MoU for coordination among Microfinance fund managers (MIVs) in response to Covid19
MoU for coordination among Microfinance fund managers (MIVs) in response to Covid19
A commentary
On the 23rd April 2020, 9 MIVs (microfinance investment vehicles) or microfinance fund managers with the combined AUM of $15 billion signed an MoU. The MoU was purportedly an initiative of Triodos. The MoU is meant to coordinate fund managers’ response to mitigate Covid19 related risks to their debt investments in the microfinance sector and cost to themselves as lenders.
Overall, it is a positive step, because it includes the ‘Going concern’ of borrowers as one of the principles of coordination. But the MoU itself, in the context of the magnitude of the crisis, does not give much confidence that it will materially help the borrowers. At best, the MoU helps the fund managers to reduce administrative burden on information sharing, reduce legal costs around waivers for covenant breach and to some extent in coordinating the debt restructuring.
Debt fund managers are disparate entities with limited firepower.
The key point in the MoU is the ‘informal handshake rollover’. The MoU is a guideline and not binding for rollovers, moratorium, and for cooperation during debt restructuring. The cooperation among the fund managers would depend on their ability and intent on rolling-over the debt. The fund managers are disparate entities with varying ability to absorb credit shocks, while sharing the return philosophy – of targeting risk adjusted, market rate of returns.
Fund managers’ ability to respond to evolving risks around Covid19, depends on their cash situation/ dry powder, structure of the fund – LP-GP vs balance sheet lenders, short vs longer tenor of their investment funds (promising liquidity to investors?), type of investors in the fund – are they patient investors or keen to redeem their investments? The stability of the fund manager itself matters and could be a concern.
Larger fund managers such as Triodos (being backed by Triodos bank helps), Blue Orchard, respA, Symbiotics and Oiko Credit could be in a better position to absorb credit losses. Oiko credit lends from its own balance sheet and hence may have more flexibility compared to LP-GP fund managers. A lender that provides additional funding/ refinancing would enjoy seniority over other lenders – again larger & liquid fund managers are at advantage over the smaller ones. The smaller fund managers naturally are at a disadvantage and unfortunately, ill-suited to deal with the current crisis. And therefore smaller fund managers have the incentive to call their loan back.
The role of Development Finance Institutions (DFIs)
The MoU does not include Development Finance Institutions (DFI) such as FMO of Netherlands, IFC, Proparco of France and DFC of USA, who are co-lenders in several markets. It is not clear how DFIs plan to respond to the stress in the microfinance sector.
DFIs have a greater ability to refinance and invest larger sums. The average debt investment size of the signatory fund managers is USD 3 million vs USD 8 million for DFIs (source: ImpactPost). DFIs are arguably more influential as lenders, have influence in the local credit markets/banks and hence their involvement can provide the much needed firepower and leadership to a mish-mash group of fund managers. This is the time for the DFIs to take a lead role in stabilizing the microfinance sector and reduce the risk of implosion of an emerging asset class that is annually serving 140 million (Microfinance barometer 2019, Convergences) low income people.
