First rated microfinance bond sells to strong demand

NEW YORK, June 1 (Reuters) - Morgan Stanley (MS.N) saw strong investor demand for the first rated bond to be backed by loans to microfinance institutions, with the deal also undertaking what is thought to be the first currency swap made from Mongolian tugrik into U.S. dollars.

The $108 million collateralized loan obligation (CLO), named BlueOrchard, packages loans made to microfinance institutions in 13 emerging markets, which are passed on to more than 70,000 borrowers.

Microfinance aims to provide financial services to low-income borrowers who have been excluded from traditional commercial banking. The service offers loans, usually less than $200, to individuals to start or expand small businesses.

Standard & Poor's rated the deal and expects to rate up to three transactions in coming months. Issuance may reach $500 million by the end of 2007 and grow to $1 billion to $3 billion a year over the next decade, S&P said last month.

"The rated notes were in extremely strong demand and were oversubscribed several times over," said Ian Callaghan, head of the microfinance institutions group at Morgan Stanley in London. "The ratings meant that mainstream institutional investors such as banks, mutual funds and other money managers could participate in the deal," Callaghan said.

CLOs package loans and are divided into tranches of higher and lower default risk for varying coupons. The structures have been increasingly in demand as they can pay higher coupons than the underlying assets.

"The demand was a combination of a number of things. The credit quality of the microfinance institutions is probably better than you see in many emerging market portfolios and helped people get comfortable with tighter pricing than you'd typically see in emerging market deals," Callaghan said.

"The CLO also has a fantastic diversification effect for investors as there isn't really anything else like it out there," Callaghan said.

The diversification was extended to loans from countries in Africa and central Asia, and Morgan Stanley executed the foreign exchange swap from Mongolian tugrik into U.S. dollars as part of the deal.

The countries are Azerbaijan, Bosnia, Cambodia, Colombia, Georgia, Ghana, Kenya, Mongolia, Montenegro, Nicaragua, Peru, Russia and Serbia.

"Emerging Market CDOs typically have been using sovereign or quasi sovereign debt that that have been issued, or even higher quality corporate institutions that might have issued debt, so now you're basically opening up the emerging market universe to more access opportunities," said Gary Kochubka, director in emerging markets structured finance at S&P in New York.

By having the CDO rated, the deal is opened up to institutional investors whose investment guidelines require ratings, as well as giving investors a way to benchmark this transaction against other emerging market deals or CDOs, he added.

BlueOrchard comprises a $42 million tranche rated "AA," the third highest investment grade rating, and a $16 million tranche carrying "BBB" ratings, the ninth highest rating, in addition to two unrated tranches of $42 million and $8 million, respectively, S&P said.