Case Study, Risk Management

Structuring and Execution of Long-Term Eurobond Hedge

African Sovereign & Regional Bank

FFC supported an African Regional Bank (“ARB”) to structure and execute its first ever EURUSD cross currency swap with a West African sovereign (“Sovereign”) to
hedge its foreign exchange exposure on the back of recently issued, USD denominated, Eurobond.

Context & Background
The FFC team has extensive experience in structuring and executing foreign exchange hedges with sovereigns in emerging markets. Given the rating of most of the sovereigns in Africa, these hedges require credit support, which has been provided by multilateral agencies in the form of a guarantee. This form of credit support makes it possible for the global banks to execute long-term hedges which provide a very high return on capital. The local and regional banks are, however, excluded from this lucrative opportunity, despite committing significant amount of balance sheet to sovereigns. The primary reason for this is the lack of their expertise in the areas of structuring, technology, operations and credit analysis on derivatives. FFC approached the ARB and proposed to pitch for the impending hedge. FFC would provide support across various teams at the bank.

Key Issues
Although the opportunity to execute a hedge with sovereigns backed by a multilateral guarantee is lucrative, the ARB or any other local or regional bank for that matter, never even considered pursuing this as they always saw this beyond their capacity or the skill set. The key challenge, therefore, was to convince all stakeholders within the ARB that such a transaction can be executed provided the team works together to achieve it. It was essential that all the related teams, such as the operations, credit,
relationship managers, treasury, fincon etc were on the same page and work with FFC to achieve a seemingly difficult objective. This was, essentially, an exercise in capacity building.

Scope of Work Delivered
The SOW delivered was wide and entailed interacting with different business and support teams of the ARB and bringing them up to speed on different aspects of the transaction. It also involved discussions with external auditors and technology teams to ensure that the transaction gets the right capital treatment and that adequate booking systems are in place.

FFC Value Add
FFC team’s extensive experience in hedging transactions allowed it to provide complete support to ARB to execute its first cross currency hedge. The transaction helped ARB immensely in differentiating it against other local and regional relationship banks in Africa, in addition to providing excellent return on capital.