Dilip Ratha


Remittances & Migration        Future-Flow Securitization     Country Risk Rating


What is FF securitization?




Development Financing through

Securitization of Receivables

Bonds backed by foreign currency receivables can allow public and private sector entities in developing countries to raise financing from international capital markets.  With proper planning, such transactions can sustain external financing even during a crisis.

This page is grossly outdated - was created in October 2001 based on Ketkar and Ratha 2001 – but still has some useful material.


What is securitization?

Securitization in emerging markets

Structure of future flow securitization

How does it improve credit rating?

Benefits of future flow securitization

Unused potential in emerging markets

Public policy issues

Examples: Pemex Finance

Example: Pakistan Telecom

Further reading

What is securitization?

Securitization is the process by which a borrowing entity—a company or a bank in the public or private sector, or a sovereign or sub-sovereign body—issues tradable securities backed by dedicated cash flows from selected assets.

The first securitized transactions occurred in the United States in the 1970s and involved the pooling and repackaging of home mortgages for resale as tradable securities by lenders.  Since then, securitized markets have grown in sophistication to cover a wide range of existing assets as well as future assets. Among the best known cases of securitization in the developing countries are the Brady bonds. Existing assets that have been securitized in recent years include bank loans and lease financing, and future flow receivables such as export receivables, credit card receivables, telephone receivables, and non-recourse project financing. 

(See also ABS, CBOs, CLOs, CMOs)

See also Giddy (1994, pp 486-489)

Back to top


Securitization in emerging markets

Rated vs. unrated transactions. Securitization transactions can be classified according to whether these are rated or not rated by major credit rating agencies, and within each of these categories, according to whether they involve existing assets or future receivables.  It is hard to obtain information on unrated securities issued by developing country entities which are typically underwritten by commercial banks that either keep them on their own books or distribute them through private placement.  Nevertheless, it is believed that rated transactions may be more prevalent in emerging market economies with relatively more developed capital markets.

Existing asset vs. future asset securitization.  Securitization of existing assets (such as lease financing) as well as future assets (such as workers’ remittances) are being used by developing country entities for raising finance. Existing asset securitization is increasing in importance and can be a big aid to the development of local capital markets.  But since existing assets are denominated in local currency, their role in raising external finance may be limited.

The first important future flow securitized transaction in a developing country occurred in 1987 with the securitization of telephone receivables due to Mexico’s Telmex.  Since then the three principal rating agencies---Fitch IBCA, Duff and Phelps (Fitch), Moodys and Standard & Poors (S&P)---have collectively rated several hundred securitization transactions with the aggregate principal amount totaling approximately $100 billion. 

Back to top


Structure of future flow securitization

In a typical future flow transaction, the borrowing entity in a developing country sells its future product to an offshore Special Purpose Entity (SPE), which issues the debt instrument (see box for an example). By a legal arrangement between the borrowing entity and major international customers, payments for the future product are directly deposited in an offshore collection account managed by a trustee.  The debt is serviced from this account, and excess collections are forwarded to the borrowing entity in the developing country.

Back to top


How does it improve credit rating?

The transaction structure outlined above mitigates several elements of the default risk. The ability of the government to interfere with debt servicing is greatly reduced by the offshore payment arrangements. The market risk arising from price and volume volatility is mitigated using over-collateralization.  The risk that a product may be sold to other than designated customers depends on the choice of collateral: such risks tend to be low for crude oil and for credit card receivables (because crude such as Maya from Mexico is sold to a limited number of buyers who have the refining capacity, and there are only a handful of major credit card companies); in contrast, diversion risks are high for agricultural staples. 

Text Box: Various Types of Risks Involved in Future Flow Securitization
Sovereign risk: will the originator’s government take steps to disrupt the payment arrangement set out in the structured transaction?
Performance risk: will the originator have the ability and willingness to produce and deliver the product?
Product risk: will there be sufficient demand for the product at a stable price and will the buyer meet his payment obligations?
Diversion risk: can the product or the receivable be diverted to customers other than designated customers.
Additionally, there are currency devaluation risk, bankruptcy risk and political risk, which are related to sovereign risk.  The usual transfer and convertibility risks are substantially mitigated when hard currency future flow receivables are securitized via an SPV structure.


