The Currency Exchange Fund (TCX) has contributed to the mobilization of nearly $ 200 million of offshore bonds issued in emerging currencies, particularly in Africa since the beginning of the year. The peculiarity of this fund based in the Netherlands, is to hedge the currency risk in currencies where banks do not intervene. “Apart from the South African Rand, few African currencies are likely to interest banks in terms of medium and long term,” says Othman Boukrami, head of TCX Trading in an interview with Financial Afrik.
The fund operates by hedging the risk of lenders and bond issuers on the currencies of African and emerging countries. The idea of TCX came to fruition ten years ago thanks to the support of national, regional and international development institutions (DFIs), namely IFC (World Bank), European Bank for Development and Reconstruction (EBRD) , The European Investment Bank (EIB), the African Development Bank (ADB), the French Development Agency (AFD), FMO, KFW, JBIC, DBSA etc. as well as the contribution of the German and Dutch governments which was capital for the creation of the fund.
At the time, almost all loans were issued in dollars and borrowers were subject to exchange rate fluctuations. TCX’s role is to manage foreign exchange risk through its capitalization and diversification-based model and, secondly, to help create a bond market where a risk premium is offered to institutional players that participate in these issues. bonds issued by the shareholders of TCX. These AAA-rated issuers make the African currency risk more attractive to investors who have little appetite for credit for lower-rated issuers.
The bonds are issued offshore and traded on the London and Luxembourg markets. The maturity dates offered by TCX range from 1 to 50 years. “We have covered over $ 5 billion since the beginning,” says Boukrami. While TCX’s purpose is to hedge the currency risk of emerging market currencies in general, Africa is a priority in the fund’s strategy.
“We have succeeded in creating a market and we want to contribute to the development of African capital markets by attracting the most potential investors. Currently, we are working with FMO, the EBRD, the IFC and soon the World Bank to sell this risk to investors through bonds issued by these development institutions. FMO has been very active on the currencies perceived as being the most difficult thanks to Matthijs Pinxteren and Pim Arends who is involved in the development of the local currency at FMO levels, “continues Boukrami.
These three DFIs issued in local currencies in London and Luxembourg. The currency risk of the issuer was immediately transferred to TCX via a currency swap. This is how the $ 200 million has been raised since the beginning of the year. This amount is used to finance part of the action of development institutions in emerging countries.
Through these issue series of development institutions, TCX contributes to the creation of a benchmark in local currencies (reference rate) and establishes a yield curve serving as a reference for investors. Today, the fund contributes to bond issues in various African (UEMOA, Rwanda, Tanzania) and emerging (Georgia, Costa Rica, Honduras, Sri Lanka, Ukraine, Burma etc) currencies.
The appetite of investors is growing.
In the near future, TCX will move to the second phase of its strategy by intervening onshore in African domestic markets. “Our goal is to transfer a portion of global savings to attractive African markets at attractive yields. Africa remains a very attractive continent and our objective is to increase its visibility to foreign institutional investors so that they can invest there, “concludes Mr. Boukrami. TCX does not have a profit maximization objective and manages currency risks on its balance sheet with very limited leverage.
Beyond currency hedging, TCX’s mandate is to be a catalyst for the development of local markets. Market operator activities and putting a price on the hedging products that TCX rating contribute to this goal.
60 coins covered
Since the beginning of its operations in February 2008, TCX has covered over $ 5 billion in local currency loans in 60 currencies. As at August 31, 2018, TCX’s total exposure was over $ 2.3 billion and was spread over 55 currencies. The price of future swaps and contracts offered by TCX is determined in line with the derivatives markets when they exist and with the fiscal and macroeconomic data of the countries concerned when TCX has to model a yield curve in the absence of a market. The TCX rating given by S & P is A (stable). The rating is primarily based on TCX capital (capitalization level), its diversification and risk management model, and the implicit support of its shareholders, many of which are institutions with an AAA credit rating. The products offered by TCX to hedge foreign exchange risk are cross currency swaps and FX forwards offered only to real-world players without speculation.
