MFX December 2010 Newsletter
Examples of Recent Deals
- 2Y USD-PHP (Filipino Peso) (Deliverable)
- 3Y USD-KZT (Kazakh Tenge)
- 2Y USD-PYG (Paraguayan Guarani)
- 2Y EUR-XOF (West African Franc)
- 2Y USD-KES (Kenya Shilling)
- 2Y USD-HNL (Honduran Lempira)
- 2Y EUR-NGN (Nigerian Naira)
News and Activities
MFX has a New Website, Take a Look!
MFX has a new website to allow for better communication with our clients, as well as provide easier access to our various educational resources. The new site features an Education Center which will serve as a centralized knowledge management area for the microfinance industry to learn about currency hedging. Also, MFX has created an Investor Relationssection that will be a protected area for our clients to review documentation, reports and other information. Please feel free to contact us if you have any questions on our new site.
Other News
MFX wins G20 SME Finance Challenge
MFX wins Best New Product Innovation Award
MFX completes Technical Assistance Pilot Project in Kenya
MFX at the 2010 SEEP Conference
What Clients are Talking About
Win-Win Local Currency Refinancings
The microfinance industry’s shift to local currency financing is mostly coming as MFIs’ hard currency loans come due and are replaced with local currency loans. But for MFIs with significant currency exposure that process is not fast enough. Fortunately there is a simple way to reduce an MFI’s currency risk that in some cases can actually simultaneously enhance the lending MIV’s return. By agreeing to refinance an existing hard currency loan into a local currency rate and then hedging the local currency risk, an MIV can preserve and even enhance its hard currency return while reducing the risks for its MFI client and its own credit risk.
There are two steps: First, the MFI and MIV agree on a simple amendment to the terms of the existing loan agreement, changing it from a straight dollar or euro loan to a synthetic local currency loan, i.e. a loan settled in dollars or euros but on terms that reflect the local interest and exchange rate. Next, the MIV enters into a cross currency swap with a provider like MFX, matching the terms of the new local currency loan and swapping those back into a hard currency return.
Whether such a transaction makes sense essentially comes down to the prevailing swap rates. The MFI will have an indifference point at which it becomes attractive to change its existing loan from hard to local currency. That local rate will equate to a dollar/euro interest rate via the swap. If swap pricing is such that an attractive local rate for the MFI yields a dollar swap rate that is higher than the current interest rate on the loan, then the MIV can both help its client reduce risk and increase its return.
Even if there is no immediate windfall for the MIV, making the switch to local currency before the loan is due can help it lock in clients. With a local currency loan already in place when the loan is due, the MIV can seek simply to roll it over rather than negotiating an entirely new loan in a competitive environment. Helping MFI’s reduce risk sooner rather than later also supports the mission of a safer more sustainable industry.
If you are interested in exploring refinancing please contact us. We can help you find the loans in your portfolio where you can receive the highest incremental return and also help with advice on documentation and the refinancing process.
News
MFX wins G20 SME Finance Challenge
MFX was selected as a winner of the 2010 G-20 SME Finance Challenge for its proposal to help international SME lenders better manage currency risk. MFX is among 14 winners who were recognized by President Obama and other leaders at the Summit in Seoul, South Korea November 11-12, 2010. International donors have pledged $500M to fund new SME Initiatives at the Summit.
MFX wins Best New Product Innovation Award
MFX’s innovative work in helping microfinance lenders also was recognized as the top innovation in microfinance among more than eighty entries at the 2010 Microfinance Recognition Awards. Winners were announced at the Investment and Innovation in Microfinance conference held October 26-27 in Washington, DC. The awards were judged by a panel of experienced microfinance experts from ACCION International, LuxFlag, Grameen Foundation, the MIX, Oxfam America, and IAMFI.
MFX completes Technical Assistance Pilot Project in Kenya
MFX spent one week with the MFI Juhudi Kilimo in Nairobi, Kenya implementing on-site technical assistance. With a focus on currency risk and liability planning, MFX worked with Juhudi to put in place policies and procedures to implement a better ALM framework and ALCO as they begin to consider ways to optimize their funding structure. The pilot project will inform the development of MFX’s TA program going forward. The project will also set up better ALM for Juhudi Kilimo over the next few years as they continue to grow.
MFX at the 2010 SEEP Conference
MFX presented on a panel at the 2010 SEEP Conference in November with the MIX Market and IMON International of Tajikistan. The panel was entitled “Managing Risks Related to MFI Funding: Data and Tools for Managers and Investors.” MFX presented its Liabilities Planning Tool and explained its usefulness for MFIs borrowing in foreign currencies. MFX also ran a 2-day technical workshop on the LPT entitled “Liabilities Planning and Funding Strategies for MFIs”.