RPT-Fitch: Political Risk Insurance Returns to Capital Markets with New Applications

Wed Feb 26, 2014 9:10am EST

Feb 26 (Reuters) - (The following statement was released by the rating agency)

Political Risk Insurance (PRI) for capital markets has reemerged with broader scopes of coverage to adapt to the changing needs of emerging markets (EM) finance, according to a new special report by Fitch Ratings.

"New PRI products that cover not only political risk but also certain credit risks typically related to a sovereign obligation could help select EM issuers to access international capital markets," says Cinthya Ortega, Director in Fitch's Latin America Structured Finance group.

Fitch rated the first ever debt security supported by PRI in 1999 and has continued to rate PRI transactions benefiting from various forms of coverage. The most recent capital markets application was the Multilateral Investment Guarantee Agency's (MIGA) coverage benefiting the class A1 notes issued by Maexim Secured Funding Limited in 2013.

Traditional PRI primarily protected private companies against government-imposed transfer and convertibility (T&C) restrictions. More importantly, PRI policies traditionally have not covered credit risk. Therefore, if the underlying obligor does not have sufficient resources to make the local currency payment, the insurance cannot be utilized.

In recent years, leading providers such as the Overseas Private Investment Corporation (OPIC) and MIGA have introduced insurance products for capital markets usage that cover certain credit events including non-payment of an arbitral award and non-honoring of financial obligations (NHFO).

Unlike traditional PRI, the determination of claim under a new policy that covers non-payment of an arbitral award is binary in nature, meaning a burden of proof can be fulfilled through a simple "yes" or "no" answer. New NHFO products bear a resemblance to financial guarantees, although limited exclusions do exist.

These newer products normally relate to a sovereign guarantee or obligation and therefore do not address private sector companies in the absence of a sovereign support mechanism.