An ex-hedge fund manager is to purchase part of the risk from an Inter-American Development Bank (IDB) Group loan portfolio in a rare balance-sheet exposure transfer that could serve as a model for multilateral lenders aiming to scale lending capacity, according to a report by Bloomberg.
IDB Invest, the private-sector arm of the IDB Group, is offloading a portion of the risk from a $1bn loan portfolio to investors led by Newmarket Capital, co-founded by Aaron Barnes, a former hedge fund manager at Mariner Investment Group.
The deal, which aims to free up as much as $500m for new loans in Latin America and the Caribbean, is intended to support poverty alleviation and environmental protection initiatives, according to details shared with Bloomberg.
Under the terms of the agreement, IDB will retain the first 3% of any losses incurred on the loan portfolio, with the next 7% of risk being transferred to Newmarket. Additionally, 3% of the risk has been placed with insurance firms Axa SA and Axis Capital. In total, the deal enables IDB to reduce its mezzanine risk exposure by 10%, with Banco Santander SA acting as the structuring agent for the transaction.
“This is a significant development for IDB, but more than that, it represents a new business model,” said IDB President Ilan Goldfajn in an interview. “This instrument can bring us closer to the scale we need.”
Multilateral lenders like the IDB are under increasing pressure to maximise the efficiency of their balance sheets, especially as developing nations confront the dual challenges of climate change and heavy debt loads exacerbated by the Covid-19 pandemic.
At the same time, the market for risk transfers has been expanding rapidly, enabling banks to issue more loans without depleting their capital reserves. Private credit funds have emerged as the dominant players in the synthetic risk transfer (SRT) market, holding more than 60% of the market share, while pension funds account for around 20%, according to estimates from the International Monetary Fund (IMF).
“There’s a growing wave of activity in this space, and this deal is going to spark even more,” said Molly Whitehouse, managing director at Newmarket and another former colleague of Barnes at Mariner. Whitehouse noted that Newmarket already has a third synthetic securitisation lined up for a multilateral lender and anticipates more deals coming through in 2025.
“We’re on the verge of a major shift in how multilateral institutions can expand lending and collaborate with the private sector,” she added.
