FX RISK IN DEVELOPMENTMANAGING CURRENCY RISK THROUGH BLENDED FINANCE SOLUTIONS

FX RISK SOLUTIONSFX risk in developing countries and development finance poses a significant challenge to sustainable development. Over the past decade, there have been several innovations to reduce this risk. However, more scale is needed as the large majority of financing to developing countries continues to be in FX.

Participants in the FX Risk in Development workshop hosted by the European Commission, OECD, EDFI, Convergence, and TCX on 1 February 2017 submitted the FX risk solutions contained in this document. Solutions include hedging solutions, guarantee products and risk participation, and local currency lending. Whilst this document does not include all FX risk solutions, we hope the overviews will encourage open collaboration and sharing of best practices. An initial document was shared with participants prior to the workshop to ground discussions in concreate solutions. The document has been updated with additional submissions post-workshop.

1 March 2017

CONTENTSHEDGING SOLUTIONS

TCX (The Currency Exchange Fund)1

MFX Solutions2

GUARANTEE PRODUCTS AND RISK PARTICIPATION

GuarantCo3

MIGA Guarantee Instrument4

SIDA Guarantee Instrument5

USAID DCA (Development Credit Authority)6

LOCAL CURRENCY LENDING

ADB CGIF (Credit Guarantee and Investment Facility)7

AfDB Local Currency Initiative8

BMZ SANAD Fund for MSME – Local Currency Window9

EBRD Early Transition Countries SME Local Currency Programme10

EIB ACP IF11

FMO MASSIF12

IFC Local Currency Solutions13

KfW ALCB (African Local Currency Bond) Fund14

TCX (The Currency Exchange Fund)1TCX enables foreign investors to provide local currency loans in emerging markets by pooling FX risks in a single fund. TCX offers hedges for currencies and tenors not served by commercial banks because of innovative macro-risk pricing tools and blended capital (incl. first-loss capital provided by German and Dutch governments). TCX uses market / risk-reflective pricing to minimize distortions and to improve risk allocation, and shares “easier” parts of its risk portfolio with the private sector. TCX is rated A- by S&P. TCX is easily scalable and is expanding its capital base to increase capacity and to broaden impact focus to include infrastructure finance.

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2007 2B 162M (first-loss) OECD DAC low and middle income countries

Financial sector/capital markets, climate finance, infrastructure, corporates

Contact: Harald Hirschhofer, Senior Advisor, TCX, h.hirschhofer@tcxfund.com

OUTCOMES

Results to Date: ~USD 4.5B hedged; daily price quotes; development and promotion of macro-risk based pricing models in frontier markets; webinars and workshops for investors and financial institutions; broader policy and advocacy.Impact on Donor Funds: No losses (100% of first loss capital remains); NAV of equity currently at initial USD subscription price. Number of Transactions : 700+ transactions, average size ~USD 6M

STAKEHOLDERS

Shareholders: EBRD, KfW, FMO, EIB, JBIC, AFD, DBSA, IFC, AfDB, OFID, BIO Invest, MFX, Proparco, EFSE, COFIDES, Oikocredit, ASN Fund, Oxfam/Novib Fund, BOMF, CGAMF, German and Dutch Gov’tOther Stakeholders: UN LIFT, SE4All, Power Africa, industry associations

OBJECTIVES AND PARAMETERS

Development Challenge: Domestic financing sources are insufficient and do not offer the tenors / rate stability required by domestic investors / households. Development finance typically denominated in hard currencies, and borrowers are exposed to unhedged exchange and interest rate risks. Hard currency financing may contribute to over-indebtedness and fragilities on the borrower and broader economy. These challenges slow and jeopardize sustainable development.Target Beneficiaries: TCX allows its shareholders to loan in local currency to banks and MFIs for on-lending to MSMEsacross the microfinance, SME finance, and energy/climate finance sectors. Financing Instrument to Beneficiaries: Cross currency swaps, currency forwards, interest rate swaps.Capital Structure: USD 526M in common equity from its 20 shareholders and USD 162M in subordinated convertible debt (i.e., first loss tranche) from the German and Dutch governments.Blended Finance Solution Mechanics: 1) First loss capital contributes to capital stability and increases risk bearing capacity (by guaranteeing a minimum return of USD Libor to equity holders over lifetime of TCX, donors improve the equity risk-return profile and catalyze private capital); 2) TCX partnered with UN LIFT program in late 2016 to overcome regulatory hurdles to microfinance in Myanmar by providing a partly donor-financed concessional hedging program to overcome barriers to foreign finance imposed by a low interest rate cap regulation. Concessional hedges are provided to eligible counterparties below risk-reflective costs and donors compensate TCX for resulting mark-to-market losses; TCX currently in negotiations to expand similar concessional hedging activity to Sustainable Energy for All.Methods of Mitigating FX Risk: 1) Global diversification improves risk-return profile and capital efficiency; makes TCX highly scalable; 2) Market / risk-reflective pricing and resulting interest carry between local and hard currency. Measures to Counter Market Distortion: 1) Only acts if additional to commercial suppliers of funding and risk mitigation services; 2) Services offered at market or risk-reflective prices to avoid misallocation and allow the entry of private competition; 3) Designs programs with donors and development experts to minimize perceived or real unavoidable distortion (in the case of concessional hedging programs, desire to improve access to finance for a targeted group may justify distortions over a limited time horizon); 4) Share a maximum portion of risk exposure with the private sectorSustainability: TCX is crisis tested, helping its clients through four global financial crisis’. TCX is highly capitalized to sustain high return volatility. Investors have earned a marginally positive USD return (on cumulative basis). Technical Assistance: Donor support macro-economic modeling activities and facilitate limited TA to some clients.Additionality: TCX only offers its FX hedging services if there is no commercial market available, and assesses its additionality by checking if available quotes are sufficiently deep/liquid/frequent to enable hedging.

MFX Solutions2MFX is a credit intermediary providing access to currency hedging products for impact lenders. Thanks to relationships with TCX and major banks, MFX can offer its clients hedging in almost any currency which MFX offsets with hedges with its market counterparties. Credit guarantees from OPIC and FMO allow MFX to hedge without requiring collateral from its clients.

