The unpredictability of currency markets exposes borrowers to significant foreign exchange risk if income arrives in one currency while financing comes in another. IFC views local currency financing as a critical part of sustainable private sector investment and the growth of local capital markets.
In recent years, we have ramped up our local currency lending program and now provide long-term financing throughout developing economies in more currencies than any other international financial institution.
To accompany funds deployed from our own balance sheet, we can also mobilize partners alongside us when we make local currency loans through a range of different approaches. Our primary products for local currency syndications are parallel loans and structured solutions.
Local-currency parallel loans function in largely the same way as parallel loans denominated in hard currencies. They enable IFC to syndicate to domestic financial institutions that already have access to the local currency, as well as international financial institutions that have local currency financing capabilities.
Structured solutions include overlay swaps and hedged A Loan Participations, which allow international lenders to participate with hard currency while the borrower receives local currency. With overlay swaps, IFC will engage a market counterpart to swap hard currency proceeds into local currency for the borrower; with hedged A Loan Participations, IFC itself is the provider of the entire local currency loan.
IFC is also exploring ways for insurance companies to expand our ability to lend local currency from our own account. In such a solution, IFC would provide a larger loan while applying credit insurance to the local currency exposure. The policy could be structured entirely in local currency or could be structured with hard currency payments.
Benefits to Co-Investors
- Increased deal flow through Stop-Winlock’s global origination capacity
- Access to Stop-Winlock’s due diligence and structuring and restructuring skills
- Time and cost savings
- All lenders, including IFC, share the same rights and obligations
- Structured and insurance solutions may offer access to financing opportunities otherwise not available in competitive markets where borrowers generally prefer local currency
Benefits to Borrowers
- Stable funding costs over time
- Predictable debt burden
- No volatility of earnings
- Sustains credit ratings
- Lessens risk of financial distress and/or bankruptcy
- Structured and insurance solutions may offer access to offshore liquidity in hard currency, provide longer-tenor financing than available from local lenders, and minimize impact/burden of local regulations