. 
“It is important to note that securitisation does not relieve the issuing bank from its obligations to the remittance depositors. So the bank must make sure that the funds are available for the depositors at all times,” he added. 
Nevertheless, he highlighted several concerns associated with a securitisation arrangement, which includes the likelihood of, “increasing the country’s inflexible debt, which could potentially impact its credit worthiness”. 
“Other issues are foreign remittances can be fairly volatile, which could impede future repayments. However repayment could be in bullet transfers or reducing balance methods but much depends on the negotiated terms of the contract,” he added.  Highlighting another potential risk involved with the arrangement to the investors, Thilakaratne said a Central Bank could always order the local bank to pay directly to them instead of the trust.  Meanwhile, on December 1 the Central Bank said it had received seven responses, five of which from leading international banks and two of which from established investment arrangers in response to their call for request for proposals made on November 12.
The Central Bank is currently reviewing the responses to determine the most suited modality for the securitised financing arrangement.