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2009 650M 68M (additional 120M in approval process)

>45 OECD DAC countries

Microfinance, SMEs, renewable energy, sustainable ag, affordable housing, health

OBJECTIVES AND PARAMETERS

Development Challenge: Lending in hard currency to impact borrowers who have local currency revenues saddles them with currency risk, undermining sustainability and increasing credit risk. Impact funds are typically hard currency-denominated and cannot carry large open currency positions – they need to hedge their local currency loans. Lenders face two challenges to offering hedged local currency loans: 1) no hedging products available from banks in illiquid currencies, 2) collateral for hedging can require up to 30% of the loan amount in additional liquidity where products are available. TCX can provide hedging in illiquid currencies but only without taking open credit risk (e.g., only with its shareholders – such as highly rated DFIs – or other highly-rated counterparties on a collateralized basis. Banks are wary of hedging with smaller impact funds and require collateral. MFX bridges this gap by hedging with impact funds on an uncollateralized basis backed by credit guarantees from its partner DFIs, and passes the market risk (e.g., currency and interest rate risk) to TCX and commercial banks at market terms. Target Beneficiaries: Impact funds (MSME, renewable energy, etc.), MFIs, SME banks, OPIC borrowersFinancing Instrument to Beneficiaries: Cross currency swaps, currency forwards, currency option productsCapital Structure: USD 17M in equity from impact funds (who are also MFX clients) and foundations who support impact lending. USD 68M of credit guarantees from OPIC and FMO. Paid in capital has been used to purchase an equity stake in TCX, as working capital, and as security for credit guarantees.Methods of Mitigating FX Risk: MFX is a currency risk mitigator for lenders.Measures to Counter Market Distortion: In its hedge price to clients, MFX passes on its hedging costs with market counterparties (TCX and Banks) who trade at market rates. MFX adds a small spread to cover its guarantee fees and other cost. Clients thus pay a premium for credit intermediation.Sustainability: MFX has been increasingly profitable on a GAAP basis for the last 4 years and recently became cash flow positive. MFX is negotiating for additional guarantees to allow it to continue to grow its portfolio.Technical Assistance: MFX provides consulting and education services to its clients and others on currency risk management, hedge administration, and hedging strategy. In the past, MFX has provided consulting services to African MFIs and banks on asset/liability management and currency risk. Additionality: By removing the barriers to hedging, MFX allows impact lenders to make local currency loans that otherwise would not have been possible or would have been made in hard currency. 50% of MFX portfolio is in illiquid currencies and roughly 25% of its trades are in African currencies which are historically underserved by microfinance.

OUTCOMES

Results to Date: Hedged >USD 1.4B of local currency loans in 1650 individual transactions; current portfolio is USD 640M in 817 transactions (28% Asian currencies, 22% Latin America, 22% Africa and 25% Eastern Europe); 77% of hedges have supported 1M microfinance loans, 23% have supported other impact sectors.Impact on Donor Funds: Leveraged donor guarantees by ~10X; no claims against guarantees in 6 years Capital Deployed To-Date (USD): > USD 1.4B in hedged loansNumber of Clients/Transactions: 90 clients with 1650 Transactions

STAKEHOLDERS

Investors: Omidyar Network, Accion Int’l, Triodos Funds, ResponsAbility Global MF fund, 40 additional impact fundsGuarantors: OPIC (USD 48M), FMO (USD 20M)Technical Service Providers: Luminis (credit due diligence), DLM (Treasury/backoffice)

Contact: Brian Cox, President and CEO, MFX Solutions, brian@mfxsolutions.com

GuarantCo3GuarantCo (GtCo) provides guarantees to support local currency financing for infrastructure projects in poorer countries. GtCo’s mission is to become a market-based recognized guarantee institution aimed at enhancing the availability and role of local currency finance for viable and sustainable infrastructure projects and at strengthening developing country capital markets for the purposes of assisting with the alleviation of poverty.

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2006 1B (further growth planned) 350M OECD DAC I to III countries Infrastructure

OBJECTIVES AND PARAMETERS

Development Challenge: The majority of infrastructure projects earn revenues in local currency and therefore should be financed in the same currency. In many emerging markets, particularly in Sub-Saharan Africa, infrastructure is often funded in hard foreign currency that imposes a significant FX risk impeding sustainability. Whilst at a project level, the revenue or tariff may be paid in hard currency or indexed to hard currency, the sector itself produces revenues in local currency from consumers. This means the FX risk is often assumed by the off-taker or, worst of all, passed down to consumers who are the least able to absorb or mitigate such risk. GtCo provides guarantees and other solutions to support local currency financing to help avoid this FX risk. In addition, by crowding in and supporting local financial institutions, GtCo helps build local capacity and self-sufficiency.Target Beneficiaries: Local financial institutions, local infrastructure projects and end consumers.Financing Instrument to Beneficiaries: Guarantees and certain contingent liquidity products that can be used to bridge the gap between an infrastructure project’s financing requirements and what is available from the local market. Capital Structure: ~USD 300M in equity, GBP 40M in callable capital from DFID, USD 30M stand-by facility from FMO.Methods of Mitigating FX Risk: Eliminates FX risk by ensuring infrastructure project financed in the same currency as its revenues. GtCo does not bear FX risk in its guarantee – it bears credit risk of the borrower / bond issuer.Measures to Counter Market Distortion: GtCo works to crowd in the local markets and requires some uncovered risk to be shared. Whilst this helps avoid the moral hazard risk, it also participates in an uncovered tranche of debt that helps establish the market interest rate for non-guaranteed risk of the borrower/issuer. In addition, GtCo doesn’t require refinancing or cancellation costs or hurdles. This has resulted in some guarantees being cancelled early, with the commercial lender taking on the full borrower/project risk at the full margin. Such cancellations wouldn’t occur if the margin, and the resulting interest rate, was below market. Sustainability: Despite significant investment for future growth, GtCo expects to be profitable in 2017.Technical Assistance: PIDG has a technical assistance facility that can be utilized by GtCo to support infrastructure projects and to some extent, capacity training but targeted at enabling project implementation and completion.Additionality: GtCo has a unique focus on local currency guarantees to support infrastructure in poorer countries. However, there is only so much GtCo can do by itself and would welcome other participants to help support larger guarantee requirements. One of the reasons GtCo, along with the Nigerian Sovereign Wealth Fund, promoted InfraCredit in Nigeria was to provide additional guarantee capacity in Nigeria beyond that which GtCo could provide itself. Infracredit will be a local currency monoline in Nigeria with a specific focus on attracting pension funds and asset managers to invest in Nigerian infrastructure through wrapped capital markets instruments.

OUTCOMES

Results to Date: 42 projects in 17 countries and variety of sectors for >USD 500m. Current guarantee portfolio >USD 430M.Impact on Donor Funds: Donor funds support capital base and credit standing; also available to meet claims. Capital allowed GtCo to obtain and maintain strong credit ratings (AA- from Fitch, A1 from Moody’s). GtCo has paid out two claims of ~USD 30 million; most will be recovered through agreed restructurings and/or by enforcement of security.Number of Institutions and/or Projects: 42 projects; number of institutions supported is higher, particularly for bond transactions where there will be a number of investors buying bonds supported by GtCo.

