MODEL 1: development finance actor as originator & issuer

Model 1 – Single development finance actor serves as both originator and issuer.

In Model 1, a single development finance actor serves as both originator and issuer. The AfDB’s R2R programme and IDB Invest’s Scaling4Impact demonstrated how a single originator can collaborate with advisers to identify a reference portfolio, structure a transaction, navigate rating agency methodologies, and engage with investors to market the deal. For institutions with sufficient scale and in-house capacity, a single-originator programme can achieve capital relief and partial additionality but has limited replicability.

Feasibility

This model is most feasible for MDBs or DFIs with large, standardised asset portfolios and well-established internal systems. It is simpler to coordinate a transaction in-house with uniform contracts, but a single originator also means that the underlying portfolio is limited by the assets this entity holds.

The institutional capacity of a single institution can also limit its ability to carry out a complex securitisation transaction. BOAD overcame this challenge by establishing a new specialised subsidiary for its securitisations. However, it may be inefficient for MDBs/DFIs to each build their own systems and expertise to operate an in-house securitisation programme. Legal complexity constrains structuring options in the near-term but is even greater for multi-originator models.

Commercial Viability

MDBs and DFIs with extensive, well-diversified non-sovereign portfolios can achieve commercial viability while directly securitising in-house loan portfolios. AfDB, IDB Invest, and BOAD’s experience have shown that securitisation transactions by single institutions can attract investors if they are well-structured.

R2R was viable because the capital relief that AfDB gained overshadowed the cost of the transaction. BOAD’s DOLI-P found strong demand in the regional market, with the 2024 transaction being placed in just 3.5 hours. But unlike these multilaterals, bilateral DFIs and national development banks may struggle to achieve commercially competitive pricing as single originators with limited diversification and higher funding costs.

Additionality

In-house securitisation can accelerate lending by freeing capital and improving rating metrics – but this only works if the limiting factor on an institution’s lending is capital adequacy. If other factors (such as pipeline quality) are binding, securitisation will not increase lending volumes although the institution will still incur additional funding and transaction costs.

When capital and rating constraints are not binding, these costs can be justified by other strategic benefits, such as securitisation, providing a cost-effective route to provide capital mobilisation.

AfDB and IDB Invest demonstrated that MDB significant risk transfer can crowd in significant private capital, with private investors serving as funded and unfunded guarantors.

Scale

BOAD has shown that by issuing two transactions in the space of a year, it has a technically feasible and repeatable structure. But few MDBs/DFIs can muster the $400-500 million issuance volumes needed for sustained market presence on their own. This means that only the very largest institutions globally can launch an origination programme on their own.

IFC, with its large, diversified private sector portfolio, stands out as a potential exception. Others, including ADB or IDB Invest, would need to securitise over 10% of their non-sovereign loans each year. IDB Invest’s 2024 transaction transferred the risk associated with 10% of its portfolio. Bilateral DFIs and regional development banks are too small individually to achieve the consistency and volume required.

Replicability

Pioneering in-house, single-originator transactions have seen some replication within the development finance community. Despite extensive publicity for AfDB’s R2R transaction in 2018, the next comparable AfDB transaction was not launched until 2022. Evidence of replication beyond AfDB was not found until IDB Invest’s Scaling4Impact in 2024.

Scale is a major barrier to replication under Model 1, as very few institutions have portfolios of requisite scale, quality, and diversification to launch transactions like R2R and Scaling4Impact. As these transactions were private, limited public information is available regarding their launch and subsequent performance. This limits the extent to which private synthetic securitisations can genuinely trigger replication by others.