The European Commission, in partnership with a hedging company called TCX, is providing subsidies to make it easier for multilateral development banks to lend to their clients in frontier currencies. Among the first such projects is an FMO loan to Bank Respublika in Azerbaijan.
TCX provides swaps into exotic currencies, which can prove costly because the currencies are volatile and there is little data available to forecast their movement. Passing these costs on to borrowers can sometimes make business prohibitively expensive and means that deals fall through.
The European Commission made €20m available in April to provide financial support for up to €60m of loans into frontier currencies, effectively discounting the cost of the swap by up to 3%, depending on the maturity of the loan.
“Demand for the facility was more than 3.3times the €60m we were able to print,” said Jerome Pirouz, TCX’s deputy head of structuring and sales. “We had 66 requests from 26 investors across 12 currencies.” The investors were largely drawn from TCX’s shareholders, most of whom are development finance institutions.
These 66 requests were ordered according to the size of the discount they required, with those requesting the smallest assistance served first. This auction system, designed by TCX, allowed 32 requests from 18 investors in 12 currencies to be served. The average discount agreed was 1.8%.
“They made €20m available, but our goal was not to deplete that immediately,” said Pirouz. “Our goal was to facilitate the largest number of projects for the lowest possible cost. The auction system we use means that those projects requiring the smallest use of monies to execute are selected first. That reduces the potential moral hazard of lenders asking for a bigger subsidy than is needed.”
Many of the projects are still awaiting local approval from central banks or internal approval from the lenders, but Dutch development bank FMO has conducted one of the first loans already, lending $10m in Azerbaijani manat to Bank Respublika, one of the largest commercial banks in Azerbaijan.
The loan will support local SMEs in the agricultural sector and young or female entrepreneurs.
The facility was an experiment both for TCX and for the European Commission. Ruurd Brouwer, CEO of TCX, said: “The stakeholders are happy and we’d be very happy to do this project again, perhaps with a larger amount.”
However, TCX is in no rush to scale. “The goal is to maximise the impact and realise transactions that otherwise would not have happened,” said Brouwer.