STAKEHOLDERS

Donors / Investors: Equity through PIDG from Dutch Government through FMO, DFAT, SIDA, SECO, DFID. Callable capital provided by DFID. Stand-by facility provided by FMO.Technical Service Providers: GuarantCo Management CompanyOther Stakeholders: PIDG, CardanoDevelopment (owner of GuarantCo Management Company)

Contact: Douglas (Pug) Bennet, COO, douglas.bennet@guarantco.com

MIGA Guarantee Instrument4

The World Bank Group’s Multilateral Investment Guarantee Agency (MIGA) provides guarantees on cross-currency swaps to promote foreign investment into developing countries. Coverage protects against losses resulting from a failure of a sovereign, sub-sovereign, or state-owned enterprise to make a payment when due under an unconditional financial payment obligation under a swap. It does not require the investor to obtain an arbitral award. This coverage is applicable in situations when a financial payment obligation is unconditional and not subject to defenses. Compensation would be based on the insured swap breakage cost, up to a preset limit.

LAUNCH DATE

TARGET COUNTRIES

TARGETSECTORS

2011 Countries that meet MIGA’s eligibility requirements Infrastructure

OBJECTIVES AND PARAMETERS

Development Challenge: Many infrastructure projects face currency mismatch between local currency revenues and long-term foreign currency financing. Faced with high capital charges on credit risk, market counterparties demand commensurate price for hedging this risk. MIGA is able to insure market swap counterparties, primarily banks, against the risk of nonpayment by eligible sovereigns, sub-sovereigns and state-owned enterprises under the obligations of the swap agreement. Target Beneficiaries: Eligible sovereigns, sub-sovereigns, and state-owned enterprises. MIGA can provide guarantees for up to 15 years, thereby increasing the tenor of loans available to investors. Financing Instrument to Beneficiaries: Cross-currency swap guarantees. For sovereigns, sub-sovereigns and state-owned enterprises, MIGA’s cover broadens access to capital markets, and in many cases, allows to do so at a lower all-in cost. For market counterparties, MIGA cover defends the credit risk and allows them to provide hedges on more attractive conditions in terms of tenor and pricing. Methods of Mitigating FX Risk: Guarantees on the breakage costs for the cross-currency swap.Measures to Counter Market Distortion: MIGA calculates a market-based premium based on the expected positive exposure of the swap, which it expects the Guarantee Holder to pay during the duration of the guarantee. Sustainability: MIGA is part of the World Bank Group, and has an implied AAA credit rating. In keeping with MIGA’s objective of promoting economic growth and development, projects supported must be financially and economically viable, environmentally sound, and consistent with the labor standards and development objectives of the country.Additionality: MIGA guarantees on cross-currency swaps enables FX hedging and reduces overall cost of financing. MIGA also adds value through its ability to offer clients extensive knowledge of emerging markets and of international best practice in environmental and social management.

OUTCOMES

Results to Date: Two transactions (2011 and 2015) in which MIGA was asked to cover the Government of Senegal’s obligations under cross-currency swaps. The total notional amount covered under these two transactions is USD 500M.Number of Partners/Guarantees: A portfolio of infrastructure projects under the Government’s “Emerging Senegal Plan”

STAKEHOLDERS

Donors / Investors: MIGA member countries

Contact: Olga Sclovscaia, Senior Manager, Financial and Capital Markets, MIGA, osclovscaia@worldbank.org

SIDA Guarantee Instrument5

In addition to grant funding, Sida offers a guarantee instrument designed to absorb risks to unlock capital and promote development in the countries where Sida participates in development cooperation. This is a flexible and effective instrument that addresses constraints related to access to capital.

LAUNCH DATE SIZE (USD)

TARGET COUNTRIES

TARGET SECTORS

2009 1,200M Sida priority developing countries

General, depends on Sida mission-level priorities

OBJECTIVES AND PARAMETERS

Development Challenge: Significant capital investment in required to spur growth in emerging markets. Private sector institutions need to be encouraged to operate in new sectors and regions with competitive loan terms. Target Beneficiaries: Sida’s guarantee instrument targets partner financial institutions, predominantly banks. These financial institutions may be operating in any sector, including energy, education, democratic governance, infrastructure, health, or business development. Financing Instrument to Beneficiaries: Sida provides four types of guarantees: (1) loan guarantees involve guaranteeing a loan between identified lenders and identified borrowers; (2) portable guarantees are letters of commitment that enable a borrower to approach a financial institute and to negotiate more favourable terms; (3) volume guarantees are agreements that buyers make with suppliers to purchase a minimum volume of products or services; and (4) loan portfolio guarantees are guarantees that collect several investments or loans in one portfolio.Methods of Mitigating FX Risk: A guarantee by Sida is a sovereign guarantee, backed by the Swedish Government. Sida is able to guarantee a variety of risks, such as credit risks and political risks, as well as more innovative structureswhere risk is absorbed by the guarantee (e.g. advanced market commitments). Guarantees cover a proportion of the credit risk according to the terms agreed upon under each partnership. Measures to Counter Market Distortion: Sida ensures that there is insignificant risk for market disturbance or distortion of the competition within the sector when evaluating projects. The purpose of Sida’s guarantee program is to crowd-in private investment to new regions and sectors. Sida charges market-appropriate fees for services. Sustainability: While Sida’s guarantee program falls under Sida’s broader development agenda, Sida does charge a risk-reflecting premium. If losses occur in the facility and the guarantee will be called upon, Sida’s share of the losses will be carried by the guarantee reserves.Additionality: When Sida looks into possibilities of issuing a guarantee, Sida needs to be additional. Sida should be active in a situation where no other actor has the possibility to issue a guarantee. Sida requires that the risk is shared with a partner, most often with a bank, a microfinance provider or other financial institution in order to avoid moral hazard. Sida will usually act as a co-guarantor together with a donor, development bank, or development finance institution.

OUTCOMES

Results to Date: At the end of 2015, the portfolio contained 29 projects, with an aggregate guaranteed volume of 3,500 MSEK. This portfolio covers many of Sida’s focus areas, such as health, environment, infrastructure, market development, and agriculture. The portfolio has a global reach, including African, European, Asian and Global projects.Impact on Donor Funds: Sida has crowded-in significant funds from other donors, development banks, and development finance institutions.Capital Deployed To-Date (USD): 500MNumber of Institutions and/or Projects: 29

STAKEHOLDERS

Co-Investors: Co-guarantors and resource partners include: USAID, Gates Foundation, Asian Development Bank

Contact: Magnus Cedergren, Sida, magnus.cedergren@sida.se

USAID DCA (Development Credit Authority)6

USAID’s DCA provides flexible credit guarantees to a variety of different types of lenders – from traditional local banks and MFIs to investment funds, pension funds, and private investors – to encourage private lenders to extend financing, often in local currencies, to underserved sectors in developing countries. By catalyzing additional investment in local markets, the program increases access to finance and promotes economic growth.

