Borrowing and Related
Financing Activities
Borrowing and Related Financing
Activities
DPI-7
Borrowing Planning
DPI-8
Borrowings
DPI-9
Loan Guarantees, On-Lending, and
Derivatives
•
Policies and procedures for borrowing
through domestic and external sources
Borrowing Planning
Prepare a comprehensive annual borrowing plan on how the
medium-term DM strategy will be implemented in budgetary period
Annual funding needs, cash
flows, assess cost
risk of alternative,
timing
Constraints by Centre
Domestic
External
Multilateral/bilateral at concessionalterms
Issue in international
capital markets Issue
securities
Loans from commercial banks, centre, central banks
3
DPI-7 mechanisms
•SNG prepares annual plan for aggregate borrowing •Based on medium-term debt management strategy
(if applicable) and annual cash-flow forecast •The plan includes (i) assessments of most
beneficial or cost-effective terms/conditions for borrowing, (ii) risks embedded in borrowing options (iii) indication of timing over budget year
Score C
•Score C PLUS plan is updated half-yearly and has details the timing of borrowing over the budget year
Score B
•Score B PLUS , cost/risk assessment is undertaken before the start of each loan negotiation and market consultations (for issuance of domestic debt securities) are held.
Domestic Borrowing
Issuers
Meet financing needs in a cost-effective manner
through domestic sources while minimizing risks
Increased choice of funding sources
Reduce dependence on captive sources
Develop stable funding sources in domestic currency
Access non-inflationary borrowing from private sector rather
than from CB financing
Supports independence of monetary policy and DeM policy
Lower transaction costs
Reduce currency risk
Additional resilience in the event of shocks
5
Domestic Borrowing: Objectives
Investors
Externalities for private sector
Greater predictability and increased
competition – government’s benchmark yield
curve useful pricing reference
Lessen price uncertainty
Financing and investment decisions reflect
true cost of capital for institutions concerned
Both require
Transparency and predictability lower
transaction costs
Competitive market process
Level of disclosure – documented procedures
Mechanisms
•SNG receives bids from registered bidders or from primary dealers with whom the price of securities is arrived at on either a multiple-price or a uniform-price basis
Auctions
•government appoints a group of institutions that, for a negotiated fee, subscribe to its bond issues and then sell to other retail/institutional investors
Syndication
•government announces availability of certain amount of securities to be sold and bids are received during a specified period.
•Tap sales can be set at a fixed price or a minimum price can be charged, depending on demand
Tap issuance
•government sets the price or yield for securities and sells these to retail investors through a program, either directly or through commercial banks, central bank, or both, as agents (not common in SNGs).
Retail
issuance
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Setting the Scene
What
is currently being done?
o Primary market - wholesale versus retail,
o Process of borrowing – auctions at market rates, syndications
or tap issuance, retail securities at fixed rates
Who
does what?
o Debt department, treasury/budget department, market
participants - primary dealers
How
is the information disseminated?
o Primary market operating procedures publicly available, in
print or electronic form, borrowing plan publicly available
o Dialogue with the market participants
When
is it done?
o One month, three months in advance, annual plan, before
each issuance
External Borrowing
Borrowing activities from external sources
–
Multilateral and/or bilateral sources at concessional or
market-based interest rates
–
Access international capital markets
Key objective is:
–
To contract at beneficial and
cost-effective
terms
•
Regular evaluation of the ‘all-in-cost’ of each borrowing
(including complimentary benefits, TA, grants etc. for
concessional loans)
–
Terms include – lender or source of funds, currency,
maturity and interest rate
To accomplish this must have:
–
Well documented
procedures
in place
–
Sound legal documentation
9
External Borrowing (cont’d)
External Borrowing - Financial Information
11
Effect ive/Start Date Maturity Date Grace Period Instrument Currency Principal Amount Interest Rate Interest Payment
Frequency
Interest Calculation Basis Fees Complimentary Benefits Lender/Creditor
Disbursement Start Date Disbursement End Date Disbursemen t Schedule Principal Repayment Start
Date
Principal Repayment End Date
Principal Repayment Amount (or Principal Repayment Schedule)
Setting the Scene
What
is currently being done?
