Borrowing and Related Financing Activities

Transcription

1 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 2 1

2 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 Issue securities Multilateral/bi lateral at concessional terms Loans from commercial banks, centre, central banks Issue in international capital markets 3 DPI-7 mechanisms Score C 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 B Score C PLUS plan is updated half-yearly and has details the timing of borrowing over the budget year Score A 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. 4 2

3 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 Broaden investor base- create level playing field 3

4 Mechanisms Auctions 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 Syndication government appoints a group of institutions that, for a negotiated fee, subscribe to its bond issues and then sell to other retail/institutional investors Tap issuance Retail issuance 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 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). 7 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 8 4

5 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) Even concessional borrowing from multilateral sources has different costs 10 5

6 External Borrowing - Financial Information 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) 11 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? Loan assessment/documentation: frequency 12 6

7 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 13 DPI8 Borrowings Prepare and publish Auction Calendar C One month ahead with issue dates and instruments B + indicative amounts + published at least one week before auction date A Published 3 months in advance Moving from C to A reflects the degree of predictability, transparency and capability of government to borrow from domestic market Debt manager who participated in negotiating loans enters transaction data into the debt recording/management system or prepares a terms sheet C B A Terms sheets for external loans prepared within 5 days, domestic same business day Terms sheet prepared within 3 days within one business day 14 7

8 DPI8 Borrowings Legal advisers C B A Legal advisers involved before concluding a loan agreement with any creditor and before concluding negotiating process with external creditors..for substantial part From the beginning C C C Written procedures have been prepared for all borrowing operations that are presently undertaken...are reviewed/updated at least every second year. at least once every year 15 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 16 8

9 DPI-9 Loan Guarantees, Onlending 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 onlending Clear operational guidelines for risk monitoring, especially credit risk Risk mitigation strategies (charging guarantee fee or onlending premium) 18 9

10 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 20 10

11 Loan Guarantees, On-lending & Derivatives C Require to assess credit risk guidelines on how to conduct assessment B Credit Risk Assessment D3 C Policies and Procedures for Loan Guarantees Dim1 A B Derivatives System Counterparty Exposure & Risks Procedures for Derivatives DeM Entity Policies and Procedures for On-lending B Guarantee Fee covering the credit risk Credit Risk Assessment Risk Monitoring A C Dim2 A On-lending Fee Term Sheet < 2 days 21 Risk Monitoring 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 22 11

12 Guarantees To Score or Not Score for DPI 9 Dimension 1 Legal Framework Policies and Issued (DPI 1) Procedures X X X X X X X X X X X Highlights links between indicators 23 Annex 1:Mapping to PEFA PEFA indicator on recording and management of cash balances, debt, and guarantees (PI 17) PEFA emphasizes proper systems for contracting loans and issuance of guarantees (managerial framework) DeMPA drills down in greater detail DPI-8,9 and 10 assess the whether the policies and procedures are in place to avoid the risks from such transactions operational framework for issuance of loans and guarantees and derivatives 24 12