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD) TARGET COUNTRIES

TARGETSECTORS

1999 4.8B 207M (loan loss reserve amountfunded by donor budget)

USAID priority developing countries

General, depends on USAID mission-level priorities

OBJECTIVES AND PARAMETERS

Development Challenge: Lack of access to credit in local currencies among MSMEs is one of the primary constraints to economic growth. Through DCA loan guarantees, USAID incentivizes financial institutions to begin lending in new sectors and to new borrowers; lending that will both increase their bottom lines while promoting prosperity and security.Target Beneficiaries: Mostly MSMEs operating in a variety of sectors. The product can also be used to support sub-sovereign or private infrastructure and renewable energy projects. Financing Instrument to Beneficiaries: Local currency loans and other financial services.Methods of Mitigating FX Risk: DCA partial credit guarantee designed to reduce risks to generate additional lending to underserved markets. Guarantee is backed by the U.S. Treasury. Typically, guarantees are up to 50%, pari passu, on the loan principal and recoveries are shared pro-rata with USAID net of reasonable documented expenses incurred. Measures to Counter Market Distortion: DCA partial credit guarantee designed to demonstrate long-term commercial viability of lending in developing markets. Crowding-in of private capital through guarantees accomplished at a fraction of cost of conventional donor support; seeks to permanently replace short-term donor funding with long-term and sustainable, locally-generated, private capital.Sustainability: Default rate is 2.5%. By lending with DCA credit guarantee, lenders gain comfort in lending to new types of borrowers and sectors as they learn it can be profitable. After the DCA expires, lending continues to these sectors and borrowers build their credit history.Technical Assistance: While DCA does not provide TA, USAID and other donors often provide TA grants alongside DCA guarantees. USAID has found that guarantees have greater results when made in coordination with TA, including assistance to borrowers to make them more creditworthy and assistance to the financial institution to develop a new loan product or revise their risk management policies when lending to a target group. Additionality: DCA has demonstrated additionality. Vast majority of DCA guarantees allowed the partner to enter a new sector, or increase their lending to a previously underserved sector. An evaluation of the DCA, completed in 2013, confirmed that the loans in DCA’s portfolio would not have happened without the guarantee.

OUTCOMES

Results to Date: USD 4.8B in credit available across 76 countries. Majority of funds towards agricultural sector (nearly USD 550M invested between 1999-2015. 92% of partner lenders are local institutions and 245K borrowers have received loans under DCA guarantees. Impact on Donor Funds: In most cases, lending to target sectors / borrowers continued after guarantee coverage expired. For every USD 1 spent on DCA guarantees, USD 23 is leveraged.Capital Deployed To-Date (USD): 4.8BNumber of Partners/Guarantees: 381 financial partners and 542 credit guarantees

STAKEHOLDERS

Donors / Investors: Co-guarantors and resource partners include: Kosovo Gov’t, Sida, GrameenFoundation USA, Green Mountain Coffee, US Department of State, AfDB, AGRA, CRS, FAO, GuarantCo, Gatsby Charitable Trust, General Electric, Senegal Gov’t, DFID, Alliance for Bangladesh Worker Safety, Netafim Agriculture Financing Company, DFAT.Technical Service Providers: Vast amount of TA providers alongside DCA; assistance originated and delivered by local USAID missions.

Contact: Chris Lee, Deputy Director, DCA, chlee@usaid.gov

ADB CGIF (Credit Guarantee and Investment Facility)7

CGIF, a Trust Fund of the ADB, provides credit guarantees for local currency denominated bonds issued by creditworthy companies/projects across the ten members of the Association of Southeast Asian Nations (ASEAN) as well as China, Japan, and South Korea (ASEAN+3). Established to promote economic development, stability and resilience of financial markets in the region, CGIF is a key component of the Asian Bond Markets Initiative (ABMI).

OUTCOMES

Results to Date: Issued 16 guarantees to 12 companies across a variety of sectors, totaling >USD 1,000M. Highlights include: i) stretching tenures in Vietnam from 1-3 to 10 years, ii) raising debt backed by existing geothermal power plant to fund new projects in Philippines, iii) helping Laotian company raise funds in Singapore, iv) helping Indonesian issuers reach institutional investors in Japan, v) helping Malaysian company issue Thai Baht bonds for a bio-ethanol plant in Thailand.Impact on Donor Funds: Donor funds only spent if there is a guarantee call; donor funds generate returns by being invested in safe assets. Donor funds could mobilize 2.5x recurring private finance flows up to USD 1,750M on the outstanding basis.Capital Deployed To-Date (USD): >USD 1,000MNumber of Guarantees / Projects: 16 guarantees to 12 companies

STAKEHOLDERS

Investors: China, Japan, South Korea, Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam, ADB

Contact: Boo Hock Khoo, Vice President, Operations, CGIF, bhkhoo@cgif-abmi.org

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2012 1,750M 700M Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam, China, Japan, South Korea

ASEAN+3 companies from all non-prohibited sectors tapping ASEAN+3 local currency bond market

OBJECTIVES AND PARAMETERS

Development Challenge: Corporations and projects face barriers to accessing local bond markets to secure longer-term financing, and depend on short-term foreign currency borrowing. Currency and maturity mismatches damaging, playing a role in the 1997-1998 Asian financial crisis and continuing to expose the region to volatile global capital flows and external shocks. CGIF aims to make ASEAN local currency bonds an investable asset class supported by local and regional investors to channel the region’s savings to support the region’s growth. CGIF's bond guarantee operation is aimed at expanding and diversifying sources of debt capital; raising funds in matching currencies and tenors; transcending country sovereign ceilings for cross-border transactions; and gaining familiarity in new bond marketsTarget Beneficiaries: ASEAN+3 issuers and investors in ASEAN+3 local currency bond markets.Financing Instrument to Beneficiaries: Guarantee to local currency denominated bonds; guarantees irrevocable and unconditional commitments to pay bondholders upon non-payment by the issuers throughout the tenor of the bonds.Capital Structure: USD 700M from ASEAN, China, Japan, South Korea and ADB.Methods of Mitigating FX Risk: Guarantees allow issuers and infrastructure projects to raise debt financing in currencies that match their receipts, reducing FX risks that cannot otherwise be mitigated for long term debt financing.Measures to Counter Market Distortion: Guarantee designed to compete at market rates. After inaugural guaranteed bond issuance, beneficiary issuers expected to tap the market at appropriate risk premium rates built off of increased familiarity and confidence amongst investors, presenting a balanced and market-based return proposition. Sustainability: CGIF will demonstrate to investors that ASEAN local currency bonds are strong investments, despite low sovereign ratings of ASEAN countries. CGIF crowds-in private sector actors less familiar with the region through risk participation and collaboration, including co-guarantees, reinsurance and other partnerships. CGIF's sustainability defined by mobilization of private sector capital into ASEAN bonds..Technical Assistance: While CGIF does not have a TA component, the mechanism was established under the ABMI. ABMI includes a wide scope of technical assistance tools for the purpose of developing local currency bond markets.Additionality: Local bond markets are crucial for growth of companies and success of projects; however efficient bond markets take time to develop. Nascent bond markets face challenges including lack of issuers, liquidity, understanding and appetite for lower rated bonds. CGIF helps address issues and set the stage for the markets to move forward.

