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Largest note ever in frontier currency

June 8, 2020

FMO, in partnership with TCX (The Currency Exchange Fund) has set a new milestone in frontier currency markets: its largest offshore note ever issued in a frontier currency, amounting to USD 50 million in Uzbekistan Som.

Fatoumata Bouaré, FMO’s Chief Risk & Finance Officer: “We are very happy to see investors’ continued interest in frontier currency risk in these volatile times with high capital flight from upcoming economies. This is an encouraging sign, which also puts the financial sector in Uzbekistan in a better position, less exposed to the dollar and less vulnerable to currency fluctuations.’’

Offset exposure
In Uzbekistan, FMO has already lent the equivalent of USD 65 million in local currency since 2018, and the equivalent of USD 20 million is ready for disbursement the coming week. Funds denominated in local currency have been provided to both Hamkorbank and Ipak Yuli Bank, FMO’s longstanding clients in Uzbekistan.

Investors can buy such frontier currency exposure through FMO notes which are hedged by FMO with TCX. In line with its core business, TCX hedges the exchange rate risk associated with the lending needed for projects in such countries. However, by stimulating the interest of investors, who are willing to take on these frontier currencies, TCX is able to offset much of its exposure. This frees-up additional capacity to provide more hedges related to the lending business of TCX’s investors. FMO has issued approximately USD 800 million in local currency denominated bonds to date.

Othman Boukrami, Head of Trading at TCX: ”It is exciting to see that despite the increased uncertainty, demand for the higher yielding frontier currencies has been little affected by the COVID-19 crisis. We believe that the diversification effect of AAA-rated frontier currency notes remains a unique feature that will see an increase in investor interest. For TCX this means more impact per USD invested in the fund.”

Citigroup acted as the arranger, structurer and distributor of the note, which has a maturity of two and a half years and an interest rate of 15 percent. The note will be listed in Luxembourg. 

“We are delighted to have partnered with FMO and TCX on this landmark transaction, which represents the largest Uzbek Som private placement ever, and contributes further to the development of the frontier currency bond market.” Says Amaury Gossé, Global Head of MTNs at Citi.