1. Liability management operations in the external markets
G-24 Technical group meeting
Colombo, February 27-28, 2018
Rodrigo Cabral
Senior Financial Officer
Financial Advisory and Banking
November 10, 2018

2. Table of Contents The rationale for LMO Exchanges, buybacks and beyond
Financial derivatives
Why are more sovereigns issuing EUR-denominated bonds?
Strategy-anchored debt management

3. The rationale for LMO

4. The rationale for LMO in the external markets
As explained before, quite similar to their use in the domestic market
Change 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

5. Brazil: continuous buyback program improving the yield curve

6. Liability management operations
external markets

7. Liability 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 etc
Should they be the object of LM?

8. New issue + accelerated switch tender offer

9. The use of financial derivatives

10. Why a DMO may want to use derivatives
Separation of funding and risk management decisions
Additional options for managing risks
Achieve and stay on strategic benchmarks
Widen the investor base
Make use of potential cost advantage or particular markets

11. However… some issues require attention
Derivatives can be efficient instruments to improve risk management, but bring additional challenges
Some 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 currencies
But may not be available for DX and credit charge may be costly

12. What do countries’ experiences tell us?
Need of a robust governance framework in place
Sweden
Strategy matters!
Very useful to improve risk management
Belgium, Hungary, Morocco, The Netherlands, Portugal, Slovenia, Sweden
First things first: full capacity and framework have to be developed
Romania
Market conditions matter
The Netherlands, Portugal
Political and reputational risks are real
Belgium
If not properly used, can go very bad!
Orange County (US)

13. Country example: Hungary Strategy and execution
Total debt:
External debt:
HUF: 60-75%; FX: 25-40%
Currency mix: 100% EUR (5% fluctuation band)
Domestic debt:
Duration: 3 years +/- 0,5 years
Fixed / floating rate composition: 66%-34% (5% fluctuation band)
Fixed 61-83%, Floating 17-39%
Before swaps
After swaps 12

14. Why are more sovereigns issuing EUR-denominated bonds?
A (very) brief summary.

15. A substantial increase in EUR-denominated EM bonds
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

16. Hard not to associate with the Divergence in monetary policies

17. A (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, branding
But decisions should be anchored in a debt management strategy
Ideally, targets for currency composition
… and valid for all LMO!

18. Thank you.