AfDB Local Currency Initiative8AfDB’s Local Currency Initiative is a policy framework that requires the Bank to approve loans in local currency wherever (1) there is sufficient demand and (2) the Bank can fund itself cost-effectively. The Local Currency Initiative provides local currency loans, hedged hard currency loans, and guarantees on local currency loans. The Local Currency Initiative builds on the success of local currency lending in South Africa and aims to increase interest while responding to growing demand for African currency denominated loans.

LAUNCH DATE

TARGET COUNTRIES

TARGET SECTORS

2005 African countries AfDB priority areas, including energy, trade integration, and agriculture

OUTCOMES

Results to Date: Since 2005, the AfDB has issued offshore bonds linked to the Botswana Pula, Ghana Cedi, Kenya Shilling, Tanzania Shilling, Uganda Shilling, Zambian Kwacha and the Nigerian Naira. AfDB has issued domestic bonds in South Africa, Uganda, and Nigeria. The AfDB has established medium term note programs (MTN) in Nigeria, Uganda and Zambia. AfDB has provided cross-currency swaps between USD/NGN for NGN 2.5 billion and USD/ZAR for ZAR 542.585 million. To date, AfDB has approved 36 local currency loans, including 28 transactions in South African Rand. Number of Institutions and/or Projects: 26

STAKEHOLDERS

Donors: IDA

Contact: Olivier Eweck, Manager, Financial Technical Services, AfDB, o.eweck@afdb.org

OBJECTIVES AND PARAMETERS

Development Challenge: The Local Currency Initiative addresses two development challenges: (1) project-related foreign exchange risk; and (2) under-developed domestic capital markets. Commercial banks, in both the developed and under-developed markets, tend to lend in shorter-term maturities. This is aggravated by the nascent nature or small-size of the bond markets in the few cases where they exist and their absence in most cases. Sub-sovereign and non-sovereign borrowers also tend to have limited access to their domestic capital market or domestic banking system. By providing local currency financing, AfDB helps to bridge these gaps. Target Beneficiaries: The Local Currency Initiative targets financial institutions, SMEs, PPP projects, private sector projects, and sovereign-owned entities. Target beneficiaries must align with AfDB’s current priorities: (1) Light Up and Power Africa, (2) Feed Africa, (3) Integrate Africa, (4) Industrialize Africa, and (5) Improve the Quality of Life for the People of Africa. Financing Instrument to Beneficiaries: The Local Currency Initiative provides local currency loans funded through bond issuance or cross currency swaps; guarantees on local currency lending; and hard currency loans hedged through non deliverable swap (synthetic local currency loans). Methods of Mitigating FX Risk: AfDB provides local currency loans only when it can raise the required resources through direct funding (e.g. issuance of local currency bonds) or currency swaps. All loans are matched on a back-to-back structure and funding is raised only to source a specified project (except for South African Rand). For synthetic local currency loans, AfDB provides a hard currency loan that is hedged with a market counterparty to protect against the local currency FX and interest rate risk. Measures to Counter Market Distortion: AfDB provides local currency products at commercial terms. Sustainability: The Local Currency Initiative prices products in order to allow the AfDB to recoup its funding costs and charge spread for credit risk. Pricing is based on the cost pass-through principle, meaning AfDB charges the all-in cost of funds plus a credit margin based on project risk. Technical Assistance: AfDB organizes regional and country-specific capacity building workshops for public and private sector representatives. This is done in in partnership with organizations like like TCX and the Initiative For Risk Mitigation In Africa (IRMA). These workshops highlight the importance of local currency lending and outline the products and solutions available to mitigate FX risk. Additionality: While commercial banks tend to focus on shorter-term lending, AfDB provides medium to long-term (up to 15 years for private sector and 25 years for sovereign guarantees) financing.

BMZ SANAD Fund for MSME –Local Currency Window9

The BMZ SANAD Fund for MSME is a public-private partnership that provides refinancing to financial institutions dedicated to micro, small and medium-sized enterprises (MSMEs) in the MENA region. Within the capital structure of the Fund, the L Shares provide an internal hedging mechanism for currency risk by bearing the risk associated with investing in local currencies for which market hedging solutions are not available. The main goal of L Shares is to protect partner institutions as well as end-borrowers from the currency risk arising from lending in hard currencies.

OUTCOMES

Results to Date: Since inception, the BMZ SANAD Fund for MSME disbursed with the L Share mechanism local currency loans to financial intermediaries in the MENA region totaling USD 37M including loans in Jordanian Dinar, Tunisian Dinar and Yemeni Rial. Financial performance of the L Shares to-date has been positive. Impact on Donor Funds: Since 2012, the financial intermediaries receiving local currency loans under the L Share mechanism disbursed over USD 84M of local currency sub-loans to over 50,000 MSMEs in Jordan, Tunisia and Yemen across all economic sectors (agriculture, trade, services and industry).Capital Deployed To-Date (USD): 42.2M invested in L SharesNumber of Institutions and/or Projects: 12 local currency loans to 7 partners in 3 countries.

STAKEHOLDERS

Donors / Investors: BMZ (administered by KfW)Technical Service Providers: Finance in Motion GmbH

Contact: Diego Stapff, Director, Finance in Motion, d.stapff@finance-in-motion.com

OBJECTIVES AND PARAMETERS

Development Challenge: Local banks and MFIs need local currency to provide local currency loans without the risk of devaluation, which can impair their ability to repay loans. Foreign lenders mostly resort to lending in hard currency, often due to the unavailability of hedging opportunities, thereby exposing their borrowers to undue FX risk. Target Beneficiaries: MSMEs and individuals with limited access to housing finance.Financing Instrument to Beneficiaries: MSME loans and housing loans, financed in local currency.Capital Structure: The L Shares protect the other investors of the Fund by taking all FX related gains and losses of Unhedged local currency Investments. Methods of Mitigating FX Risk: L shares are not mitigating but take on the FX risk. The FX risk is priced by an expert committee based on the FX risk premium needed to compensate the L Shares for the FX risk. Blended Finance Component: Local currency exposure through unhedged loans is taken on by L Shares that underwrites any currency risk and protects other fund investors in Notes, A, B and C Shares from local currency exchange rate fluctuations. Thereby, L Shares provide additional risk cushion for senior investors that are unwilling to take unhedged FX exposures. Measures to Counter Market Distortion: Since the L Shares are a long-term instrument, the FX risk premium is priced without applying a discount/subsidy on the FX risk pricing and based on the assumption that the parity conditions are fulfilled in the long-term. The premium is calculated based on the macroeconomic as well as financial data analysis of the country for the particular currency. Sustainability: L Shares are not a mechanism for subsidizing local currency loans, but rather a facilitating instrument to provide local currency financing. To maintain long-term sustainability of this mechanism, the FX risk premium, which is priced using macroeconomic analyses and models, shall compensate the L Shares. Technical Assistance: Technical assistance can be provided through a TA Facility.Additionality: L Shares are secondary to external hedging providers and are only used when an external hedge cannot be structured (e.g., if client is not willing to bear the cost of a potential unwinding, if bid-ask spreads are prohibitively high).