Keeping in mind the performance, product and sovereign risks, the rating agencies have arrived at the following hierarchy of future flow receivable transactions in terms of deals that are most secure to those that are least secure. The securitization of heavy crude oil receivables is deemed to be most secure while the securitization of future tax receipts is thought to be least secure.

Hierarchy in future flow-Backed Transactions

  1. Heavy crude oil receivables
  1. Airline ticket receivables, telephone receivables, credit card receivables, and electronic remittances
  1. Oil and gas royalties, export receivables
  1. Paper remittances
  1. Tax revenue receivables

Source: Standard & Poor's (1999b), Fitch (2000b).


It is possible to securitize future flow receivable transactions even at the lowest end of the hierarchy shown in Table 1.  An example of this is the securitization of co-participation tax revenues (via federal tax sharing) by several Argentine provinces (Standard & Poor’s 1999).  Of course, it becomes more difficult to obtain investment grade transaction rating as one moves to the lower end of the hierarchy.  Alternatively, it becomes necessary to build in more safeguards to improve credit rating as one moves down the hierarchy. (The ability to structure away sovereign risks is greatly reduced at the height of a liquidity crisis.  The risk mitigation through future flows structure works best when sovereign risk perception are high and liquidity is low, but not during a full-blown crisis.)

Insurance companies are playing a rising role in the 1990s insuring the various elements of risk described above.  A number of insurance companies – MBIA, Ambac, FGIC among them – have provided financial guarantee.

Back to top


Benefits of future-flow securitization

In the 1990s, many borrowing entities in developing countries that had a higher local currency rating than their government were able to pierce the sovereign foreign currency credit ceiling by using securitization of future receivables. The innovative structuring of these transactions allowed borrowers to obtain significantly lower interest rates and longer maturity than on their own unsecured bonds or government eurobonds.

To the investors, the attractiveness of this asset class lies in its good credit rating and its stellar performance in good as well as bad times. Their investment grade rating allows future flow-backed securities to attract a wider class of investors including, for example, insurance companies that face limitations on buying sub-investment grade papers. Also, the price of future flow securities tends to be less volatile than that of unsecured debt which is another reason why investors like this asset class.  Moreover, there have been no debt defaults on rated future flow asset-backed securities issued by developing country entities, despite repeated crises of liquidity and/or solvency. An interesting example is the telephone receivable deal of Pakistan’s public sector telephone company—Pakistan continued to service this debt even in the face of selective default on its sovereign debt.  However, while this track-record of no-default is encouraging, the test has not been stringent enough yet.  This is in part because the size of this asset class has been small relative to that of unsecured debt.

Does securitization increase the cost of unsecured debt? According to the efficient market hypothesis, pledging a part of receivables to back securitized notes should affect the ability of the borrower to service the remainder of its debt. However, market participants argue that this would be the case only when securitized debt rises significantly above certain critical levels.  One reason behind this lack of effect of securitization on unsecuritized debt is that by achieving investment-grade ratings, asset-backed securities attract a wider range of investors including insurance companies and pension funds who are constrained to buy only investment grade assets (Giddy 1994, p 487).  Another reason may be that the benefits of securitization may improve the ability of the entity to service its unsecured obligations.  For example, a bank may profit from lower capital costs (for meeting capital adequacy requirements) if it offloads a part of its loans through securitization.  Other explanations rest on the presence of market imperfections.  For example, unsecured liabilities may be guaranteed by the government (e.g., by deposit insurance in the case of a bank).

