The World Bank helped a Turkish stateowned bank save USD 3.48 million on aUSD 5 million loan by using the Partial
Maturity Currency Conversion featureof IBRD Flexible Loans.
Background
Small and Medium Enterprises (SMEs) are one of thegrowth engines of the Turkish economy. In the aftermathof the global economic crises of 2008-2009, thegovernment leaned on SMEs to retrigger economic growth.
This included World Bank’s “Access to finance for Small andMedium Enterprises” projects in 2008 and 2010. The
project financing was in the form of credit lines
intermediated by state-owned banks (Turkish Investment
Bank, Vakıfbank, and Ziraat Bankası) to on-lend to SMEs.
The banks were selected based on their extensive networkand diversified lending practices, including underservedregions.
Ziraat Bankası’s loan allocation of USD 100 million
designated at least 25 percent of the loan proceeds to beon-lent in priority regions where SME’s revenue was mainly
in Turkish lira (TRY). As a result, five percent of the loancarried FX risk: Ziraat Bankası was obligated to pay back theIBRD loan in USD, but some of its customers in the priority
regions were paying back in TRY. The mismatch exposed
both Ziraat Bankası and the government (as the guarantorof the loans) to FX risk due to TRY volatility.

Risk Management Objectives
Manage Ziraat Bankası’s exposure to FX risk from debt
obligations to IBRD in USD, and the on-lending operations
to SMEs in TRY.

Photo Credit: Photo by Omid Armin on Unsplash

IBRD Financial Solution
IBRD provides clients the ability to convert theiroutstanding loans into local currency for risk management
purposes, provided IBRD can hedge the FX risk in themarket. As in the case of TRY at that time, when themaximum swap tenor available in the market is shorter
than that of the loan, clients can avail of the option ofPartial Maturity Conversion of their loan.
In 2014, at the request of Ziraat Bankası, the World Bank
executed a partial maturity conversion on an outstanding
USD five million, 21-year loan at LIBOR + 73bps to TRY 10.6
million at 11.1 percent for seven years (which reflects themaximum swap tenor available in the market at the time
when it was requested). The World Bank does not take FX
risk with this redenomination, as it offloads this risk to themarket with a currency swap.
On April 1, 2021, the conversion period end date, using theFX rates on that date, the remaining loan amount(denominated in TRY) was redenominated back to USD at a
new lower amount.

Transaction Structure

World Bank Treasury’s Role
• The IBRD leveraged its triple-A credit rating to provide
Turkey’s Ziraat Bankası with improved market accessand competitive financial terms.
• On the loan closing date, September 30, 2014, IBRD
converted the outstanding loan amount from USD toTRY, using the ad hoc request for the conversion
feature of the IBRD Flexible Loan (IFL).
• The applicable interest rate following the conversion
was determined on market terms by converting theVariable Rate — 6-month USD LIBOR +73 bps into a
Fixed Rate in TRY as well as a transaction fee for theconversion.
The partial maturity loan conversion allowed the total loan
amount to be protected against FX risk up to the first sevenyears. Ziraat Bankası had the option to conduct anotherredenomination at the end of the conversion period.

OutcomeOver the term of the partial maturity conversion from April
1, 2014, to April 1, 2021, the client’s exposure on the IBRDloan was matched with their on-lending activity in TRY.
On April 1, 2021, Ziraat Bankası chose not to conduct
another redenomination and kept the loan in USD at thenew, much lower notional.
The remaining loan amount of TRY 9.92 million wasredenominated to USD 1.19 million (which otherwise would
have been USD 4.67 million).

The client was thus immunized against any FX movementin the 7-year period (in this case TRY depreciated almost
fourfold, from 2.13 TRY/USD to 8.35 TRY/USD). Mitigating
the FX risk for Ziraat Bankası facilitated financially soundon-lending to SMEs, particularly in the priority regions.
Managing financial risk through conversions to local
currency is one of the many ways the World Bank Grouphelps member countries become more resilient toeconomic shocks. IBRD’s triple-A credit rating, market
presence and convening power allow the World Bank
Treasury team to develop innovative new products to help
clients maximize financing and mitigate risk.

How can a partial maturity loan conversion help
protect Borrowers from FX risk?
Partial maturity conversions are offered to clients whenthe maximum swap tenor available in the market isshorter than that of the loan.
Partial maturity loan currency conversions redenominate loans to local currency, allowing the totalloan amount to be protected against any FX risk up to
the end of the partial period.
At the end of the period, the client has the choice tofurther hedge this amount in local currency byrequesting to do another partial (or full if the FX marketallows) maturity redenomination.

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.