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2012 42.2M 42.2M Algeria, Egypt, Iraq, Jordan, Lebanon, Morocco, Palestinian Territories, Tunisia, and Yemen

Financial sector

EBRD Early Transition Countries SME Local Currency Programme10

EBRD Early Transition Countries SME Local Currency Programme provides local currency loans to MSMEs and financial institutions for on-lending to MSMEs in low-income and middle-income countries in central Asia and the caucuses. The programme aims to reduce MSMEs and local financial institutions exposure to FX risk by providing capital in local currency.

LAUNCH DATE

MATURITY SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2011 2021 400M 50M Mongolia, Kyrgyz Republic, Tajikistan, Georgia, Armenia and Moldova

MSMEs

OBJECTIVES AND PARAMETERS

Development Challenge: There is a systemic under-supply of local currency funding to financial institutions in the subject countries, which is passed on to MSMEs. MSMEs do not have access or have limited access to local currency loans. The majority of loan volumes to MSMEs in the subject countries are in FX. Conventional approaches to local currency loans use all-in interest rates that are at a premium to local interest rates and a significant premium to FX rates. As an example, interest rates on international financial institutions local currency loans to banks for on-lending to MSMEs are typically around 11-14% in the subject countries; comprising a 8-11% cost of hedging/funding plus a 3-5% credit margin. This practice led to high levels of dollarization in the financial sector – with foreign exchange liabilities (deposits and loans from IFIs) and USD assets (loans to MSMEs). This practice exposes MSMEs to huge currency risk (mismatched revenues and liabilities) threatening solvency during local currency depreciations. At the national level, at scale in these countries with large trade and current account deficits, this practice exposes the financial sector to systemic currency risk and solvency risk. Target Beneficiaries: Local finance institutions and MSMEsFinancing Instrument to Beneficiaries: Local currency loans—to MSMEs and local financial institutions(for on-lending)—and guarantees on local currency lending. Local FIs include banks, microfinance institutions, and leasing companies. Methods of Mitigating FX Risk: EBRD is fully hedged for FX risk: either raising local currency funding market rates through local market bonds/private placements or international private placements or entering currency hedges through TCX for the FX risk. Measures to Counter Market Distortion: Local currency loans are extended at premiums to prevailing local market interest rates (e.g., 6-month local currency deposit rate floor for loans to banks).Sustainability: EBRD monitors domestic interest rates. When the EBRD cost of funding/hedging decreases to allow EBRD local currency loans to be extended be in line with domestic market interest rates, then program is phased out for that country.Technical Assistance: Donors provide TA to support the improvement, deepening and broadening of domestic financial intermediation in local currency.Additionality: There is a systemic under-supply of local currency financing for MSMEs, especially term loan financing. The Programme shifts MSME loans from FX to local currency.

OUTCOMES

Results to Date: The percentage of EBRD’s MSME local currency loans has increased from 0% in 2009 to ~50% over 2012-15. In aggregate, ~USD 500m of local currency loans have been provided to ~500,000 MSMEs. ~40% MSMEs borrowed in local currency for the first time.Impact on Donor Funds: To date, there has been one small specific provision on the donor funds due to a non-performing loan in the portfolio. All original donor funds are now supporting the second generation of MSME loans. Donors are not financially remunerated for the guarantee since that would reduce the amount.

STAKEHOLDERS

Donors / Investors: EBRD Shareholder Special Fund, Multi-Donor ETC Fund, US Treasury, Swiss SECO Other stakeholders: Ministry of Finance and central banks have signed MoUs and agree to reform-oriented action agenda; IMF and World Bank coordinate the action agenda.

Contact: Thea Kokhreidze, Principal Banker, EBRD, kokhreit@ebrd.com

EIB ACP Investment Facility11The EIP ACP Investment Facility ( ACPIF) is a revolving fund offering a diverse set of instruments, including local currency lending, to countries in Africa, Caribbean, and the Pacific (ACP). Local currency loans are granted in EUR and converted to local currency by the recipient. Repayments are based on a local currency amortization schedule, converted to EUR at the prevailing foreign exchange rate at repayment. The ACP IF provides financing for projects where the market cannot deliver the required local currency funding.

LAUNCH DATE

SIZE (USD)

TARGET COUNTRIES

Facility launched 2003;Local currency launched 2007

Maximum of 1,564M Africa, Caribbean and the Pacific, and in the overseas countries and territories

OUTCOMES

Results to Date: ACP IF local currency loans contribute to financing private sector projects and bring about the additionally described above. Impact on Donor Funds: Donors funds have been invested and redeployed generating an overall surplus of 11% on the funds disbursed cumulatively until FY 2016. This is due to favorable economic climate on balance, with lower than forecasted devaluations realized so far. Thanks to the favorable results to date and the increased demand, management decided in 2016 to increase the local currency limit from 10% to 40% of the overall endowment under the ACP IF. Capital Deployed To-Date (USD): USD 533.6M.

