Bringing in Institutional Investors to Support Home Ownership for Lower- and Middle-Income Panamanians
From afar, Panama City appears to be a gleaming collection of residential skyscrapers stacked with expensive condos that look west over the Pacific Ocean.
But the dream of home ownership looks quite different for many Panamanians, who are looking to purchase a first house, far from glitzy downtown, that offers enough space to raise a family and the ability to commute to jobs in the city. Getting a mortgage is critical to this aspiration. For those with modest incomes, finding a lender was difficult, even before the pandemic began weighing on the economy.
Citibank is helping these buyers by providing financing to Caja de Ahorros, a public bank and one of the country’s largest mortgage lenders. MIGA guaranteed a $250-million loan arranged by Citi, helping Caja de Ahorros secure long-term dollar financing with attractive terms, which the bank will use to provide mortgages to lower and middle-income Panamanians. The state-owned savings bank is proud of its commitment to make 50 percent of its home loans to women, who account for just 29 percent of all homeowners in Panama.
Citibank Managing Director Jonathan Herzog spoke with us about how the bank structured the loan through a unit called Kairos Global Solutions—which in Greek means ‘propitious moment’—to make it attractive to institutional investors.
What sort of clients did you approach to fund the loan to Caja de Ahorros?
We reached out to many investors. Chief among them were institutional ones such as insurance companies. They have a great need for safe assets that pay enough interest to cover their liabilities, and yields are very low now, as you know.
How did you structure the loan to make it attractive to them?
We divided it into five different tranches for five different investors. Three of them were life insurance companies that were looking for very long-term duration on the loan. Another was a bank that wanted a shorter duration. All of those parts were backed by MIGA. The last part, 5 percent of the total loan amount, was not backed by MIGA, so it carries a higher interest rate. We are looking to place that with other investors in coming months.
Did the different tranches benefit Caja?
Yes. The tranches lowered the cost of the transaction because the short-term money is cheaper than long-term money. These savings are passed along to Caja, helping it provide low-cost mortgages and promote home ownership in Panama, which is especially important now because the COVID-19 crisis is making lenders wary. Caja’s customers tend to be lower and middle-income home buyers, many of whom are public sector employees, and the bank makes 50 percent of these loans to women, who are under-represented as homeowners in Panama.
These days, investors want to meet ethical goals around environmental, social and governance standards, or ESG. What made the Caja loan attractive to them?
Our investors are interested in supporting projects that have positive ESG impact and wanted to support Caja’s mission to support affordable housing development and home ownership, which is much needed in Panama. Investing in a project that is backed by MIGA and the World Bank gave investors assurance that the money would be used for a good purpose, and that Caja de Ahorros has the systems in place to make sure the project is a success. Having a strong rationale for the use of funds was as important as having a sound basis on the credit side.
MIGA-guaranteed financing is complex. How did you explain the value of the MIGA guarantee?
These kinds of transactions are certainly better suited for more sophisticated institutional investors. We had very complex and detailed conversations held over several months to explain what MIGA is and how the MIGA guarantee works. This was not an off-the-shelf bond that you sell in 24 hours. We worked with MIGA to educate investors, and that cooperation really helped us bring them comfort.
Were investors concerned about adequate due diligence?
Because the money was going to an overseas bank, there was concern about the jurisdiction. But we did undertake a lot of due diligence, and were able to assure investors that we had done all we could in terms of compliance, and know-your-customer requirements. Each one of our investors did their own independent assessment, too.
Do you plan to replicate this kind of loan with MIGA elsewhere?
Yes, as a matter of fact our team, Cross-Border and Public Sector Solutions (“XPS”), focuses on incorporating capital and derivatives markets solutions to transactions with sovereign agencies, alongside its focus on multinational companies and supranational organisms. It is, to our best knowledge, the only team of this kind on the Street, leveraging the firm’s unique conflux of broadest local presence and global, all-around product arsenal. It is headed globally by Valentina Antill, who’s been at the forefront of innovation in the EM supranational space for decades. We learned a lot in this transaction, and our investors learned a lot about MIGA. It will probably always take a little more hand-holding to get investors to understand how a MIGA guarantee works, but the extra work is worth it. Investors get more yield while doing more good for the world and we need that right now.