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August 18, 2004
First and Largest International Microfinance Bond Issued
    by William Baue

Grameen Foundation USA joins forces with two socially responsible investment firms to issue a $40 million bond to support microfinance institutions in nine developing nations.

International microfinance, which provides small loans to micro-entrepreneurs to help them rise out of poverty, just got a huge boost. Late last month, the Grameen Foundation USA (GF-USA) announced the offering of the first and largest microfinance bond issued from US capital markets. The $40 million bond, which will support microfinance institutions (MFIs) in nine developing nations, is enabled in large part by a $30 million guarantee from the Overseas Private Investment Corporation (OPIC).

This guarantee was secured by two socially responsible investment (SRI) firms, Geneva-based BlueOrchard Finance and Connecticut-based Developing World Markets, which were in turn supported by equity investments from GF-USA. These three organizations joined with a few other equity investors to form a special purpose company called Blue Orchard Microfinance Securities I to issue the bond.

According to Drew Tulchin, manager of GF-USA's capital market programs, this bond marks a progressive step in the development of microfinance, shifting from a philanthropy-based to a commercial-based model.

"We are changing the perception that microfinance institutions are funded only by charitable donations," said Mr. Tulchin. Currently, only an estimated 20 percent of microfinance funding is made by commercial operators, according to GF-USA. "This success expands the equation to include investors as viable partners through commercial financing."

The bond issues, which all mature in 7 years, will be broken down into senior and junior notes, with the latter further broken down into first and second risk tiers. The senior notes are backed by the OPIC-guaranteed funds and are therefore considered as safe as investing in 7-year US Treasury Notes (or "T-bills"). The senior notes will generate fixed yields 25 to 50 basis points (bps) more than T-bills. As they carry greater risk, the two sets of junior notes will generate higher fixed yields--100 to 200 bps more than T-bills for the second-tier risk junior notes, 400 to 600 bps more for the first-tier risk junior risk notes.

JP Morgan Securities will service the bond, a fact that has raised some hackles due to the fact that JP Morgan Chase (ticker: JPM) also financially supports payday lenders, the polar opposite of microfinance.

"At the Federal Reserve's April 15, 2004 public hearing on the proposed merger of JP Morgan Chase and Bank One, I presented evidence that the two banks make secured loans to dozens of payday lenders, which lend at interest rates from 300 to 800 percent," said Matthew Lee, executive director of Inner City Press (ICP), a Bronx-based non-profit that combats predatory lending. "JP Morgan Chase's continued funding of payday lenders, as well as its even more recent move to convert to a national bank charter to escape state anti-predatory mortgage lending laws, seems inconsistent with 'socially responsible' banking."

Despite this potential inconsistency, the bond will go a long way toward combating poverty by providing affordable loans to more than 40,000 micro-entrepreneurs in Latin America, Eastern Europe, and Southeast Asia through 15 or so established MFIs. As the loan terms are typically less than a year, the seven-year financing will be able to support up to 280,000 loans.

The microfinancing will be lent predominantly to women, consistent with core Grameen strategy. This strategy dates back to 1976, when Grameen Bank was established in Bangladesh to provide tiny loans to very poor people to allow them to start "micro-businesses." Currently, 94 percent of Grameen Bank's 3.4 million borrowers are women.

"Loans are usually made to women because women are considered to be the best poverty fighters," according to Grameen philosophy. "Studies show that women invest their profits in their children, nutrition, and education."

"They also improve living conditions for their families and reinvest in their businesses, even providing employment to other community members," Grameen logic continues.

GF-USA identifies a ripe market for microfinance, which is projected to grow from a $2.5 billion market today to a $25 to $50 billion market in the future.

"This landmark deal, we anticipate, is just the first of many," said Mr. Tulchin of GF-USA.

Blue Orchard Microfinance Securities I expects to issue another $40 million in bonds in the US in the next four to six months.


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