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.