Conditional Deliverables – October 2012







The Conditional Deliverable Guide

October 2012

www.tcxfund.com

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Conditional Deliverables – October 2012

1 Introduction TCX provides hedging products to its clients (“TCX Clients”) on the basis of deliverable settlement if specific conditions are met. These conditions apply to liquidity risk, credit risk, operational risk and legal risk. Provision of conditional deliverables is subject to the use of one or more approved settlement services providers ‐ currently, only INTL Global Currencies Limited (“IGC”)). Within its capacity as payment agent in the loan document, IGC is mandated to execute all spot trades for conditionally deliverable transactions at a spot rate determined as the best rate offered from reference currency dealers. IGC will receive and pay funds spot on behalf of TCX and its counterparties to and from the designated local clients (the borrower). TCX will not hold any domestic accounts. Conditional deliverable products facilitate the provision of a truly domestic loan by TCX Investors. This means that the borrower receives local currency on disbursement, and settled its obligations in local currency onshore, subject to the conditions as stated here in and as per the conditional deliverable confirmation.

2 Geographic scope TCX currently offers conditional deliverables in the following currencies: 

Ghanaian Cedi (GHS)



Zambian Kwacha (ZMK)



Tanzanian Shilling (TZS)



Kenyan Shilling (KES)



Ugandan Shilling (UGX)



West African CFA (XOF)



Dominican Republic Peso (DOP)



Costa Rican Colon (CRC)



Philippine Peso (PHP)



Indonesian Rupiah (IDR)

Should you have a strong interest in trading on a conditional deliverable basis in another currency, please contact us.

3 The transaction mechanics 3.1

Pre‐trade arrangements

Should a client wish to conclude a transaction with TCX on a conditionally deliverable basis, it should inform TCX upon submission of a request for an indicative and binding quote. TCX will inform IGC of the interest to transact. IGC will:

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Conditional Deliverables – October 2012

a.

b. c.

supply the TCX Client with all relevant information as regards information requirements for approval of payments into and out of the country in question – i.e. exchange control issues, required documentation, fees levied by local banks (particularly for the repatriation process), withholding tax, etc. conclude KYC on end‐clients (borrowers) and assist the TCX Client to conclude appropriate loan documentation with regards to: a. Banking account details of IGC onshore; b. Conditions precedent for disbursement (related to local registration requirements); c. Payment details (maximum amount per day/week/month, notification delay for disbursements, settlement delay, etc); d. Registration / approval process of loan locally; e. Ensure appropriate clauses to confirm the appointment of IGC to be the agent of both the lender and borrower in order to execute all relevant foreign exchange transactions and associated payments resulting from the Loan Agreement.

Once IGC is ready to transact, it will inform TCX. The trade will be executed a minimum of 2 business days from this notification. 3.2

Disbursement

On disbursement, USD funds are transferred from the lender to TCX. IGC conducts an auction to obtain the best rate available in the market. The rate at which the transaction is executed is the best rate obtained less a fee. Funds are delivered directly to the account of the borrower. IGC will work with the lender and borrower to register the investment as per local rules and regulations (where applicable). Conditional  Deliverable  Swap (ISDA)

TCX Auction with  authorized spot  FX dealers

TCX Client

TCX offshore  Bank Acct

USD principal  and interest 

Investor offshore  Bank Acct Loan document  between lender  and borrower

USD

offshore onshore

Dealer 1

Dealer 2

Dealer 3

LCY TCX onshore  Bank Acct

LCY principal  and interest 

Borrower

INTL 

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Client onshore  Bank Acct





Conditional Deliverables – October 2012

3.3

Repayment (principal and interest)

The local borrower pays the local currency amount owed on the loan document directly to the Payment Agent, IGC, onshore. TCX pays the USD principle and interest directly to the Lender. Please note the swap reverts to a non‐deliverable structure with settlement between the TCX Client and TCX completed offshore in USD in the event that: a. b. c. d. e.

A Convertibility or non‐transferability event occurs; Late payment by the borrower of more than 5 business days; Default by the borrower under the loan document; IGC no longer the payment agent; Failure by borrower to fulfill local capital control / regulatory approvals / registrations within 1 month of disbursement.

We refer you to the attached conditional deliverable template confirmation, on which all deliverable transactions are based with the annex providing the NDF terms. It is important that the payment mechanics of the underlying loan document match the conditional deliverable confirmation payment mechanics. Please note that where conditional deliverables are settled as a non‐deliverable we use the Ask rate rather than the Mid for the FX Fixing. 3.4

Risk allocation and Pricing

The risk allocation of conditionally deliverable and non‐deliverable structures are compared in the table below. Synthetic Loan (Non‐ Deliverable Swap)

(Deliverable Swap)

TCX

TCX

Credit risk: Failure to pay by the borrower.

Lender

Lender

Hedge / Loan match risk: that the terms of the loan and terms of the swap do not match, resulting in an imperfect hedge.