STAKEHOLDERS

Donors: EU member states

Contact: Andrea Pataki, Senior Mandate Management Officer, EIB, a.pataki@eib.org

OBJECTIVES AND PARAMETERS

Development Challenge: The central objective of the ACP IF is poverty reduction, sustainable development and the progressive integration of the ACP countries in the world economy. Medium to long-term local currency lending for private sector investments is scarce in frontier countries with more fragile economies, weaker currency regimes, underdeveloped financial markets and where medium-long-term currency hedging tools are non-existent. Target Beneficiaries: The ACP IF local currency loans benefit local enterprises that do not trade internationally, particularly SMEs and very small businesses. Financing Instrument to Beneficiaries: Local currency loan. The FX premium and maximum tenor are determined by EIB’s Economics department. The assessment of country eligibility for local currency lending and the maximum permissible loan maturity for a country is decided by taking into account the macroeconomic stability and the currency regime, such as monetary, exchange rate policies, debt, reserves, fiscal deficit, volatility of exchange rate, and inflation.Capital Structure: 100% donor funded by the European Development Fund (EDF), which is funded by EU member states’ budgetary funds. Methods of Mitigating FX Risk: A robust legal, operational and risk management framework safeguards the financial interests of the EU and its Member States. The facility is pooled, revolving with amortizations, including FX premia, reinvested in new operations. The method of FX risk mitigation is technically not a hedge nor a full insurance against FX risk, but rather a balance of FX premia against losses arising in the portfolio. FX exposures do remain in the portfolio with a long-term neutral view for break-even. Measures to Counter Market Distortion: EIB is committed to competitive risk-reflective pricing in the markets. EIB economists take an array of economic and financial variables into consideration and apply best market judgement on a case-by-case basis to generate the most appropriate pricing for FX premia. Sustainability: The ACP IF is highly sustainable for three reasons: (i) local currency lending is limited to countries characterized by relative macroeconomic and financial stability; (ii) donors have secured a 100% fully equity funded vehicle and are prepared to take the full residual FX loss; and (iii) local currency lending is just one part of a larger portfolio consisting mostly of hard currency loans. Additionality: The IF absorbs currency risks that would otherwise rest with financial intermediaries and/or finalbeneficiaries. For intermediaries, medium-long term local currency loans allow greater stability of earnings and capital, lower fragility to liquidity and funding risks. Final beneficiaries enjoy better resilience to shocks, and are sounder and hence more creditworthy and prosperous. The provision of appropriate medium-long-term financing in local currency develops local markets, local value chains (especially in agriculture) where financial markets are under developed. This translates into reduced systemic economic risks and hence greater economic and financial sector stability.

FMO MASSIF12MASSIF enhances financial inclusion for those MSMEs that are disproportionately affected by a lack of access to high quality financial services. MASSIF supports intermediaries that reach out to MSMEs in fragile and low-income countries, MSMEs in rural areas and those dependent on agriculture, women-owned MSMEs, and intermediaries that provide access to productive goods and services for base of the pyramid individuals.

LAUNCH DATE

MATURITY SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2006 2026 590M 340M Global, low- and lower-middle income countries with a focus on fragile countries

General

OUTCOMES

Results to Date: >900K micro-entrepreneurs supported, >47K SMEs supported with debt, £86M SMEs supported with equity, 150% revolvability. 84% of portfolio consists of local currency financing. A Oxford Policy Management and MicroSave study found that six MASSIF-supported FIs expanded loan portfolios for MSMEs faster than market trends. Impact on Donor Funds: Plays important role catalyzing new investors by demonstrating sustainable lending model. Also builds capacity of MSMEs to receive commercial loans.Capital Deployed To-Date (USD): USD 509.4MNumber of Projects: 391 investments, 193 capacity development projects

STAKEHOLDERS

Investors: Dutch government (97.22%) and FMO (2.34%).Technical Service Providers: Enclude, Global Banking Alliance for Women

Contact: Jeroen Harteveld, Fund Manager, FMO, j.harteveld@fmo.nl

OBJECTIVES AND PARAMETERS

Development Challenge: MSMEs are the backbone of most developing economies. MSMEs generate employment and more equal distribution of wealth in economies with high levels of inequality. One of the main barriers for MSME growth is access to financial services such as credit, savings accounts, payment services, and insurance, particularly in local currency. In SSA, a MASSIF focus region, 6% of adults have access to formal borrowing and only 1 in 3 have an account at a financial institution. Businesses struggle with high collateral requirements, short tenor of loans, and scarce private equity for the smallest businesses. This is where MASSIF plays an important role.Target Beneficiaries: MASSIF’s fund strategy responds to unmet demand for financial services in specific segments in target markets: i) Support intermediaries reach out to MSMEs in the least penetrated countries or with acute disaster / migratory problems (post conflict regions), ii) Support intermediaries reach out to MSMEs in rural areas and MSMEs dependent on agriculture, iii) Support intermediaries better reach out to women and youth entrepreneurs, iv) Support intermediaries provide access to productive goods and services for BoP individuals. For each investment theme, MASSIF selects most appropriate distribution channels (e.g., MFIs, PE funds, cooperatives) and partnerships to provide tailored financing and capacity development benefitting these end-beneficiaries. Financing Instrument to Beneficiaries: MASSIF provides equity (e.g., venture capital, equity capital and mezzanine for taking participations), loans (including local currency loans), guarantees, and capacity development grants. Capital Structure: FMO manages the MASSIF funds on behalf of the Dutch government (97.22%) and FMO (2.34%). Methods of Mitigating FX Risk: MASSIF can provide financial intermediaries with local currency financing. MASSIF does not hedge its local currency portfolio. Measures to Counter Market Distortion: MASSIF invests early on and takes higher risk, catalyzing other investors into riskier markets segments. No other players provide financing with similar tenor on workable terms in these markets. Sustainability: MASSIF is financially sustainable and revolving; new investments are financed through repayments and income from the existing portfolio while bearing risks that are considered too high for other investors, like currency risks, unstable environments, and limited track records. Technical Assistance: Capacity development grants to strengthen investees. Funds deployed to finance risk mgmtsystems, mgmt training, product development, independent board seats, and other capacity-building projects.Additionality: MMASSIF has demonstrated additionality in strengthening financial institutions. MASSIF targets an underserved market segment with longer-term and more flexible (local currency) financial products and services. This access to local currency financing can improve enterprises’ risk profiles and crowd-in additional sources of finance. With this, MASSIF has been able to play a significant catalyzing role towards other investors.

IFC Local Currency Solutions13IFC provides customized local currency solutions in a number of ways including through local-currency loans, currency hedging solutions, credit guarantees, and risk sharing facilities. IFC leverages its global presence and deep knowledge of emerging markets to take risks that other commercial lenders are not able to take. Adding blended finance would be a powerful way for IFC to scale up its current offerings to clients. For example, by combining donor funding with IFC’s own funding and hedging capabilities, IFC can provide local currency financing using simple structures –such as straightforward loans at more affordable rates to clients. Alternatively, IFC can use donor funding to provide first-loss support on risk sharing facilities, enabling more viable local-currency lending.

