1. What currencies are available for AIIB Local Currency Loans? As of September 2019
- Indian Rupee
- Indonesian Rupiah
- Thai Baht
- Turkish Lira
- Russian Ruble
AIIB will continue 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 clients may prefer to borrow in local currencies?
There are several benefits for clients in local currency financing:
- Reduction in earnings’ volatility due to FX movements
- Decrease of debt burden in case local currency depreciation
- Reduced possibility of financial distress
- Possibility of borrowing local currency in longer tenor
3. Why local currency financing is of interest to AIIB?
There are several benefits to AIIB in local currency financing:
- Stronger credit of the loan portfolio
- Access to loan markets that operate in local currency only
- Expansion of product toolkit
4. How AIIB sources local currencies for on-lending to clients?
AIIB will use the following approaches for its local currency funding:
- Initially, the Bank will access back-to-back funding through swaps to finance a specific project;
- at later stage, the Bank will rely on pool funding, where AIIB maintains a pool of liquidity trough swaps and offshore bonds in a certain local currency to finance various projects; and
- funding through on-shore bond issuance.
5. How does AIIB manages currency risks associated with local currency financings?
At the time of disbursement of a local currency loan or conversion of a USD disbursement or outstanding USD loan balance into local currency, AIIB will execute a funding or hedging transaction to raise 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 the AIIB’s loan to a client so that the Bank 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 change upon expiration of the funding/hedging instrument. In general, availability of local currencies is always subject to 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 this 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. Will it be mandatory for the borrower to avail loan in single local currency only or there will be flexibility in choosing the currency?
Disbursements potentially can be made in local currency, USD (or other currencies), subject to loan documentation. It is expected that if at the time of disbursement request, it is not possible to source the local currency in a size, tenor and at a rate required by the client, the client may request a disbursement in USD instead.
9. How local currency loans are priced?
Pricing components are:
- AIIB’s cost of funds in local currency (if funding through bonds):
1. Cost based on local market-based benchmark (government bond yield or a relevant reference rate)
2. Issuance or execution costs (underwriting fees, execution costs)
3. Recurring costs (listing, custody, payment fees)
- AIIB’s cost of funds in local currency (if funding through swaps): swap rate or a relevant reference rate
- Client or project spread (negotiated separately for each loan)
- Front-end fee
- Commitment fee
10. What will be the benchmark for AIIB cost of funds in case of swaps?
For the currencies other than USD, applicable benchmark rates are the interest rates in the domestic market of the underlying currency.
11. How can borrowers request local currency financing?
Following mechanisms are available:
- 1. Upon disbursement: each disbursement and its currency of repayment will be made in local currency, requested at the time of disbursement
- 2. Conversion request: 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 in case 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?
Standard disbursement notice period of 15 business days would be enough for cross currency swap preparation, agreeing on terms and then execution
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?
These are dependent on each market: in some countries financial markets are fairly developed and in some less so. There are limits by size, tenor, structure, beyond which market counterparts will not trade; or the price will increase to penalize too small or too large trade, or charge for maturity premium. Please liaise with AIIB Treasury on specific terms.
14. Can the local currency loans be prepaid or cancelled?
If local currency financing is arranged through a cross currency swap, clients will be allowed to prepay all or part of the disbursed and outstanding amount during the life of the loan, by notifying AIIB according to the relevant provisions in the loan documentation and paying corresponding breakage costs. If the local currency financing is provided through a bond issuance, the client may not be permitted to prepay until the maturity of the matching bond issuance.
Borrowers will be allowed to cancel all or part of the undisbursed balance. Prepayment or cancellation charges may apply in case AIIB incurs costs as a result of the loan prepayment or cancellation by a client.
15. What will be the break cost incurred due to prepayment resulting in unwinding of swap??
The amount of break costs is the cost that AIIB needs to pay to the swap counterparty for unwinding an existing or executing offsetting swap. This cost is calculated as a sum of net present value of future cash flows of the two legs of the swap at the future point in time, using market curves (e.g. interest rate, foreign exchange, currency basis) calculated as of the day when the client wishes to prepay or amend the loan. At that time market conditions could be very different from todays.
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 a sum of 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 will be outlined in the loan documentation. In addition to standard loan provisions, they may include currency availability, currency substitution if currency is not available, 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 request is sent, or increased costs related to funding or hedging arrangements.
17. Can client ask for a USD loan and cross currency swap from AIIB to hedge its currency risk exposure, or request a cross currency swap to hedge its existing currency liability?
No, AIIB offers lending products to its clients in USD, local currencies or non-USD hard currencies in which it can fund itself in the debt or derivatives markets. AIIB does not offer hedging products to its clients at present time.
18. When will the FX and interest rate for a loan be determined?
The FX rate and corresponding interest rates will be determined when AIIB executes funding or hedging transaction, matching each individual disbursement date
19. In an infrastructure project with long construction period, the exchange rate and interest rate will vary across the construction period. This might result in foreign exchange and interest rate risks. Can client lock the exchange rate and / or interest rate at the day of loan agreement signing?
AIIB will transact a funding / hedging transaction to cover each disbursement, which means the client must take currency and interest risk until all disbursements are complete. Depending on individual market availability, 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 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.