Lender

Mitigated

Liquidity risk: that there is insufficient hard currency available in the country to settle hard currency obligations offshore.

Borrower

TCX

Lender

Lender

Lender / Borrower

TCX

Risk category

Market risk: Movement in FX and interest rates.

Convertibility / Non‐transferability risk: the occurrence of any events which makes it impossible to convert local currency into hard currency and / or transfer hard currency from the country to offshore. Settlement Risk: a counterparty (including local banks providing spot FX services) does not deliver funds per agreement to the appropriate accounts.

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Domestic Loan



Conditional Deliverables – October 2012 Tax risk: As per standard loan documentation, any current or future withholding taxes to be paid by borrower.

Borrower

Borrower

Regulatory risk: Failure to obtain necessary approvals, licenses, authority to sell local currency and purchase hard currency to honor loan obligations.

Borrower

Borrower

Generally, TCX charges a premium for conditional deliverable transactions over that of non‐ deliverable structures. The premium is based on: 

The bid‐offer spread of the relevant currency;1



The applicable fee to the payment agent;



Any applicable banking charges/ fees levied by local financial institutions;

For large transactions, TCX also reserves the right to charge a liquidity risk premium.

4 Loan term sheet considerations Term

Synthetic Local Currency Loan



Domestic Local Currency Loan

Loan

Equivalent of USD […] million in Same as for synthetic. [LCY] calculated using the same FX Fixing Rate used in the swap or LCY […] million.

Term, availability period and repayments

Based on project / borrower requirements. Please see www.tcxfund.com/tenors for tenor and fixed rate limitations of hedging products offered by TCX.

Same as for synthetic

Floating Interest rate

[Local currency benchmark] + […]%, subject to Matarial Adverse Change clause.

Same as for synthetic.

List of benchmarks available at www.tcxfund.com/benchmarks. 1 Please note that the borrower would incur the bid‐offer costs in the non‐deliverable structure, as

the borrower is responsible to convert local currency into hard currency to settle his obligations under the loan offshore. The inclusion of bid‐offer spreads in the swap quote should thus not been seen as an additional cost.

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Conditional Deliverables – October 2012

Term

Synthetic Local Currency Loan



Domestic Local Currency Loan

Same as for synthetic. Fixed interest […] %. rate The interest rate over all or a portion of the outstanding amount under the Loan may be converted to a fixed rate, subject to availability to the Lender of suitable hedging (by TCX). TCX will support Fixed reversed into floating rate subject to payment of unwinding costs (if any) between the Lender and TCX hedging. Please visit www.tcxfund.com/tenors for the latest maximum tenors for fixed rate loans. Day count Must match swap confirmation. Contact us for this information. convention, business day conventions

Same as for synthetic.

Interruption of If, at the Lender’s sole discretion Same as for synthetic. benchmark acting reasonably (or as initiated by TCX), the selected local benchmark floating interest rate is deemed to cease functioning, a new and more appropriate benchmark may be selected. If the Borrower does not agree to the proposed interest benchmark reset, it may opt to restate the Loan in USD. A restatement fee equal to the prepayment charge will be applied. Interest Payment Dates

As per project requirements, swap Same as for synthetic. matches.

Commitment [ ] % of the USD equivalent amount Same as for synthetic. Front‐end fees fee, Front‐end payable in USD or [ ]% of LCY loan can be netted from disbursement fee principal amount. amount.

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Conditional Deliverables – October 2012

Term

Synthetic Local Currency Loan



Domestic Local Currency Loan

Repayments

On or before each repayment date, On or before each repayment date, the agreed amount in LCY will be payable the amount payble in LCY will be by the borrower in LCY. The LCY applied by the Borrower to amount will be credited to TCX's LCY purchase USD at the Fixing Rate account in the relevant country gross (same as swap) prevailing [2] days of any fees / taxes. prior to the repayment date. The USD amount will be credited to the Lender’s USD account in [London]. NB: TCX’s settlement partner to be appointed as payment agent in loan documentation. We also require basic NB: The same Fixing Rate as used KYC info on Borrower in order to in the swap is used to ensure swap receive / pay funds directly from / to and loan matches perfectly. This Borrower. Please contact us for more implies that bid/offer spread costs information on specific requirements. and any banking fees are for the account of the borrower.

Late Payments

TCX Client (the Lender) is obligated under the swap agreement to honour settlements on time regardless of any deviations and changes to the underlying loan. If the borrower pays late the Lender will thus be exposed to market risk from the due date to the date the funds are received. Consideration should be given as to whether the borrower should be required to cover any market risk costs / losses incurred as a result of late payment. Penalty interest is typically not hedged under a standard swap agreement and should thus be payable in USD.