Back to top


Unused potential in emerging markets

Future flow securitization has significant potential for growth because such transactions allow issuers to pledge receivables over a number of years. The potential for future flow securitization from developing countries appears far more than the level of current issuance.  The potential outside Latin America, especially in Eastern Europe and Central Asia, is also quite large.  Countries in the Middle East have large oil receivables that can be securitized to raise capital.  In South Asia and Africa, the potential for securitization lies in remittances, credit card vouchers, and telephone receivables. 

Constraints on future-flow securitization.  A major constraint on the growth of future flow transactions arises from the paucity of good collateral in developing countries.  (Oil is an example of good collateral for several reasons.  The stock of oil in a country is more or less known.  Well-developed global markets make oil a highly “liquid” asset.  Given its importance to a nation’s economy, chances of government interference in oil exports are low.  Finally, the risks that exports may be diverted to foreign importers not covered in a securitization structure is low in the case of oil exports, especially crude oil exports.)

Other constraints to securitization include the absence of high-quality issuers. Securitization deals tend to be complex and involve high preparation costs and long lead-times.  The lack of legal clarity on bankruptcy procedures in many developing countries adds further impedimenets to these deals.  In some cases, policy makers are simply not familiar with this mechanism. Many issuers cannot—or do not want to—assume the burden of full disclosure of information in a timely fashion.  Others worry about whether pledging future receivables might taint their creditworthiness.

Back to top


Public policy issues

Future-flow securitization, however, increases inflexible debt of the issuer as well as the nation.  Although the current level of future flow debt is nowhere near the danger level in any country, such debt combined with debt from other preferred creditors can reduce the flexibility in debt servicing and jeopardize issuer creditworthiness.  However, inflexibility in debt servicing may be (arguably) a good thing in many developing countries, especially in those with a history of misallocation of public debt. (Rating agencies have not downgraded sovereign credit ratings of either Mexico or Venezuela on account of their high securitized debt.  Mexico’s securitized debt of around $19 billion is about 16 percent of its total debt, and Venezuela’s securitized debt of nearly $6 billion is 18 percent of its total debt.)

Nevertheless, if developing country entities do need to borrow to smooth consumption or investment over business cycles, they may find this asset class attractive. If planned and executed ahead of time, it can provide a way of accessing markets during times of liquidity crisis.  Another attractive aspect of this structure is that the value of the underlying collateral—for example, worker remittances, credit card receivables, or oil exports—may rise during a crisis, thus, making this asset counter-cyclical in nature. (For example, Mexico’s real exports rose 30 percent and real imports declined 8 percent in 1995.)  For many developing countries, future flow receivable-backed securitization may be the only way to begin accessing international capital markets. Considering the long lead times involved in future flow deals, however, even public sector entities would need to keep securitization deals in the pipeline and investors engaged in good times so that the asset class remains accessible during a crisis.

An equally important incentive for governments to promote this asset class lies in the externalities associated with future flow deals.  Future flow deals involve a much closer scrutiny of the legal and institutional environment than unsecured transactions.  Besides, the preparation of a future flow transaction often involves reforms of the legal and institutional environment.  These reforms would facilitate domestic capital market development and encourage international placements as in the aftermath of the Brady deals in the early 1990s.

Public policy to facilitate future flow-backed securitization should focus on relaxing the above constraints.  Transaction costs can be reduced through expansion of the scale of these deals by planning a series of issues by the same issuer (the so-called master trust arrangement). The size of the deals can also be raised via receivable pooling. (Telephone companies in several Caribbean countries, for instance, could pool their receivables from international telephone calls for securitization. It is not easy, but may be possible, to avoid the complication arising from relatively more creditworthy entities subsidizing less creditworthy entities using innovative structures. See Standard and Poor’s 2001.) Establishment and use of indigenous credit rating agencies to obtain domestic credit rating can also reduce transaction costs, although care has to be taken in mapping local rating scales to international scales. Certain segments of this asset class—such as securitization of oil receivables—may be amenable to standardization and a cookie-cutter approach.  Clarification of bankruptcy laws will be helpful for all financial deals including securitization.  Also, educating policy makers and potential issuers about the benefits and risks of this asset class will help.

