When the US International Development Finance Corporation (DFC) was scouting for opportunities to expand its presence in Latin America, the agency found a willing and creative partner in Brazilian payments group Stone Co.
The result of the partnership was a landmark $467.7 million, 7-year securitization transaction that intends to create a new source of credit for micro, small and mid-sized enterprises (MSMEs) in Brazil, with a focus on businesses led by women in the impoverished north and northeast of Brazil. The transaction, which wins the award for DFI-Backed Deal of the Year, closed in December, 2023.
Diego Salgado, a former JP Morgan banker who is now head of treasury at Stone, says that the company started to weigh alternatives for raising funding for MSME lending in 2021. It considered knocking on DFC’s door after learning from market sources that the US agency was seeking bankable projects in Brazil.
“We tried to find an angle where the DFC would bring something different to the market, and the result was that, for the first time, it was possible to perform a long-term securitization deal for a significant amount of debt issued by financial entities that are not among the top five lenders in the country,” Salgado says.
The result was the first-ever international financing based on the securitization of credit card receivables due by non-systemic Brazilian financial institutions. The facility acquires account receivables due by over twenty such institutions, including credit card issuers accounting for roughly 20% of the market, on a non-recourse basis.
With the support of DFC, Stone was able to bundle credit card debt owed by clients of retailers and other clients of the company’s payments solutions, unburdening Stone’s balance sheet and freeing credit for MSMEs as a result.
“Normally, banks and investors have little appetite for this kind of debt,” Salgado points out. “It is a market gap that we are working to close.”
The most complex part of the deal involved creating a mechanism to hedge against currency risk. That step was needed to make the whole process acceptable to the DFC, which was not at the time dispose to deploying reais for the deal.
“It took us nine months to structure the hedging mechanism,” Salgado recalls.
In a statement, the DFC noted that, in Brazil, MSMEs are among the world’s most disproportionately underbanked market segments, which is why the transaction fits well the agency’s mission.
“DFC’s support for the Stone project will expand services and working capital financing for thousands of MSMEs in Brazil, including in Brazil’s poorer north-eastern states and that are women-owned and led,” the DFC pointed out.
Borrower’s Counsel: Milbank
Lender: DFC
Development Finance Structuring Agent: JP Morgan
Hedge Structuring Agent’s Counsel: Cleary Gottlieb
Lender’s Counsel: Trench Rossi Watanabe; Mayer Brown
Hedge Structuring Agent: Morgan Stanley
Borrower: StoneCo
All supporting financial institutions and law firms were transmitted to LatinFinance by the award category winners. For updates please email awards@latinfinance.com