A hedged loan participation debut in Kazakhstan

In Kazakhstan, in April 2019, the EBRD mobilised third-party capital for a local-currency loan to a microfinance institution through a new product called a hedged loan participation (HLP). The product’s dual aim is to encourage third-party investment while protecting both borrowers and lenders from exchange-rate fluctuations.

Facilitating access to microfinance across the country

KazMicroFinance opens in a new tab(KMF) is a microfinance institution offering micro-sized loans to entrepreneurs and small businesses in Kazakhstan. The fund operates eight branches in the country’s largest cities. Each branch has rural outlets, bringing new financing opportunities to small businesses and entrepreneurs in numerous industries in remote locations across the vast country.

Fostering innovative market transactions

The transaction was the EBRD’s first syndicated loan to a microfinance organisation in Kazakhstan and also its first local currency-denominated syndicated loan there.

The Bank provided US$ 10 million from its own account, syndicating the remaining US$ 40 million to microfinance investment funds via the HLP. The syndication product allowing EBRD to sell US dollar-based participation in the loan, which was denominated and provided to KMF in Kazakh tenge.

This structure protects both KMF and the participating investment funds from currency risk. It also enabled investment funds with no access to the local currency to participate in an EBRD product in Kazakhstan.

The EBRD Treasury’s intermediation in the HLP allowed the syndicated participants to receive an income stream of US dollar LIBOR + margin from the fixed-rate loan. 

Timing is critical in sometimes tricky markets

The Treasury Client Solutions team played an integral role in structuring the solution, explaining how it worked to both the borrower and the loan participants. Standard loan and participation agreements had to be revised and negotiated to take into account the innovative structure of the HLP.

Timing was critical when it came to funding the participation and disbursing the loan, as market transactions were undertaken in such a way as to ensure loan affordability in what can be a volatile and illiquid cross-currency swap market. The EBRD Treasury is highly satisfied with the outcome of the HLP and looks forward to further opportunities to structure similar solutions in other markets.