IBRD’s negative pledge. Future flow securitization can potentially conflict with the negative pledge provision included in IBRD loan and guarantee agreements.  This provision does not prohibit the creation of security in favor of other creditors.  Instead, it prohibits the establishment of a priority for other debts over the debt due to the IBRD. However, the IBRD may grant a waiver in respect of this clause in certain circumstances, in particular, when transactions involve small amounts (World Bank Operational Manual OP7.20).

Back to top


Examples: Two Transactions by Petroleos Mexicanos

Mexico’s state-owned oil and gas company, Petroleos Mexicanos (Pemex) is to date the largest emerging market issuer of future flow-backed structured notes.  Two large transactions undertaken by Pemex after the crisis of 1994/95 are discussed below.

A. United Mexican States (Pemex) and the U.S. Treasury rescue package of 1994-95

Amount $ 6 billion, closing date of transaction August 5, 199, maturity 5 years (2001), interest three-month LIBOR plus 2 percent, payable quarterly, Depositaries: Swiss Bank Corporation, New York Branch and the Federal Reserve Bank of New York (FRBNY). Rating ‘BBB-‘, several notches above the ‘BB’ rating of the United Mexican States and the Pemex.

In August 1996, the United Mexican States issued $6 billion in structured notes backed by exports of crude oil and oil derivatives by Pemex.  This transaction used a modified version of the structure used in the ($20 billion) financing of the rescue package by the U.S. Treasury in February 1995.  The proceeds were used for repaying the U.S. Treasury financing.  In this structure, Pemex’s export sales subsidiaries, PMI Comercio Internacional (PMI) and PMI Trading, irrevocably instructed their customers to make all payments for exports into designated accounts at the Swiss Bank Branch in New York (depositary), which was in turn instructed to transfer 57.14 percent of all funds on deposit to a transaction account owned by Banco de Mexico at the FRBNY, and the remainder to a trustee account for servicing the structured notes.  In the event of a payment default to the U.S. Treasury or the holders of the notes, FRBNY was authorized to debit the transaction account of Banco de Mexico for amounts then due under the notes, for making payments to debt holders.

According to Standard and Poor’s, the credit rating of the structured notes did not benefit from the involvement of the FRBNY which acted only as a depositary, nor from that of the U.S. Treasury, since the obligations due to the latter were scheduled to mature before the notes’ final maturity in 2001.

B. Pemex Finance Limited

Amount: Nine issuances during 1998 and 1999, each up to $500 million. Future US dollar receivables owed to Pemex Finance Ltd. by designated customers who will receive Mayan crude oil from Pemex Exploracion y Produccion (PEP), via Petroleos Mexicos Internacional (PMI). Rating BBB.

PMI arranges to sell Mayan crude oil, or some other crude oil type if Mayan becomes unavailable, to designated customers who agree to deposit their payments into an offshore collection account.  PMI, a subsidiary of Pemex, is the distributor for Mayan crude oil, which is produced by PEP.  Pemex Finance Ltd. is the offshore issuer of notes.  It purchases the receivables from PMI via the offshore Pemex subsidiary, PMI Services. 

The diagram shows that sales of the crude oil to designated customers and of receivables to PMI Services are out of the jurisdiction of the Mexican government.  The first claim on the receivables is from the note holders, and the Mexican central bank is not involved in the process. Chase Manhattan Bank has agreed to administer the issuance of all debt and the payment of interest and principal on such debt in accordance with Pemex’s agreements.  After paying note holders principal and interest, excess payments, based on fluctuation in crude oil prices, are paid to PMI Services and PMI, via the offshore collection account. 

