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 Mukhi
2. Workshop schedule Questions and answers/conclusion 30 12:30 12:00 Mock loan negotiation 30 12:00 11:30 Financing: the specifics of loans 40 11:30 10:50 Coffee break 20 10:50 10:30 BO system demonstration 10 10:30 10:20 Financing: evolution, options and actors 50 10:20 9:30 Introduction to BlueOrchard Finance 10 9:30 9:20 Introduction to course and Expectations 20 9:20 9:00
3. 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 mission BlueOrchard’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 philosophy 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. Our approach We provide innovative financial instruments and solutions for placements in microfinance , bridging the gap between capital markets and microfinance institutions. W e 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 values We 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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5. 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
8. Various options for financing Senior Unsecured Debt Subordinated Debt Senior Secured Debt Deposits Debt Preferred Shares Common Shares Equity Risk to investors Cost to MFI
9. 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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11. Domestic vs. international markets International Markets Domestic Markets MFI Funding Source of Slide: MicroRate – Review of Microfinance Investment Vehicle Market (October 23, 2006) Microfinance Investment Vehicles MIVs Development Agencies, Foundations & NGOs acting as investors in microfinance Regional Banks - local and second tier Private local investors Private, Social, Commercial, Institutional Investors
12. 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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14. Investment Process Risk Management STEP 2 Due Diligence STEP 3 Risk Scoring STEP 4 Portfolio Management STEP 1 Qualification of new Investments BlueOrchard’s 4-step investment process and risk management
15. STEP1 & 2 Qualification of Invest. & DD Comprehensive data collection and on-site due diligence visits Audited financial statements of previous 3 years Business Plan External rating reports MFIs eligibility criteria 3 year track record Total assets > $1 MN Operational self-sustainability Profitability 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 management Strategy and business plan Corporate governance Transparency Staff and organizational infrastructure Liquidity and funding Currency management Balance sheet ratios Profitability Loan 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
Debt financing - borrowing money from a lender or investor with the understanding that the full amount will be repaid in the future, usually with interest. Equity financing - investors receive partial ownership in the company in exchange for their funds—does not have to be repaid. In most cases, debt financing does not include any provision for ownership of the company (although some types of debt are convertible to equity). Instead, small businesses that employ debt financing accept a direct obligation to repay the funds within a certain period of time. The interest rate charged on the borrowed funds reflects the level of risk that the lender undertakes by providing the money. For example, a lender might charge a startup company a higher interest rate than it would a company that had shown a profit for several years. Since lenders are paid off before owners in the event of business liquidation, debt financing entails less risk than equity financing and thus usually commands a lower return. Though there are several possible methods of debt financing available to small businesses—including private placement of bonds, convertible debentures, industrial development bonds, and leveraged buyouts—by far the most common type of debt financing is a regular loan. Loans can be classified as long-term (with a maturity longer than one year), short-term (with a maturity shorter than two years), or a credit line (for more immediate borrowing needs). They can be endorsed by co-signers, guaranteed by the government, or secured by collateral—such as real estate, accounts receivable, inventory, savings, life insurance, stocks and bonds, or the item purchased with the loan.
Advantages Disadvantages Private market Faster More expensive Less disclosure than public offering More restrictive covenants Less legal liability risk Less market visibility for MFI More accessible (historically) for MFIs Public market More liquidity Disclosure requirement more onerous Cheaper Legal liability risk greater Greater market visibility Slower to issue More difficult to restructure or renegotiate terms
Fixed uniform interest rate, established at the commencement of the loan, which stays in effect throughout the life of the loan. Floating interest: reset at specified intervals, usually by reference to a market indicator in the domestic or international borrowing markets.