Debt Capital Markets (DCM) Program
Development of local bond markets contributes to deepen the financial system and increases countries’ resilience to the reversal of capital flows during periods of financial instability; capital markets help mobilize domestic savings for financing long-term investments reducing dependency on external borrowing. Latin America and the Caribbean countries (“LAC”) lag other emerging markets regions in terms of capital market development, namely in private sector participation. LAC corporate bond issuances represent only 33% of GDP vs. East Asia with 95% and Eastern Europe with 43%. Corporate bond markets in LAC are also characterized by a high concentration in highly rated companies (AA rating or above), lack of liquidity, small size of corporate issuances and shorter maturities than sovereign bonds.
The IDB Group is seeking to support LAC private sector issuers1 in accessing Debt Capital Markets financing with two products both in local currency and USD: (i) partial credit guarantees (“PCGs”) that will act as credit enhancement to meet local institutional investors’ risk appetite and rating requirements; and (ii) the subscription of debt securities2 which is expected to act as “seal of quality” to boost investors’ confidence. Private sector issuers are expected to benefit from bond issuances as they provide a more diversified base of financing, and better financial terms (longer maturities, larger ticket sizes, etc.). The Program is expected to contribute to deepen financial systems of LAC.
1 Private sector issuers include: Corporates, Financial Intermediaries, Special, Purpose Vehicles, and any other entity eligible to receive financing in accordance to IDB Group policies.
2 Debt securities are debt instruments issued by corporates, financial institutions, sub-nationals entities, included among others: bonds, notes, debentures, certificates, commercial paper that are traded in the capital markets.
1. Project Description. The Program is seeking to support LAC private sector issuers in accessing debt capital markets with two products: PCGs and subscription of debt securities.
2. Environmental and Social Categorization and Rationale. Each individual utilization under the Program must be classified under IIC sustainability policies as FI-2 and FI-3 for financial intermediaries (FIs) and Category B and C for corporates. At this stage, specific eligible Issuers have not yet been identified, and to that end the specific environmental and social risks and impacts associated with each participating Issuer cannot be analyzed at this time. It is assumed that focus will be given to low risk issuers (FI-3, and Category C), but the will ultimately be determined based on market/issuer response to the product.
3. Environmental and Social Risks and Impacts. The potential key Environmental, Social, Health and Safety (ESHS) and labor risks and impacts associated with the Program are related to the sector / activities engaged in by each participating Issuer. To that end, the IIC will evaluate the environmental and social management of the issuer, and review the risks and impacts of their activities. The issuer will be required to manage environmental and social impacts in accordance with IDBG Policy. The Program will exclude Category A and FI-1 underlying projects / issuers. After the first year of operations, the IIC will assess its work in enhancing Issuers’ environmental and social performance and report back to the team.
4. Mitigation Measures / E&S Action Plan. Specific environmental and social safeguard requirements for individual Issuers cannot be made at this time. The project team will assess environmental and social risks on a case by case basis and will confirm during due diligence and prior to Credit Committee the final classification. In case the project is categorized as FI-2 or B the project team will include environmental and social actions commensurate with risk and in line with the IIC Sustainability Policy. Issuers will be expected to have an acceptable environmental management system and implement sustainability management practices in line with IIC’s Sustainability Policy. Issuers will report annually on sustainability performance.