Should TCX not receive the LCY on the payment date the TCX Client will be notified immediately. A grace period of maximum [5] business days will prevail after which the TCX Client will be obliged to pay the equivalent USD of the LCY amount owed converted to USD using the Fixing Rate prevailing [2] days prior to the settlement date. The USD amount will be deposited in TCX's USD account in [Amsterdam]. TCX is still able to repatriate funds received onshore later than [5] business days however this would be for the account and risk of the TCX Client. Please review conditional deliverable swap confirmation in this regard. Any penalty interest payable is typically not covered by the swap and should thus be payable in USD.

Loan Default

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Swap is unwound / restructured Swap reverts to non‐deliverable and is



Conditional Deliverables – October 2012

Term

Synthetic Local Currency Loan



Domestic Local Currency Loan unwound / restructured within 45 business days in USD offshore.

within 45 business days.



Unwind costs, if applicable, may be payable by the Lender to TCX or from TCX to the Lender.

Unwind costs, if applicable, may be payable by the Lender to TCX or from TCX to the Lender.





Consider restating oustanding loan and interest into USD using the Fixing Rate used to unwind the swap.

Consider restating oustanding loan and interest into USD using the Fixing Rate used to unwind the swap.

Prepayments

Mandatory Prepayment / Restatement to USD

Allowed. Unwind costs applicable.

Same as for synthetic.





If for any reason the swap is not available or must be unwound, you should consider including an option in the loan agreement allowing the Lender to initiate Mandatory Prepayment and / or restating the loan in USD using the same Fixing Rate as in the swap.

Same as for synthetic.

Political / TCX does not hold transfer / TCX does not hold transfer / convertibility risk. Should such an Convertibility / convertibility risk and such events event occur, the swap reverts to the Transfer Risk do not impact the TCX Client's (ie non‐deliverable structure and the Lender’s) obligations under the borrower must thus settle obligations swap agreement with TCX as the under loan agreement offshore in USD. swap is entirely offshore. An event of default is triggered. Given that the Borrower pays Use 1998 ISDA FX definition of obligations in USD offshore this General Transfer and General event will trigger default. Convertibility to ensure loan and swap matches. Use 1998 ISDA FX definition of General Transfer and General Please review conditional deliverable Convertibility to ensure loan and swap confirmation in this regard. swap matches.

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Conditional Deliverables – October 2012

Term

Synthetic Local Currency Loan



Domestic Local Currency Loan

Conditions precedent

Disbursement should be subject to Same as for synthetic. a suitable hedge, i.e. subject to MAC clause. In addition, KYC information, loan documentation, agency appointment and tax items (if applicable) must be submitted to TCX 5 business days prior to disbursement. Please contact us for country specific information in this regard.

Tax, Expenses, Standard loan clauses. Repayment above. Banking Charges

Compliance Standard loan clauses with law and regulations

See

Borrower responsible for all present and future taxes. All payments under loan to be made without counterclaim or setoff and free and clear of, and without any deduction or withholding for, any Taxes or other payments. Borrower must retain all necessary documentation and proof of payment and must submit to the payment agent upon reasonable request.

Borrower required to comply with all regulatory laws, approvals, licenses required with regards to the facility including capital account and foreign exchange laws. Failure to comply and inability to transfer funds offshore will result in non‐deliverable settlement. Please review conditional deliverable swap confirmation in this regard. Whilst TCX and its settlement partners endeavors to assist in processing regulatory approvals it does so on a best effort basis only. Responsibility for appropiate registration is the responsibility of the borrower. Swap settles on NDF basis if relevant required approvals are not obtained within 1 month of disbursement.

Anti‐money

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All TCX Client’s have provided TCX

Same as for synthetic.



Conditional Deliverables – October 2012

Term

Synthetic Local Currency Loan

laundering and Environmental and Social requirements

with a Compliance Certificate. Please ensure your loan complies with the representations and warranties made to TCX in this certificate.



Domestic Local Currency Loan



5 Contact information Please contact us should you required additional information. Our details are:

Structuring Team TCX Investment Management Company B.V.



Sarphatikade 13



1017 WV



Amsterdam, The Netherlands



[email protected] Per van Swaay, Jorge Gomes, Jerome Pirouz, Philip Buyskes General Office Number





+3120 531 4851



This guideline document is provided by TCX for information and discussion purposes only. TCX has no fiduciary duty towards you, and assumes no responsibility to advise on, and makes no representation as to the appropriateness, suitability or possible consequences of, the prospective transaction. Any decision based on these comments is entirely for your own account and risk. You are advised to seek advice from a legal adviser or make your own independent judgment with respect to any matter contained herein. The Currency Exchange Fund N.V. (TCX) is structured as an open end investment fund. The statutory managing director of TCX is TCX Investment Management Company B.V. (TIM). According to 1:12 sub 1b Act on financial supervision TCX and TIM are exempted from the obligation to obtain a licence from the Authority for the financial markets as only qualified investors may invest in TCX. The contents of this document should not be considered as an advice to participate in TCX or purchase any securities offered hereby.

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Conditional Deliverables – October 2012

Swap Confirmation Template removed from website version. Please contact the TCX Team for your specific transaction.

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