G24 Technical group meeting Colombo February 2728 2018 Rodrigo Cabral Senior Financial Officer Financial Advisory and Banking February 26 2018 Table of Contents The rationale for LMO Exchanges buybacks and beyond ID: 830500
Download The PPT/PDF document "Liability management operations in the e..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Liability management operations in the external markets
G-24 Technical group meetingColombo, February 27-28, 2018
Rodrigo CabralSenior Financial OfficerFinancial Advisory and Banking
February 26, 2018
Slide2Table of Contents
The rationale for LMO
Exchanges, buybacks and beyond
Financial derivatives
Why are more sovereigns issuing EUR-denominated bonds?
Strategy-anchored debt management
Slide3The rationale for LMO
Slide4The rationale
for LMO in the external markets
As explained before, quite similar to their use in the domestic marketChange the cost-risk tradeoff
Reduction of
refinancing risk
in particular
No ‘market development’ function, but improving the yield curve and reinforcing benchmarks is usually an objective
3
Slide5Brazil: continuous buyback program
improving the yield curve
4
Slide6Liability management operations
external markets
Slide7Liability management operations
in the external markets
Traditional operations:Buybacks (tender offers) and exchanges
More recent approaches:
Discrete (secondary market) buybacks
Accelerated switch tender offer
Make-whole call and par-call
Discussion on new CACs,
pari
pasu etcShould they be the object of LM?
6
Slide8New issue +
accelerated switch tender offer
7
Slide9The use of financial derivatives
Slide10Why
a DMO may want to use derivatives
9
Slide11However…
some issues require attention
Derivatives can be efficient instruments to improve risk management, but bring additional challengesSome risks are mitigated,
other risks are created
…
Credit risk (risk of counterparty)
Liquidity management
Accounting, systems, operational capacity considerations
And, unfortunately, market
may be limited for EM
Deep market for international interest rates and hard currenciesBut may not be available for DX and credit charge may be costly
10
Slide12What
do countries’ experiences tell us?
11
Slide13Country example: Hungary
Strategy and execution
Total debt:
HUF:
60
-75%; FX: 25-4
0
%
Domestic debt
:
Duration: 3 years +/- 0,5 yearsFixed 61-83%, Floating 17-39%External debt:Currency mix: 100% EUR (5% fluctuation band)Fixed / floating rate composition: 66%-34% (5% fluctuation band)
12
12
Before swaps
After swaps
Slide14Why are more sovereigns issuing EUR-denominated bonds?
A (very) brief summary.
Slide15A substantial increase
in EUR-denominated EM bonds
14
Newcomers beyond Poland, Romania, Bulgaria, Tunisia, largely in Latin America. Also Indonesia (1bn July 2014, 1.25bn July 2015 and 3bn June 2016), small EUR issuance in 2014 from South Africa and Korea. These are all middle income, better rated issuers
Slide16Hard not to associate with the
Divergence in monetary policies
15
Slide17A (very) brief
Summary
The two markets have their own particularities
Depth, tenors, acceptance of lower-rated issues
Countries should
avoid having a ‘view
on the market’
Cross-currency swaps should be used to compare the cost
Reasons to access the EUR market can go
beyond cost
Risk, investor base, brandingBut decisions should be anchored in a debt management strategyIdeally, targets for currency composition… and valid for all LMO!
16
Slide18Thank you.