1. What currencies are available for AIIB Loans for nonsovereign-backed clients?
As of January 2021, AIIB can offer financings in multiple hard and local currencies. In addition to Australian Dollar (AUD), British Pound (GBP), Canadian Dollar (CAD), Chinese Renminbi (RMB), Euro (EUR), HK Dollar (HKD), Japanese Yen (JPY), Korean Won (KRW), Mexican Peso (MXN), New Zealand Dollar (NZD), Norwegian Krone (NOK), Singapore Dollar (SGD), Swedish Krona (SEK), Swiss Franc (CHF), and US Dollar (USD), operational currencies available to nonsovereign-backed clients and certain public sector entities are Bangladesh Taka (BDT), Egyptian Pound (EGP), Indian Rupee (INR), Indonesian Rupiah (IDR), Kazakhstan Tenge (KZT), Malaysian Ringgit (MYR), Philippine Peso (PHP), Russian Ruble (RUB), Thai Baht (THB), Turkish Lira (TRY), and Vietnamese Dong (VND). AIIB expects to add currencies, which will include both major non-USD hard currencies and local currencies based on AIIB’s ability to fund itself in those currencies.
2. Why would clients prefer to borrow in local currencies?
Local currency financing has several benefits for clients:
- Reduction in earnings volatility due to FX movements,
- Decrease of debt burden in case of local currency depreciation,
- Reduced possibility of financial distress, and
- Possibility of borrowing local currency in longer tenor.
3. Why is local currency financing of interest to AIIB?
Local currency financing has several benefits for AIIB:
- Stronger credit of the loan portfolio,
- Access to loan markets that only operate in the local currency, and
- Expansion of the product range.
4. How does AIIB source local currencies for on-lending to clients?
AIIB uses the following approaches for its local currency funding:
- Initially, AIIB will access back-to-back funding through swaps to finance a specific project.
- At a later stage, AIIB may will rely on pool funding, where it maintains a pool of liquidity through swaps and offshore bonds in a certain local currency to finance various projects.
- AIIB may also engage in funding through onshore bond issuances.
5. How does AIIB manage currency risks associated with local currency financings?
At the time of the disbursement of a local currency loan, or the conversion of a USD disbursement or an outstanding USD loan balance into local currency, AIIB will execute a funding or hedging transaction to raise the local currency in the market. The profile of such funding/hedging operation will be structured to match the maturity, interest rate type, repayments and other terms of AIIB’s loan to the client so that AIIB is hedged from any currency exposure. In some cases, the tenor of the market instruments may be shorter than the tenor of the loan, in which case, the client takes on the risk of interest rate and currency changes upon expiration of the funding or hedging instrument. In general, the availability of local currencies is always subject to the market conditions in each market at the time of transaction.
6. Are all the currencies available on a permanent basis?
The availability of local currency financing is subject to AIIB’s access to the specific local currency market and the liquidity of said market. AIIB will determine the feasibility of accessing the market on a case-by-case basis, as well as the maturity and costs of the transaction.
7. Who can apply for local currency loans?
Local currency financing is available to private sector clients and certain public sector entities.
8. Does the borrower have flexibility in choosing the disbursement currency?
Disbursements can be made in the local currency, or in USD (or other currencies), subject to the loan documentation. If it is not possible to source the local currency in a size, tenor and rate required by the client at the time of the disbursement request, the client may request disbursement in USD (or another agreed currency) instead.
9. How are local currency loans priced?
Pricing components for local currency loans for nonsovereign-backed clients are as follows:
- AIIB’s cost of funds in local currency
- if funding through bonds:
if funding through swaps:
- Cost based on local market-based benchmark (government bond yield or a relevant reference rate),
- Issuance or execution costs (underwriting fees, execution costs), and
- Recurring costs (listing, custody, payment fees).
Client or project spread (negotiated separately for each loan)
- swap rate or a relevant reference rate.
