Title: InterAmerican Development Bank
1Inter-American Development Bank
Local Currency Lending
- Local Currency Facility
- A. Local currency (LC) conversion of
disbursements/ outstanding loan balances - B. LC swaps with the IDB to hedge existing IDB
debt - C. LC conversion of called guarantees
- Facility allows for execution of up to 5 loan
operations per year - Objective
- Provide proactive response to borrowers needs
- Provide LC financing within the Banks prudent
risk management parameters - Constraints
- Charter Bank cannot take currency exposure
- Financial Markets
- - Banks AAA of limited value in LC markets
- - Local currency availability
-
2Inter-American Development Bank
- A. LC conversion of disbursements/outstanding
loan balances - Loan approval remains in USD, CHF, EUR or JPY
- Conversion of disbursements available for all
lending products (SCF-L, SCF-Adj, CPS, USD
Window, Private Sector Loans, Emergency Loans) - Conversion of outstanding loan balances not
available for adjustable rate loans (SCF-Adj. and
CPS) - Conversions subject to market conditions
- Fixed, floating or inflation-linked interest rate
financing in LC, if available - Perfect match of LC disbursements with Banks LC
funding - Partialterm conversions with possibility to roll
over or to modify amortization schedules of
disbursements (subject to WAL limitation) - Pricing swap at the LC equivalent of USD
Libor10bps, plus OC lending spread - Conversion fee, prepayment fee and unwinding cost
reimbursement
3Inter-American Development Bank
- B. LC swaps with IADB to hedge existing IADB
debt - ISDA Master Agreement required
- No collateral requirement for sovereign-guaranteed
transactions - Cross-default provisions required
- Priced at cost, plus transaction fee
- C. LC conversion of called guarantees
- Borrower could request conversion of obligation
into LC once cash flow schedule for likely
repayment is established - Pricing is same as for LC loans under conversion
option
4Inter-American Development Bank
Local Currency Lending Additional Options
- 1. Non-inclusion of Currency Substitution Clause
- Intended to protect the Bank from exposure if a
swap counterparty defaults and cannot be replaced - Potential exposure from this risk is limited by
the existing swap exposure limits and constant
monitoring of the counterparties - 2. Modification of Amortization Schedules
- Allows the loan to match funding in LC within WAL
limitations - Cannot extend average life or maturity of
original loan - 3. Pricing
- For bond financing, pricing would be a pass
through of the Banks actual cost plus the OC
lending spread -
5Inter-American Development Bank
Local Currency Lending Operations Under
Execution
- Banobras (Fortem I) - 300 million loan approved
in 2001 - - Pilot operation as of today, four 20 million
disbursements in Mexican Pesos executed through
swaps - - LC disbursements have matched original loan
maturity in dollars - - Fortem II - 200 million loan approved in June
under LCF - BNDES - Eligibility of 3 billion CCLIP to LCF
approved in August - Procidades - 800 million loan to Municipalities
approved in October - - Standardization of financial terms through
aggregation of quarterly disbursements and
minimum disbursement amounts - - Fixed interest rates on inflation-adjusted
principal - - Average maturity of LC disbursements cannot
exceed 15.25 yrs - D. Other borrowers Active discussions with
potential public and private sector borrowers in
Mexico, Colombia and Peru on currency conversions
and execution of direct LC currency swaps with
IADB
6The IADB Actively Participates in the Latin
American Capital Markets
Inter-American Development Bank
- The Bank is present in the local currency capital
markets of the Banks borrowing member countries
through - Issuance of bonds in local currency 27 bond
issues in Latin American currencies in the last
two and a half years (BRL, CLP, COP, MXN, PEN) - Swap transactions to hedge issuance of bonds
and/or loan disbursements in local currency - IADBs Charter requires it to obtain local
government consent for issuance in the currency
of the member country.
7The IADB as an Issuer of Local Currency Bonds
Inter-American Development Bank
- IADB issues bonds with a global format
denominated in local currency that are placed
simultaneously among domestic and international
investors, seeking a well-diversified investor
base, with the aim to improve the price discovery
process and the liquidity of the securities. - By contributing to establish a new asset class in
the local market of AAA issuance, IADB helps the
asset diversification of the local investors.
8The IADB as a User of Cross Currency Swaps in
Local Currency
Inter-American Development Bank
- The IADB has executed more than 30 swap
transactions in local currency for a total
notional of USDeq. 1.6 billion in connection with
its bond issues and lending operations in the
following currencies BRL, CLP, COP, MXN and PEN. - As a user of swaps in the local currencies of the
region, the Bank helps provide liquidity to the
market, especially in long maturities, allowing
other market participants to hedge their
positions. - In the more illiquid markets, IADB works with
dealers to develop a publicly traded swap curve,
helping the valuation of the transactions to
comply with risk management and accounting
requirements.