IDB lands private-sector deal after tough negotiations

The Inter-American Development Bank is to transfer $725m of its capital to the Inter-American Investment Corporation (IIC), after a difficult round of talks ultimately resulted in a deal early Monday morning.

The agreement by the bank’s governors at their annual meeting in Busan, South Korea, clears the path for the IDB’s four private-sector institutions to merge into a single unit, a move intended to streamline the operations.

Negotiations focused on how much of the $2.03bn capital needed would be fresh money and how much would be transferred from the IDB.

IDB borrowing countries were heard to prefer the capital to be newly-subscribed. That would have left a strong capital base at the public-sector lender, plenty of firepower for fresh credit and its triple-A rating unquestioned.

A deal satisfying this group – involving a $500m transfer from the IDB – was close to being reached on Sunday morning, but was later blocked, LatinFinance heard.

Net lenders to the IDB – such as the US, which has 30.01% of voting power at the bank – preferred a transfer of a large amount of capital from the existing entity, LatinFinance understands. That would allow them to maintain a large shareholding in the new institution, without having to put in new contributions. Colombia was heard to join the US in this position.

Opponents feared that taking such a large chunk of capital out of the existing bank could imperil its rating, although LatinFinance understands that a “shadow” rating report indicated the triple-A would withstand a capital withdrawal of around $750m.

K-pop break

In a lighter turn, talks adjourned for two hours on Sunday night so that participants could see Korean pop star Psy, of “Gangnam Style” fame, play in the closing ceremony. But overall the negotiations were somber, with Latin America’s smaller economies pitted against the region’s bigger ones as talks extended beyond 3am local time on Monday morning.

Part of the difficulty in capitalizing the new institution is that a purely private-sector lender needs a higher capital ratio than one that lends to governments. Lending to businesses is riskier, particularly since the IDB has preferred creditor status when it lends to sovereigns.

The World Bank’s private sector arm, the IFC, is triple-A rated and often named as a model for the IDB to emulate with its new private sector lender. But the IDB’s new institution is heard to be targeting only a double-A rating.

Leadership question

The capital will start being transferred from 2018, “consistent with the continued maintenance of the IDB’s AAA long term foreign currency credit rating,” the bank said as it announced the deal. Each transfer will need approval from the IDB’s board of governors.

The $1.305bn of new capital, meanwhile, will be contributed by member countries over seven years starting 2016.

The merger is set to bring together the IIC with three entities that sit under the vice-presidency for private sector and non-sovereign guaranteed operations: the Department of Structured and Corporate Finance, the Multilateral Investment Fund and Opportunities for the Majority.

Carl Muñana is general manager of the IIC, while Hans Schulz is VP for private sector and non-sovereign guaranteed operations, a role he has held on an interim basis since January 2013.

Bank insiders said it was too early to speculate on who might lead the new institution. LF