While this structure mitigates the usual convertibility and transfer risks, other risks still remain. Primarily, there is a risk that a fluctuation in crude oil prices will result in revenues insufficient to cover the interest and principal due to note holders.  The overcollateralization of the notes minimizes this risk – PMI will provide a minimum coverage ratio of three times the amount needed for payment of interest and principal. Designated customers have also signed agreements acknowledging their commitment to purchase crude oil and to make any future payments into the offshore collection account.  Further enhancing the strength of such issuance is Pemex’s track record of timely servicing of debt in the past.  As a result of these enhancements, S&P rated the credit of 1998 and 1999 tranches A-2 and A-4 and 1999 tranche A-5 as BBB.  Rated as AAA are 1998 and 1999 tranches A-1 and A-3, as they are insured by MBIA and AMBAC.  These ratings are clearly favorable relative to the BB foreign currency rating of the United Mexican States.  

Back to top


Example: Pakistan Telecommunications Co Ltd (PTCL)

No default on asset-backed papers even in the face of selective default on  sovereign debt

In 1997, the Pakistan Telecommunications Company Limited (PTCL) issued $250 million in bonds backed by future telephone settlement receivables from AT&T, MCI, Sprint, British Telecom, Mercury Telecommunications and Deutsche Telekom. Even though the Government of Pakistan owns 88 percent of PTCL, this issue was rated BBB- by S&P, four notches higher than the B+ sovereign rating.

Following the detonation of nuclear devices in May 1998, Pakistan’s economy and creditworthiness deteriorated rapidly.  Investors became concerned that faced with increasing official demands for equal burden sharing, the government might place the future flow receivable-backed securities in a single basket with all other sovereign debt and interfere with PTCL’s debt servicing.  The Government of Pakistan rescheduled its Paris Club debt obligations on January 30, 1999 and signed a preliminary London Club agreement on July 6, 1999 to reschedule $877 million of sovereign commercial loan arrears.  But PTCL’s future flow net receivable backed bonds were not subjected to any rescheduling or restructuring, although their rating was downgraded several times during 1997-98 (see table below).  Partly this was because the amount required to service these obligations made up only 30 percent of the total net telephone receivables of the company.  But the main reason was that there was a strong incentive on the sovereign’s part to keep servicing the bonds and not jeopardize the operation of the local telephone network and even more importantly risk severing Pakistan’s telecommunication link to the rest of the world.

History Of PTCL Credit Rating


Pakistan Sovereign Rating

PTCL Rating






At issuance due to its structure



BB+/Neg. outlook

Following the detonation of a nuclear device which led to the imposition of trade sanctions and the freezing of $13 billion in foreign currency bank deposits




Following a downgrade of Pakistan's rating from B- to CCC




Following a tentative agreement with the IMF which opened the way for debt restructuring while leaving uncertain the precise fate of PTCL debt




Following the rescheduling of US$969 million of commercial loans in default since July 1998.




Expected to be upgraded to BB

Source:  S&P


Back to top


Further reading

Fitch IBCA, Duff & Phelps. International Structured Finance Criteria Reports. Various issues.

Fitch IBCA, Duff & Phelps. 2000.  "Rating Securities Backed By Future Export Receivables."  October 10.

Giddy, Ian H. 1994. Global Financial Markets.  Lexington, Massachusetts: D. C. Heath and Company.

Ketkar, Suhas and Dilip Ratha. 2001a.  Development Financing during a Crisis: Securitization of Future Receivables.” Policy Research Working Paper 2582. The World Bank. April.

Ketkar, Suhas and Dilip Ratha. 2001b.  Securitization of Future Flow Receivables: A Useful Tool for Developing Countries.” Finance and Development, pp 46-49. March.

Moody’s. 2001.  Revised Country Ceiling Policy: Rating Methodology.

Ramos, Alberto M. 1998. “Government Expenditure Arrears: Securitization and Other Solutions.” IMS Working Paper WP/98/70. May.

Standard and Poor’s. 1999b.  Lessons from the Past Apply to Future Securitizations in Emerging Markets.” July.

Standard & Poor's.  2000. “Bank Survivability Criteria Aids Future Flow Issuers.”  Standard & Poor’s CreditWeek.  September 27.

Standard & Poor’s. 2001. “New Rating Criteria for Multiple-Credit-Dependent Obligations.” May.

Back to top