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InterAmerican Development Bank

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A. Local currency (LC) conversion of disbursements/ outstanding loan balances ... to hedge issuance of bonds and/or loan disbursements in local currency ... – PowerPoint PPT presentation

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Title: InterAmerican Development Bank


1
Inter-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

2
Inter-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

3
Inter-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

4
Inter-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

5
Inter-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

6
The 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.

7
The 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.

8
The 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.
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