OBJECTIVES AND PARAMETERS

Development Challenge: Emerging market countries typically have some levels of local currency liquidity, but the private sector – particularly infrastructure and SME sectors – struggle obtaining local currency finance. As a result, local borrowers need to seek foreign-currency denominated loans in the international markets. This creates significant FX risk for companies whose revenues are in local currency. Institutions like IFC can play a critical role in creating incentives to local financial institutions to lend to local companies in local currency at required tenors and viable costs. In countries where local currency is not readily available and the hedging market is fledgling, IFC can also help local borrowers mitigate the FX. This is important where absolute levels of interest rates in USD/EUR tend to be lower when compared to local currency levels, leading local companies to prefer financing in USD/EUR. The challenge is acute where markets are small and illiquid resulting in large interest rate differential between USD/EUR and local currencies. Target Beneficiaries: Private sector clients in emerging markets.Financing Instrument to Beneficiaries: Local currency loans, cross-currency hedging solutions (swaps and/or forwards),unfunded risk participation (credit enhancement of loans and/or bonds or portfolio of loans).Methods of Mitigating FX Risk: By providing local currency solutions to its clients in emerging markets, IFC takes the FX risk, which is hedged through various mechanisms: currency swaps/forwards through market counterparties, local banks, central banks, bond issuances, and specialized funds (e.g., TCX).Measures to Counter Market Distortion: Creating sustainable markets is at the core of IFC mission. Non-market based solutions (such as special counterparts – central banks and specialized funds like TCX) are used as measures of last resort. Blended finance is sparingly available and is deployed only in the instances where absolutely necessary following transparent governance process set up by IFC that ensures that following principles are adhered to: i) additionality beyond IFC’s regular financing operations; ii) minimum concessionality needed to induce the investment; iii) sustainability: time-bound support to projects which do not need long-term subsidies. Additionality: Due to its global origination platform and strong credit culture IFC is able to provide financing to clients that typically have limited access to tenors and amounts in domestic or international markets. Due to its triple A rating IFC is able to source longer maturities in local currencies than are usually available to local companies on their own credit. IFC can also arrange currency hedging at more reasonable terms than is usually available to companies on their own, for example, minimizing the use of collateral, etc.

OUTCOMES

Results to Date: >USD 19B of local currency financing in over 73 emerging market currencies to more than 500 clients globally; deployed donor funds (~USD 150M) to facilitate local currency solutions through risk-sharing facilities and direct local currency lending, supporting >USD 2B of local currency solutions to >40 clients globally. Risk sharing facilities supported loan portfolio growth primarily in the SME, energy efficiency, and ag sectors Impact on Donor Funds: Net payout from donor funds on risk sharing facilities totaled USD 3M under 12 projects.Capital Deployed To-Date (USD): 150M

STAKEHOLDERS

Donors / Investors: Clean Technology Fund, Global Post Conflict Reconstruction Fund, IDA, DFID, Global Agriculture and Food Security Program, Women Entrepreneurs Opportunity Facility (Goldman Sachs Foundation), World Bank Trust Funds

Contact: Keshav Gaur, Director, Treasury Client Solutions, IFC, kgaur@ifc.org

SIZE(USD)

DONOR SUPPORT (USD) TARGET COUNTRIES

>19B of local currency financing in >73 emerging market currencies to support private sector development

~150M, mainly supporting local currency lending and risk-sharing facilities

IFC countries of operation

KfW ALCB (African Local Currency Bond) Fund14

The African Local Currency Bond Fund (ALCB Fund) acts as an anchor investor and provides TA to support non-sovereign entities issue local currency bonds in developmental sectors such as financial inclusion, housing, renewable energy and agriculture. The Fund aims to promote the development of African capital markets. The strategy of the Fund is implemented by working closely with issuers, investors and intermediaries to overcome the barriers and challenges they face. This involves promoting advantages of local currency issuances, working with issuers to bring local currency bonds to market, providing TA to enhance local market standards, enhancing local credit assessment standards through rigorous due diligence, acting as an anchor investor for local currency bond issuances, ensuring harmonization of documentation standards, and supporting market transparency through promoting public listings.

LAUNCH DATE

SIZE (USD)

DONOR SUPPORT (USD)

TARGET COUNTRIES

TARGET SECTORS

2012 48M 39.5M Africa (excl. South Africa) Financial inclusion, housing, renewable energy and agriculture

OUTCOMES

Results to Date: Invested USD 39.5M in 17 local currency bonds issued by 12 companies across seven African countries, reducing FX exposure for issuers and crowded-in institutional investors.Impact on Donor Funds: Leveraged USD 39.5M to crowd in >USD 227M by 2015 in local currency funding from institutional investors, of which 83% are local. Capital Deployed To-Date (USD): USD 39.5MNumber of Institutions and/or Projects: 12

STAKEHOLDERS

Donors: KFW, on behalf of BMZTechnical Service Providers: Lion’s Head Global Partners (LHGP) Asset Management (Fund Manager)Other Stakeholders: Estera(Administrator)

Contact: James Doree, Fund Manager, ALCB Fund, James.doree@alcbfund.com

OBJECTIVES AND PARAMETERS

Development Challenge: Functioning capital markets are vital for balanced economic growth; bringing together issuers, intermediaries and investors to channel long-term funding to the private-sector. Local currency bond markets in most African countries are characterized by limited primary issuances from the private-sector alongside a lack of market depth, liquidity and transparency, creating barriers to finance for companies and limited opportunities for local investors.In absence of long-dated local currency funding, businesses forced to expose themselves to exchange rate risk by borrowing in foreign currencies or financing long-term projects with short-term loans. This not only expose the individual business, but also create systemic risks in the private-sector which in turn raises risk premiums and restricts investment in the long-term. Furthermore, without viable and transparent private-sector investment opportunities, domestic liquidity (such as savings, pensions and other pools of capital) are channeled into government debt or speculative real estate.Target Beneficiaries: Ultimate benefactors are low-income households and MSMEs. The Fund invests in bonds issued by companies operating in developmental sectors.Financing Instrument to Beneficiaries: Anchor investment in local currency bonds issued by local companies.Capital Structure: 100% equity with KFW as sole shareholder. The Fund is currently raising senior and subordinated notes to be subscribed to by public and private investors to grow the Fund and leverage this capital. Methods of Mitigating FX Risk: The Fund fully hedges its own exposure through TCX or local hedging providers.Measures to Counter Market Distortion: The Fund does not provide funding at below-market rates, rather pricing based on its co-investors and local market conditions, avoiding distortion.Sustainability: Profitable and cash flow positive for FY 2015 and 2016. While currently reliant on DFI funding, plans to raise funding through alternative investor types moving forward (already in discussion with US institutional investors).Technical Assistance: TA provided by the TAF is on a cost-sharing basis and can cover a range of areas related to structuring transactions in line with local market requirements and international best practices, marketing transactions to local institutional investors, and helping issuers obtain social and credit ratings. Additionality: Providing supplementary resources to issuers helps to ensure bankable local currency deals come to market and that appropriate incentives are in place for issuers, investors and intermediaries. The facility also provides comprehensive review of transaction legal documentation, helping to harmonize documentation standards and support market transparency. In many instances, the Fund is originating and executing deals from scratch.