–
Access to external concessional financing – MLT,
Bilateral, non-concessional, foreign markets
Who
does what?
–
Does the DMO/MOF undertake loan negotiations, or
does the Centre? Which entity has the loan
documentation, legal advice
How
does this take place?
–
Assessment of loan terms, record of loan terms
When
is it done?
DPI 8: Dimensions to assess
•
Preparation and publication of an auction
calendar for issuance of SNG debt securities
•
Entry of transaction data into the debt
recording/management system by front-office
staff or, alternatively, preparation of a terms
sheet after conclusion of any borrowing
•
Availability and degree of involvement of legal
advisers
•
Availability of documented procedures for all
borrowing operations
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DPI8 Borrowings
Prepare and publish Auction
Calendar
One month ahead with
issue dates and
instruments
+ indicative amounts +
published at least one
week before auction
date
Published 3 months in
advance
C B A
Debt manager who
participated in negotiating
loans enters transaction data
into the debt
recording/management
system or prepares a terms
sheet
Terms sheets for external
loans prepared within
5 days, domestic
same business day
Terms sheet prepared
within 3 days …within one business day
C B A
Moving from C to A reflects the degree of predictability, transparency and capability of
DPI8 Borrowings
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C B A
Legal advisers
C C C
Legal advisers involved before
concluding a loan agreement
with any creditor and before
concluding negotiating process
with external creditors
Written procedures have been
..for substantial part
From the beginning
…at least once
every year ...are reviewed/updated at
least every second year. prepared for all
borrowing operations
that are presently
undertaken
Evidence
Method of domestic borrowing, amounts issued through
retail securities, copy of borrowing program, calendar,
process of conducting an auction
Information memorandum or prospectus, announcement of
T-bills/bonds in print or electronic media, information on the
primary dealers, meeting with market participants
Sources of external borrowing, basis for choosing
creditor/currency and other terms
Documented procedures for borrowing in foreign markets,
copy of sample terms sheet prepared after completing a loan
contract
A copy of recent analysis of the cost-effective terms and
conditions
DPI-9
Loan Guarantees,
On-lending and Derivatives
17
Key DeMPA Requirements
•
Contingent or Loan guarantees represent potential
financial claims against the government
•
that have not yet materialized but could trigger a realized
financial obligation or liability under certain
circumstances
.•
Government on-lending is often a substitute for
guaranteeing loans that are raised directly by
beneficiary
•
Control and monitoring of loan guarantees and
on-lending
•
Clear operational guidelines for risk monitoring, especially
credit risk
•
Risk mitigation strategies (charging guarantee fee or
Key Requirements
•
Derivatives used as hedging instruments
(swaps, caps, and futures) normally entail market and credit risks, & substantial operational risks. Important that these are transacted within a clear risk management framework and backed by sound legal
documentation with systems in place for proper recording and accounting of these transactions.
–
Clear decision-making and delegation to transact
–
Systems to record, monitor, settle, and account for
derivative transactions
–
Appropriate documentation
–
legal - master derivatives agreement;
–
preparation of terms sheet (physical or electronic) for all
financial terms
19
Dimensions to Assess
1.
Availability and quality of documented policies and procedures for approval
and issuance of the SNG loan guarantees
2.
Availability and quality of documented policies and procedures for on-lending
of borrowed funds
Availability of a DeM system with functionalities for handling derivatives and
availability and quality of documented procedures for the use of derivatives
Loan Guarantees, On-lending &
Derivatives
21 B G Policies and Procedures for Loan Guarantees Procedures for Derivatives Policies and Procedures for On-lending Dim1 Dim2 C DeM Entity A Guarantee Fee covering the credit risk C B A D3 Derivatives System C Credit Risk Assessment Credit Risk Assessment On-lending Fee Risk Monitoring CounterpartyExposure & Risks Risk Monitoring
B
Term Sheet < 2 days
A
Require to assess credit risk guidelines on “how to” conduct assessment
Scores Summary
Dimension 1& 2: Guarantees and
On-lending-Moving from a C to an A reflects the ability to
assess and monitor credit risk
Dimension 3:
Moving from a C to an A reflects
the degree of sophistication of the DMO in
managing risks associated with derivatives
Guarantees – To Score or Not
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