The deal, dubbed Scaling4Impact, falls within recommendations for MDBs set out in a G20 report focused on expanding lending capacity by about $200 billion over the coming decade. The African Development Bank was the first multilateral lender to move into the SRT market with a 2018 deal linked to a $1 billion private-sector loan portfolio to investors led by Mariner Investment Corp., where Barnes and Whitehouse worked as directors at the time. That transaction generated returns of 11% for its investors.

The deal with Newmarket forms part of IDB’s new so-called originate-to-share business model. The idea is to bundle loans made to IDB’s 26 member countries and across sectors, and repackage these as a standardized product for private investors.

Interest from private investors like Newmarket comes as multilateral lenders face a financing drought from government shareholders, many of which are struggling to manage their deficits. At the same time, the lenders are trying to balance their economic development mandate with the need to focus on environmental considerations, adding to pressure to boost their financial clout.

Against that backdrop, synthetic securitizations on private-sector loans “make a lot of sense, both developmentally as well as financially,” said Chris Humphrey, senior research associate at think tank ODI and an adviser to the G20 on how to boost the investing capacity of multilateral development banks.

Multilateral development banks “want to go from billions to trillions” of dollars worth of impact, Whitehouse said, and the synthetic securitization with IDB is “a really elegant structure” that helps ratchet up its financing.

The IDB deal benefited from ratings agencies providing clear guidance on how to structure securitizations in order for them to be treated as a pathway to capital relief, Newmarket’s Barnes said. That clarity “is going to be a game changer,” he said.

Traditionally, multilateral development banks have had to maintain high levels of capital to safeguard their credit ratings — often AAA — and keep their financing costs low. Whitehouse says the IDB transaction shows private investors are willing to look at different risk structures.

“A lot of private-sector capital engagement with development lending is in the senior-rated capacity, where someone’s coming in and buying the AAA notes,” Whitehouse said. “It’s really powerful and hopefully very catalytic to demonstrate that there is private sector capital interest at a very different risk-return profile.”

(Adds reference to IMF report in fifth paragraph.)

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