ADB Debt Management Products This brochure presents the Asian Development Bank’s debt management products and explains their main features and purposes. It also provides an overview of basic terms and conditions to help borrowers in making informed decisions when using these products. About the Asian Development Bank ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments ADB Debt Management for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Products ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org ADB Debt Management Products Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2020 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 8632 4444; Fax +63 2 8636 2444 www.adb.org Some rights reserved. Published in 2020. Publication Stock No. ARM200040-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. 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Please contact [email protected] if you have questions or comments with respect to content, or if you wish to obtain copyright permission for your intended use that does not fall within these terms, or for permission to use the ADB logo. Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda. All photos are by ADB. Printed on recycled paper ADB Debt Management Products Introduction Sovereign borrowers in developing member countries (DMCs) of the Asian 1 Development Bank (ADB) have gained more experience in managing debt portfolios over the last decade. However, improvements in public debt management capacity have not always been matched by access to key risk management tools. For example, access to risk management tools of many DMCs is limited to short-dated swaps or swaps with strict collateral requirements. ADB’s debt management products are available to address the problem of swap market access and thereby facilitating best-practice debt management efforts of DMCs. This brochure presents the main features of ADB’s debt management products as well as basic terms and conditions to help borrowers in making informed decisions when using these products. Debt Management Products 2 As approved by the Board of Directors in and the DMC client, having separate financial November 2006, the Asian Development Bank contracts with both. The pricing achieved on (ADB) offers sovereign (including sovereign- ADB’s market transaction would be passed guaranteed) clients debt management products directly to the DMC client. for their third-party liabilities. Third-party DMC clients benefit in many ways from liabilities refer to loans that financial institutions ADB’s role as market intermediary. Based on the and agencies other than ADB provide to cost pass through principle, DMC clients may sovereign clients, including loans from achieve more favorable transaction pricing on commercial financial institutions, outstanding the swaps, as well as longer maturity terms as bond issues, or bilateral loans. such pricings and maturity terms would reflect Based on sound justification and an existing ADB’s superior credit rating. DMC clients also debt management framework, sovereign clients benefit from ADB’s transaction execution can use such debt management products to experience, knowledge of derivatives pricing optimize their debt management strategy. methods, and extensive network of major ADB debt management products currently financial institutions from which it can solicit available are the following: transaction bids. y Interest Rate Swaps Using ADB as an intermediary may also y Cross Currency Swaps (CCSs) save DMC clients valuable credit lines with y Local Currency Swaps (transforming a nonsovereign institutions. Unlike most foreign currency liability into a local currency commercial counterparties, ADB does not liability, currently only available in selected require a sovereign borrower to enter into developing member countries [DMCs]). a collateral arrangement to avail of its debt Acting as a financial market intermediary, ADB management products. stands between market financial institutions ADB Debt Management Products Interest Rate Swaps third party into a USD fixed-rate liability by for Third-Party Liabilities entering into the appropriate interest rate swap with ADB. ADB would offset the interest rate Clients may use ADB’s Interest Rate Swap risk associated with the swap by entering into products to manage interest rate risks in their a fully offsetting swap with a market third-party liabilities or to alter the interest rate counterparty. sensitivities of their external debt portfolios by transforming the interest rate basis of one or more existing third-party loans. Interest rate swaps for third-party liabilities can be either Cross Currency Swaps from floating interest rate to fixed interest rate, for Third-Party Liabilities or vice versa. For example, DMCs may want to fix the CCSs can change currencies of specific debts, interest rate of the third-party loan so that the adjusting the currency composition in a DMC loan will not be exposed to future interest rate government’s debt portfolios to eliminate risks; in other cases, DMCs may achieve the currency mismatch or to achieve government’s fix-floating rate borrowing mix target in their evolving currency composition targets. overall external debt portfolios by adjusting For example, a DMC may be overexposed the fixed interest rate borrowings via interest to certain currencies as a result of having rate swaps. borrowed significantly in that currency. By Figure 1 provides an example of how a client using ADB’s third-party liability cross currency could transform an original United States swap, the DMC would be able to adjust the 3 dollar (USD) floating rate-based liability to a target mix of currencies of its liability portfolio. Figure 1: Example of an Interest Rate Swap for Third-Party Liability USD Fixed Interest Rate USD Fixed 6-month Interest Rate USD LIBOR Client ADB Market Counterparty 6-month USD LIBOR 6-month USD LIBOR Original USD LIBOR Liability to Third Party Products LIBOR = London Interbank Offered Rate, USD = United States dollar . Source: Asian Development Bank (Treasury Department). Debt Management Figure 2 provides an example of how a client Currency Swap with ADB. ADB would offset could transform an original Japanese yen (JPY) the currency risk associated with the swap liability to a third party into a USD-based by entering into a fully offsetting swap with a liability by entering into the appropriate Cross market counterparty. Figure 2: Example of a Cross Currency Swap for Third-Party Liability USD LIBOR USD LIBOR JPY LIBOR Client ADB Market Counterparty JPY LIBOR JPY LIBOR Original JPY LIBOR 4 Liability to Third Party JPY = Japanese yen, LIBOR = London Interbank Offered Rate, USD = United States dollar. Source: Asian Development Bank (Treasury Department). Figure 3: Example of a Local Currency Swap for Third-Party Liability LC Fixed Interest Rate LC Fixed Interest Rate USD LIBOR Client ADB Market Counterparty USD LIBOR USD LIBOR Original USD LIBOR Liability to Third Party LC = local currency, LIBOR = London Interbank Offered Rate, USD = United States dollar. Source: Asian Development Bank (Treasury Department). ADB Debt Management Products Local Currency Swaps Refer to the procedure on usage of debt for Third-Party Liabilities management products (Box). Before entering into any of the above Clients may also transform a foreign currency debt management product agreements, liability into a local currency liability which ADB will work with the client to ensure is currently only available in selected DMCs. that the client’s sovereign asset-liability The reverse transformation of a local currency strategy meets best-practice standards liability into a foreign currency liability is not and that debt management decisions offered, since such transactions