Financial Solutions FAQ
Flexible Financing Facility (FFF)
Direct LC Swaps with IDB to hedge loan and/or portfolio currency exposures
- What are direct LC swaps with the IDB?
- Is an ISDA Mater Agreement required to execute direct LC swaps with the IDB?
- Are direct LC swaps executed against individual loan exposures?
- Are cross-default provisions between loans and LC swaps required by the IDB?
- Is posting of collateral required?
- Can a LC swap with the IDB be terminated early?
- What could trigger termination events by the IDB?
The FFF offers borrowers financing solutions to better manage currency exposures with the IDB through direct hedges with the Bank. Direct LC swaps with the IDB refer to the option borrowers have to hedge currency exposures of IDB debt to LC or another currency of the region, subject to market availability.
Yes. Borrowers need to enter into a Master Derivatives Agreement (MDA) with the IDB, pursuant to which they can request currency swaps into LC from the IDB.
Not necessarily. Borrowers can choose to execute direct LC swaps with the IDB against a particular loan or at a loan portfolio level. Most importantly, there is no netting of payments between loans and swaps; that is, cash flows, payment amounts and due dates of LC swaps are independent of loans, each being contracted and settled separately. The only connection between LC swaps and loans (aside from cross-default provision discussed below) is that the sum of nominal amounts of the USD leg of all LC swaps of a borrower cannot exceed outstanding loan amounts in that currency.
Yes, cross default provisions apply between loans and swaps with the IDB. This means that loan contracts must be amended to incorporate this provision before an ISDA agreement could be executed with the IDB.
No, the IDB does not request the posting of collateral or CSA. However, this could change should new financial regulation were to result in changes that require a different treatment by the IDB of this provision.
Borrowers can terminate LC swaps with the IDB at any time subject to the IDB’s ability to unwind its hedging transaction with the market. Costs or gains resulting from the redeployment of funds by the IDB are passed on to borrower.
Termination events (full or partial) on a LC swap include: (i) default or delay in payments by the borrower, or loan acceleration, (ii) illegality; and, (iii) if, as a result of a prepayment, the notional amount of the outstanding debt in US dollars is less than the aggregated notional amount of swaps in that same currency (measured by the US dollar leg).