10. What will be the benchmark for AIIB cost of funds in case of swaps?
For currencies other than USD, the applicable benchmark rates are the interest rates in the domestic market of the underlying currency.
11. How can borrowers request local currency financing?
The following mechanisms are available:
- At the loan origination. Borrowers can, at the time of the loan origination, request that the loan is denominated in local currency, and each disbursement and its currency of repayment will be made in the local currency.
- Conversion request after disbursement. Borrowers can request the conversion of all or a portion of the disbursed amounts into local currency, at any time during the life of the loan. Conversion of already disbursed amounts into a local currency will be available if AIIB can effectively source local currency through swap markets or a bond issuance.
12. What is the disbursement notice period for a local currency denominated loan?
The standard disbursement notice period is 15 business days.
13. Is there a maximum number or volume of swaps that can be executed for one project in a year and/or throughout the availability period?
This depends on each market. In some countries, financial markets are fairly developed while some are less so. There are limits by size, tenor, or structure, beyond which market counterparts will not trade or will trade only at a price that may be prohibitive. Please liaise with AIIB Treasury on specific terms.
14. Can local currency loans be prepaid or cancelled?
If the local currency financing was arranged through a cross currency swap, clients can prepay all or part of the disbursed and outstanding amount during the life of the loan, by notifying AIIB in accordance with the relevant provisions of the loan documentation and paying the corresponding breakage and other related costs. If the local currency financing was provided through a bond issuance, the client cannot prepay the loan until the maturity of the matching bond issuance.
Borrowers can cancel all or part of the undisbursed balance. Prepayment or cancellation charges may apply in case AIIB incurs costs as a result of loan prepayment or cancellation by a client.
15. What will be the break costs due if the prepayment of a loan results in the unwinding of the corresponding swap?
The amount of break costs reflects what AIIB needs to pay to the swap counterparty for unwinding an existing—or executing an offsetting—swap. This unwinding cost is calculated as a sum of the net present value of future cash flows of the two legs of the swap at a future point in time, using market curves (e.g., interest rate, foreign exchange, currency basis) and calculated as of the day when the client wishes to prepay or amend the loan.
The break cost is an amount that is a greater than zero, that AIIB needs to receive from the client, derived by subtracting present value of all future local currency cashflows from the sum of the local currency loan principal and accrued interest.
The amount of break costs cannot be calculated in advance simply because the market rates change daily and are not available for future dates.
16. Are there any other costs to be borne by the client other than the break cost or prepayment charges in case of prepayment?
All the local currency-specific provisions are outlined in the loan documentation. In addition to the standard loan provisions, the loan documentation may include clauses relating to currency availability, currency substitution, break costs in case of voluntary or mandatory prepayment, or any changes to the payment of interest or principal, or failure to take disbursement after a request is sent, or increased costs related to funding or hedging arrangements.
17. Can a client take out a USD loan with AIIB or with a third party and request to benefit from a standalone cross currency swap entered into by AIIB to hedge its expected or existing currency risk exposure under such third-party loan?
No, AIIB does not offer standalone hedging products to its clients at the present time.
18. When is the currency equivalent or currency conversion and interest rates for a loan determined?
The currency conversion rate and corresponding interest rates are determined when AIIB executes the corresponding funding or hedging transaction, matching each individual disbursement date.
19. In an infrastructure project with a long construction period, the exchange rate and interest rate will vary over the construction period, which might result in foreign exchange and interest rate risks. Can a client lock the exchange rate and/or the interest rate on the signature date of the loan agreement?
AIIB will execute a funding/hedging transaction to cover each disbursement, which means that the client will bear all currency and interest risks until all disbursements are completed. Subject to market conditions, if the client agrees to submit an irrevocable disbursement request (containing the predetermined schedule of disbursements, interest and principal repayments), it may be possible to determine the currency and interest rate for the required amount of the loan. A clear cost recovery mechanism would need to be in place in the event of a request to modify this schedule.