Fitch has confirmed a downgrade of VG Microfinance – Invest Nr. 1 GmbH’s senior CDO notes to ‘BB+’ and assigned a Negative Outlook. According to Fitch, the downgrade of the senior CDO notes is the result of the rating agency’s concern for the political uncertainty and sharp asset deterioration of the Nicaraguan MFI, Asociación de Consultores para el Desarrollo de la Pequeña, Mediana y Microempresa (ACODEP’s) loan book. ACODEP currently represents 8.8 percent of the portfolio with default risks that have materially increased.
The transaction contains subordinated credit exposure against 20 microfinance institutions across 15 jurisdictions with the largest exposures in the portfolio from the following countries: Azerbaijan: 21.7 percent, Kenya: 17.1 percent, and Ecuador: 12.3 percent. The institutions were selected by Deutsche Bank AG (‘AA-‘((AA minus))/’F1+’/Rating Watch Negative) in its role as seller and protection buyer for the transaction. Fitch is also concerned with the recent devaluation of local currency for Eastern European and Asian MFIs as the portfolio may also suffer from foreign exchange exposure. Please see here for an additional breakdown of the transaction.
While the senior notes benefit from 40 percent subordination that is provided by unrated junior, mezzanine notes, and excess spread for credit protection if the portfolio experiences defaults, Fitch views approximately 60 percent of the portfolio as commensurate with ‘CCC’ or below risk. More importantly, the agency assumed that no recoveries would be obtained following a default of an MFI, in the analysis of the transaction (due to the subordinated nature of the loan obligations). However, given the credit enhancement, Fitch has stated that it “expects the CDO notes to be able to withstand the default of 5-6 names without incurring a loss.” In addition, Fitch notes that the credit risk associated with the majority of the portfolio has remained stable or in some cases has improved slightly.
Collateralized debt obligations (CDOs) are a type of structured asset-backed security. The value and payments of a CDO are derived from a portfolio of underlying fixed-income assets. In addition, CDOs have assigned different “risk classes/tranches”. The risk and return for a CDO investor depends directly on how the CDOs and their tranches are defined. Interest and principal payments are made in order of seniority, with the junior tranches offering higher coupon payments (interest rates) or lower prices to compensate for additional default risk.
According to the MIX Market, the microfinance information clearinghouse, ACODEP was established in 1989. ACODEP serves small microentreprises mainly in urban areas of Nicaragua. Working capital loans are charged with flat interest rates of 24 percent to 72 percent. Investment loans bear the same interest rates, but are calculated on declining balances. Penalty fees for late payment runs high: 1 percent of outstanding capital and 10 percent of past due amounts.
As of December 31, 2007, the number of personnel stands at 292, 70,933 active borrowers, average loan balance per borrower USD 483 dollars with 57.60 percent of its clients being women borrowers. ACODEP’s gross loan portfolio is at USD 34.2 million, total assets of USD 49.9 million, debt/equity ratio at 458 percent, ROE of 16.62 percent, Return on Assets of 3.30 percent, PAR > 30 days ratio at 7.86 percent.
MicroCapital reported a paper wrap-up in April entitled, “Cautious Resilience: The Impact of the Global Financial Crisis on Latin American & Caribbean Microfinance Institutions, by Sebastian von Stauffenberg.” The 52 page report, provides a framework for how the impact of the global financial crisis on Latin America and the Caribbean MFIs evolved during the last quarter of 2008.
Remittances in LAC are expected to decline (roughly to USD 58 billion) in 2009. According to the Inter-American Development Bank, 2008 remittances are equivalent to 10-25 percent of GDP for seven countries (Guyana, Haiti, Honduras, El Salvador, Nicaragua, Jamaica and Guatemala) with four additional countries over 5 percent of GDP (Belize, Dominica Republic, Ecuador, Bolivia and Paraguay).
The report states that Microfinance investment vehicles (MIVs) generally expect their portfolio quality to decline in 2009. While there has been no default in principal or interest repayments to the MIVs, the general consensus is that they are at or near their maximum exposures in the LAC region (particularly with Peru, Bolivia, and Nicaragua).
MicroCapital also reported in January 2009, of thousands of farmers and small businessmen gathered to protest against high interest rates of microfinance institutions in the community of Tipitapa, Guatemala. The protests were organized by the Movement of the Producers of the North (MPCN). The protestors demanded that Congress approve a moratorium on debt to microfinance institutions and that microfinance institutions suspend seizure of delinquent borrowers’ assets such as houses, property, and other means of subsistence. The protestors alleged that some MFIs are guilty of changing the conditions of their loans mid-term. Until the moratorium is in place and interest rates are lowered, the protestors stated that they will continue the movement.
This is not the first violent protest over microfinance interest rates in Nicaragua. MicroCapital reported on August 2008 that protestors gathered in the offices of microfinance organization Fundacion para el Desarrollo de Nueva Segovia (FUNDENUSE), kidnapped an employee and threatened bodily harm.
By Zoran Stanisljevic
Additional Resources:
Nasdaq, April 2009, Fitch:VG Microfinance-Invest Nr.1 GmbH’s Notes
The MIX Market, ACODEP MFI Profile, Katalysis Profile
ACODEP (Asociación de Consultores para el Desarrollo de la Pequeña, Mediana y Microempresa): Home
Fitch Ratings: Home
MicroCapital, April 2009: Cautious Resilience: The Impact of the Global Financial Crisis on Latin American & Caribbean Microfinance Institutions, March 2009
MicroCapital, January 2009: Three Injured in Nicaragua as Thousands Demand Moratorium on Debt Repayment to Microfinance Institutions
MicroCapital, August 2008: Violent Protests Against Nicaraguan Microfinance Institution
MicrofinanceForum, World Microfinance Forum Geneva: Microfinance: an attractive dual-return investment opportunity. Positive long-term outlook but some clouds in the medium-run Raimar Dieckmann, Senior Economist, Deutsche Bank, pages 7-8.
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