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Honor Thy Sovereign Financial Obligations

Hoda Atia Moustafa's picture

In December 2010 and again in April 2011, MIGA issued contracts representing many "firsts" for the agency -- our first two non-honoring of sovereign financial obligations contracts, our first coverage for stand-alone debt, and first coverage for sub-sovereign credit risk. I was fortunate enough to have worked on both projects, which support public transport in Istanbul, as well as on the template non-honoring contracts for MIGA.  These firsts were a result of recent, historic amendments to MIGA’s operational regulations and our convention.

With these projects, we have finally unharnessed the power of the non-honoring product, which protects against losses resulting from a government’s failure to make a payment when due under an unconditional financial payment obligation or guarantee given in favor of a project. While authorization to provide this cover has been in place since April 2009, without the ability to cover stand-alone debt, its application was quite limited. This is because demand for this product is largely driven by commercial banks providing loans to public sector entities, where there is no "private" equity for MIGA to cover -- heretofore a requirement under our convention. The projects in Istanbul, which MIGA had been working on for nearly two years, went through many re-iterations, various complex structures, different covers, reinsurance structures, etc. I remember the call shortly after MIGA's convention was amended last November via a supermajority approval of the Board of Governors of MIGA's member countries. We told our very patient clients at WestLB that at long last we could cover the loan directly and also cover existing projects. We could almost hear the thought going through their heads: "Really, you can do that now? Seriously?" You betcha -- less than six weeks later, the contract was issued. And less than four months later, we worked with the same client to issue a contract on behalf of six international banks for a 280 million Euro loan financing a major project in Istanbul that could not have happened without MIGA cover in place.

Aside from the unleashing of MIGA's potential in this arena, the projects themselves are great ones. They support the Otogar – Bagcilar – İkitelli – Olimpic Village and Kadikoy-Kartal-Kaynarca Metro expansions ,  and the obligor in each case is the Municipality of Istanbul. In a city of approximately 15 million, Istanbul is in great need of this major expansion of its public transportation system. It will alleviate traffic and congestion in one of the largest cities in the developing world, increase access to jobs, and reduce carbon monoxide emissions in the process. The Basel-II relief that this product afforded commercial banks is also essential, as it enables them to expand their capacity for exposure to Turkey for future projects. 

But for MIGA, this was a true market test of a new and very powerful product that has been an important element of the political risk insurance market for some time. Unlike most of our political risk insurance products, this contract contains limited exclusions and termination provisions, and provides a clear and streamlined timetable for claims determination, operating more like a financial guarantee than a limited insurance product. Because MIGA is essentially providing credit enhancement to a government-entity, this required a fundamental change in our underwriting approach; we looked at the loan more as a lender than as a political risk insurer, and were very involved in the each stage of the negotiations. 

This is a very exciting and busy time for MIGA; with new products being rolled out and new capabilities post-convention change, we have more flexibility to cover different kinds of projects than ever before. The sky’s the limit!

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