Local Currency Financing Treasury October 2014 Contents • Rationale for Lending and Borrowing in Local Currency • Local Currency Portfolio • Local Currency Financing Platform • EBRD’s Role in Capital Markets Development Local Currency Financing Integral to the Bank’s Mission “To stimulate and encourage the development of capital markets” Agreement Establishing the European Bank for Reconstruction and Development (Chapter 1, Article 2. Functions) Rationale for Lending in Local Currency Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development By LENDING in local currency, the Bank is able to: • Improve the creditworthiness of projects which solely generate local currency income by avoiding FX risk • Direct short-term liquidity back into the real economy • Extend the maturity of local currency loans available in the market • Reinforce existing market indices, or create new, transparent ones • Stem unhedged currency mismatches on the balance sheets of both corporate and household sectors Rationale for Borrowing in Local Currency Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development By BORROWING in local currency, the Bank is able to: • Offer an alternative triple-A benchmark to the government curve, which will increase the transparency of corporate pricing in the domestic market • Create an opportunity for credit diversification in domestic investors’ portfolios • For international investors local currency Eurobonds can provide a AAA conduit allowing the dissociation of currency and currency allocation risks. This is often a precursor to them participating in the local government and corporate / bank market. • Introduce innovative techniques that help to foster the overall development of the market • Reinforce existing market indices, or create new, transparent ones EBRD’s Local Currency Asset Portfolio Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development • First local currency loan - Hungarian Forint (HUF) in 1994 • Since 1994 the Banks committed loan financing in: Albanian Lek (ALL) Georgian Lari (GEL) Polish Zloty (PLN) Armenian Dram (AMD) Hungarian Forint (HUF) Romanian Leu (RON) Azerbaijani Manat (AZN) Jordanian Dinar (JOD) Russian Rouble (RUB) Belarusian Rouble (BYR) Kazakh Tenge (KZT) Slovak Koruna (SKK) Bulgarian Lev (BGN) Kyrgyz Som (KGS) Tajikistani Somoni (TJS) Czech Koruna (CZK) Macedonian Denar (MKD) Tunisian Dinar (TND) Egyptian Pound (EGP) Moldovan Leu (MDL) Turkish Lira (TRY) Mongolian Tugrik (MNT) Ukrainian Hryvnia (UAH) • The Bank has signed 443 loans denominated in 23 local currencies for a total project value of EUR 9.4 billion as of October 2014 • The Bank has provided senior and subordinated loan financing in a number of local currencies, as well as one investment in a RUB- denominated residential mortgage-backed security Local Currency Loans arranged by EBRD Portfolio by Currency (EUR 9.4 billion*) Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development GEL JOD KGS 0.1% ALL 0.9% 0.6% MDL 0.0% 0.2% RUB MKD 51.5% 0.1% UAH MNT 3.6% EGP 0.7% 0.3% Other SKK 6.8% 0.4% TJS CZK 0.0% 1.2% HUF TRY RON 2.6% 0.3% 3.7% KZT BYR 6.7% 0.1% BGN AMD PLN 0.4% AZN 1.5% 24.5% 0.6% * EBRD’s local currency loan portfolio (“A” loans): EUR 8.1 billion as of October 2014 Local Currency Loans arranged by EBRD Portfolio by Sector Business Groups Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development Power & Energy 23.4% ICT Natural Resources FI, SEMED & Turkey 3.0% 1.6% 0.5% Municipal & Env Inf 13.8% Transport Other 6.1% 23.4% Manufacturing & Services FI, EU 11.1% 5.5% FI - Insurance & Financial Services Agribusiness FI,C Asia, Caucasus, FI, WB, Belarus, Moldova, 9.6% FI, Russia 8.5% Mongolia Ukraine 10.3% 5.4% 0.5% Local Currency Loans arranged by EBRD Maturity Profile Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development 140 120 100 80 60 40 NumberLoans of 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Maturity in Years Local Currency Financing Platform Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development • Single currency revolving facilities • Cross currency interest rate swaps • Domestic bonds • Eurobonds • Promissory notes • TCX Single Currency Revolving Facilities Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development • Committed floating rate financing through 1 year extendible back up lines • First facilities negotiated in RUB in 2001 • Have signed facilities in BGN, KZT, RON and UAH • Not currently most cost-effective route Advantages Cost efficient source of financing, especially with low disbursement levels of project financing Straightforward to negotiate Does not create excess cash, as drawdowns only occur upon project disbursements Endorses existing money market index or creates a new one Drawback Refinancing risk owing to short tenor of the facilities Cross Currency Interest Rate Swaps Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development • Optimal means of matching loan features (size, tenor, amortisation) when the FX regime and legal enforceability of derivatives contracts permit • The EBRD has established pools of liquidity through swaps in CZK, HUF, KZT, PLN, RON, RUB and TRY Advantages Timing, size and tenor requirements can be matched more closely Allows flexibility to offer fixed or floating loans Drawbacks Poor pricing transparency where markets lack liquidity and depth May limit activity with local banks/subsidiaries when requirement to use local counterparty Domestic Bonds Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development • Issued under local laws and regulations • The EBRD issued domestic HUF bonds in 1994 and 1996, and has launched domestic RUB bond issues in 2005 • In 2014 the Bank issued its inaugural AMD and GEL floating rate notes Advantages Contributes to capital markets’ development Can lengthen maturity of liabilities Drawbacks Onerous and sometimes inchoate legal and regulatory requirements Loan disbursement patterns may give rise to cash management needs, utilising bank credit lines and potentially increasing costs Triple-A rating not valued appropriately Exposure to payment and clearing systems Domestic Bonds EBRD’s AMD Floating Rate Note Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development Creating funding base through the Armenian bond market Using domestic auction mechanism means efficient price discovery, access to wider investor base as well as price transparency EBRD’s Objectives Listing the notes and applying for them to be repo-eligible with the Central Bank of Armenia Contribute to the further development of the capital market by introducing regulatory amendments and technical modifications Rechanneling AMD proceeds to the real economy Issue Date: 31 January 2014 Size: AMD 2 billion AMD bond terms Coupon rate: Linked to 6-month T-bill rates Exchange: NASDAQ OMX Armenia Custody: Central Depository of Armenia Repo Eligibility: Central Bank of Armenia Eurobonds Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development Means to fund local currency loan where a currency is fully convertible EBRD has issued Eurobonds in CZK, EEK, HUF, KZT, PLN, RON, RUB, SKK and TRY. RUB was accepted as a full settlement currency in ICSDs (Euroclear and Clearstream) in 2007 Advantages Can contribute to capital markets development Possible access to longer term funding Easy to document in MTN format Drawbacks Loan disbursement patterns may give rise to cash management needs, utilising credit lines and potentially increasing costs Sporadic international investor interest Eurobonds EBRD’s RUB Note linked to ROISfix* Section 1 Section 3 Section 4 Section 2 Rationale for Lending and Local Currency Financing EBRD’s Role in Capital Markets Local Currency Portfolio Borrowing in Local Currency Platform Development Developing local capital markets: ROISfix is a benchmark based on uns ecured o/n trades entered into by banks with high credit quality Promoting and participating in creation of competitive and transparent EBRD’s