Collateralized Transactions: Recent Developments and Policy Considerations
December 2023
Prepared by IMF and World Bank Staff
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Executive Summary
This note provides an update to “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” prepared by the IMF and the World Bank (2020) in response to a request from the G20 IFA Working Group, to assess collateralized transactions from a development perspective. It restates the findings from that note, including the different dimensions collateralized transactions can take, how collateralized financing can benefit borrowers and lenders, and also the pitfalls associated with such arrangements. The note takes stock of recent developments, including how recent restructurings have been affected by the presence of collateralized loans, and the limited progress made in terms of addressing information and data gaps. It concludes with a discussion of a set of policy recommendations and a way forward.
The pros and cons of collateralized borrowing as discussed in the 2020 note remain relevant. Specifically, collateralized financing of projects where future revenue streams are directly linked to repayment under adequate disclosures that mitigate the risk of mispricing for both unsecured and secured creditors has the highest potential for benefiting the borrower and protecting the longer-term development relationship with creditors. Conversely, collateralized financing, even if related to a project, can cause more harm than good when one or more of the following criteria are met: (i) it does not improve borrowing terms; (ii) it weakens debt sustainability; (iii) it is not disclosed; or/and (iv) it does not respect negative pledge clauses.
This note contributes to the IMF and World Bank’s Multi-Pronged Approach (MPA) to address debt vulnerabilities, which comprises pillars on transparency, capacity building, analytical tools, and international financial institution (IFI) policies for sustainable lending. It also underlines the need for greater transparency across borrowers and lenders, institutional capacity development in borrowing countries, and financing practices that protect longer-term development relationships between debtors and creditors.
The note highlights the limited progress that has been made in improving the transparency of collateralized debt data. The data of collateralized transactions are not collected systematically by borrowing country Debt Management Offices (DMOs) and are sparsely available for IFIs. Creditor-led voluntary disclosure efforts have not been very fruitful. The IMF Debt Limits Policy (DLP) requires reporting of related and unrelated collateral in the debt holder profile table accompanying country documents relating to program requests or reviews. However, reporting on collateral has been limited, including due to capacity constraints. The World Bank is currently revising its Debt Reporting System (DRS) template to identify which loans are collateralized, with effective rollout expected in 2025. Some incremental progress has been made through reconciliation with various external debt datasets.
The prevailing environment of high debt levels and associated vulnerabilities makes it even more important to carefully weigh the costs and benefits of collateralized transactions. This implies appropriate transparency and disclosures, and internalizing of all near-, medium-, and long-term costs of collateralization (including for future non-collateralized borrowing) before a cost-benefit analysis is done by borrowers of collateralized versus non-collateralized financing options.