Investment Banks use PRI (generally currency inconvertibility and non-transfer coverage) to mitigate country risk on capital markets securities offerings by emerging market issuers. This customized capital markets PRI coverage enables an issuer to:

• • mitigate currency inconvertibility and exchange transfer risk in cross border bond or notes issues;
  • achieve a credit rating higher than the sovereign rating when issuing debt internationally; and
  • expand the potential investor pool by providing a rating at a certain eligibility level (generally investment grade).

Sovereign’s underwriting activities in the capital markets arena have been focused primarily on 144A bond issues and rated private placements by issuers based in sub-investment grade emerging markets. Sovereign’s PRI support can often enable issuers that carry investment grade local currency ratings to pierce the “sovereign ceiling” and obtain investment grade ratings on their bond issues by mitigating the cross-border currency transfer and convertibility risk.

This PRI enhancement to investment grade can result in significant cost savings to the issuer, as well as improving access to private capital and opening up opportunities with institutional investors. Sovereign has worked with all the major rating agencies and these agencies are familiar with Sovereign’s policy form and financial strength ratings.

The PRI protection on these debt issues normally covers between 12 and 36 months of interest against the risks of currency inconvertibility and nontransfer. Sovereign’s capital markets coverage is available for tenors up to 15 years and amounts of up to $80 million.

Case Studies

A summary of Sovereign’s capital markets transactions to date is as follows:

• Sovereign underwrote capital markets PRI coverage supporting a $200 million notes issue by Finansbank, Turkey’s fifth largest bank, pursuant to Rule 144A/Regulation S. The 10-year policy covers up to 18 months of interest payments on the notes against the risks of currency inconvertibility and non-transfer. Merrill Lynch served as sole placement agent for the notes. Sovereign’s political risk coverage enabled the issuer to achieve an investment grade rating for the notes of Ba1, which was several notches above Turkey’s long term foreign currency rating of B1 at the time of issue.
• Sovereign underwrote capital markets PRI coverage in support of a $234 million offering of notes due 2015 issued by the Salta Hydrocarbon Royalty Trust. The 15-year, $74 million policy covers up to 31 months of interest payments on the notes against the risks of currency inconvertibility and currency non-transfer. Rated by Standard & Poor’s, Moody’s and Fitch Inc., the notes are collateralized by oil and gas royalties due to the Province of Salta in Argentina under existing concessions. Sovereign’s political risk coverage enabled the issuer to achieve an investment grade rating for the bonds of BBB-, which was three notches above Argentina’s sovereign rating (at that time) of BB-.
• Sovereign underwrote capital markets PRI coverage in support of a $95 million securitization of Senior Mortgage Bonds on behalf of BACS, I Mortgage Trust. The bonds are backed by U.S. dollar-denominated mortgage loans, secured by residential properties in Argentina. The issuer, Banco de Crédito y Securitizacion S.A. (BACS) is an Argentine financial entity formed by the International Finance Corporation, Banco Hipotecario S.A. and Inversiones y Representaciones S.A., to create and develop the secondary mortgage market in Argentina. The senior bonds were part of the $115.8 million BACS I 2001-1 issue of mortgage bonds. The 12-year political risk insurance policy covers up to 15 months of interest payments on the notes, against the risks of currency inconvertibility and currency non-transfer. Moody’s assigned an “A1” rating to the senior bonds while Fitch Inc. rated the transaction “A+.” These ratings were nine notches above Argentina’s sovereign ceiling for Moody’s and seven notches for Fitch Inc.
• Sovereign underwrote capital markets PRI coverage in support of a $250 million equivalent Yen issue and a $100 million dollar issue by Banco Itaú in Brazil. The notes are unsecured and unconditional obligations of Banco Itaú. This was the first Brazilian A-rated unwrapped issue, the first subordinated bond offering in Brazil, and the largest Yen-denominated bond offering, at that time, ever to be enhanced by political risk insurance. The 10-year political risk insurance policy covers up to 18 months of interest payments on the notes. Merrill Lynch served as sole placement agent for the bonds. Moody’s assigned an “A3” rating to the subordinated bonds, which was at that time seven notches above the B1 foreign currency debt rating of the Federal Republic of Brazil.
• Sovereign underwrote capital markets PRI coverage in support of a $300 million, 10 year bond issued by Banco Nacional de Desenvolvimento Economico e Social (BNDES). Sovereign’s PRI enabled the issuer to achieve an investment grade rating for the bonds. JPMorgan Chase and Merrill Lynch were placement agents for the BNDES bonds.
• Sovereign underwrote capital markets PRI coverage in support of a $49.7 million securitization of residential mortgage-backed bonds, the first such securitization in Costa Rica. The transaction was also the first securitization by Banco Interfin S.A and Banco de San Jose S.A., the second and third largest private financial institutions in Costa Rica. The 15-year political risk insurance policy covered up to 30 months of interest payments on the bonds against the risks of currency inconvertibility and currency nontransfer. The transaction was rated “AAA” by S&P and “Aaa” by Moody’s Investors Service, Inc. This was the first time the rating agencies had assigned a transaction a higher rating than the then sovereign rating of Costa Rica “BB/Ba2”, which reflected the added support to the transaction by the transfer and convertibility policy issued by Sovereign.
• Sovereign underwrote a capital markets PRI policy in support of Banco Bradesco S.A. (“Bradesco”), Brazil’s largest private bank. Bradesco sold $500 million of 10-year subordinated bonds to help finance an increase in lending. Merrill Lynch was the placement agent for the bonds, which are registered on the Luxembourg Stock Exchange. Sovereign’s 10-year insurance policy covered up to 12 months of interest payments on the bonds against the risk of currency inconvertibility and non-transfer. The PRI wrap enabled Moody’s to assign a Baa1 rating to the bonds, several notches higher than the Brazilian sovereign at that time. The bond issue was oversubscribed and received a large amount of interest among institutional investors.
• Sovereign underwrote a combined, Sovereign-EDC (Export Development Canada, Canada’s ECA) Capital Markets PRI coverage in support of a $300 million bond issue by Tele Norte Leste Participações S.A. (“TNL”), Brazil’s largest telecommunications provider. The $25.4 million PRI policy was issued in support of TNL’s 10-year, unsecured and unsubordinated notes. The 10-year PRI policy covers up to 12 months of interest payments on the notes against the risks of currency inconvertibility and non-transferability. J.P. Morgan Securities Inc. acted as lead manager and sole bookrunner for the issue. Sovereign issued the PRI policy with EDC providing additional capacity through reinsurance of Sovereign. This marked the first public agency reinsurance for a capital market transaction and the first time EDC had participated in a capital markets issue as a political risk reinsurer. Moody’s Investor Services Inc. assigned a “Baa3” rating to the notes based on the fundamental credit quality of TNL and to the existence of the currency inconvertibility and non-transferability policy. This rating is five notches above the long-term foreign currency debt rating of the Federative Republic of Brazil (rated “B2” (Moody’s) at that time.