Highlights••••Converting IBRD loans to local currency
reduces currency risk for borrowers
IBRD can convert disbursed and outstandingbalances of IBRD loans into local currency,subject to market availability
Local currency offered by IBRD is typicallyattractive for non-sovereign entities withlocal currency revenues
IBRD must hedge its own currency risk andintermediates currency transactions with thefinancial markets

Currency risk is the risk that debt and debt service
payments in hard currency increase (measured in localcurrency) when the currency depreciates. Economic shocks
are often accompanied by currency depreciations. Thus,
currency risk tends to impact countries when a shock has
already hit them, and the sudden depreciation exacerbates
repayment challenges.
IBRD local currency financing is provided as a conversionof the original currency to local currency at the time ofdisbursement or thereafter. IBRD Flexible Loans (IFLs) arecommitted in USD, EUR, JPY or GBP. At the time of each
disbursement, the interest rate in local currency is set for thedisbursed amount. IBRD cannot convert loans to local currency
before disbursement because the timing of disbursements is
unknown and cannot be hedged by IBRD. The lending rate foreach disbursement will reflect rates that IBRD can secure fromthe markets at the time of disbursement. In addition to loan
conversions, the Bank also offers free-standing local currency
swaps (see paragraph below).
Local currency conversions have most frequently been
provided to non-sovereign entities. IBRD loans are often
onlent or lent directly with a sovereign guarantee, for example,
to state-owned enterprises (see South Africa example), stateand local governments (see Mexico example), or government
agencies. These entities typically have local currency revenues,
are averse to currency risk, and often have neither theinstitutional capacity nor access to derivates for hedging therisk. A large portion of World Bank loans to state-owned
enterprises is already converted to local currency.

Deferred Drawdown Option: Major Terms & Conditions

IBRD typically provides local currency conversions
through currency swap transactions. IBRD does not takecurrency risk on its balance sheet and, therefore, IBRD typicallyledges local currency conversions by executing mirroring
currency swap transactions with market counterparties.
Currency swap markets, when available, provide the flexibility
to match the hedge with the repayment profile of the loan.
However, the long tenors of 10 years or more that characterize
IBRD loans are available only for the most liquid emerging
market currencies, for example, BRL, COP, IND, INR, MXP, PHP,UYU, and ZAR. A full list of currencies approved for conversion
is included in Box 1.
IBRD can also provide local currency through the bondmarkets. In this case, IBRD simultaneously lends in local
currency and issues local currency bonds. The cash flows of
the bonds and the loan have to be perfectly matched.
Therefore, this approach requires considerable coordination
between the borrower, the bond investors, and the WorldBank. This approach is most efficient when specific investors,
for example, a local pension fund, have the appetite for tripleA-rated IBRD bonds denominated in local currency with amatching repayment profile (see Uruguay example).
Loan conversion modalities:• Automatic Conversion of Loan Currency (ACLC). The
disbursed funds are automatically converted at the time of
disbursement at the exchange and interest rates, reflecting
current market conditions.
• Partial amount conversion. A partial amount is converted
into local currency where the borrower wishes to convert
less than the full outstanding amount or in cases where ahedge for the full amount of the transaction is not available
to IBRD.
• Partial maturity conversion of outstanding amounts.
The borrower may wish to lock in the interest rate in local
currency for a shorter period, or the hedge may not be
available in the market for the full tenor of the loan. If a loan
is hedged for partial maturity, it may be renewed on arolling basis, so the borrower remains protected against
exchange rate fluctuations.
Requesting loan conversions. The borrower may submit arequest for 1) ACLC by selecting the relevant option in the Loan
Choice Worksheet at negotiation and signing the required legal
documentation; and 2) conversion of disbursed andoutstanding loan balances by submitting the Conversion
Request Form available on the World Bank Treasury website.

Updated as of April 2021

Free-standing local currency swaps provide a currency riskhedge alternative to loan conversion. A free-standing
currency swap has the same economic implications as the loanconversion, but it is provided under a separate legalagreement. That enables borrowers to convert disbursed andoutstanding balances of existing IBRD loans into local currency
without changing the terms of the underlying loan. It can also
be used to hedge loans from third parties. Borrowers wishing
to transact free-standing swaps with the Bank need to enter
into a Master Derivatives Agreement (governed by theInternational Swaps and Derivatives Association, ISDA) withIBRD. Like loan conversions, it is subject to market availability.
See the product note on Hedging Products and ask your WorldBank Treasury Banker for more information. Free-standing
swaps can be requested through the Hedge Request Form.
Transaction fees:
https://treasury.worldbank.org/en/about/unit/treasury/ibrdfinancial-products/lending-rates-and-fees#2

Case studies:• South Africa – Local currency financing for state-owned enterprises• Uruguay – Local currency financing to the national government• Mexico – Local currency financing and risk management for housing finance• Mexico – Local currency financing to sub-national governments

Box 1: Currencies approved for hedging
using currency swaps
Azerbaijan manat
Brazilian real
Chilean peso
Chinese yuan
Colombian peso
Costa Rican colon
Egyptian pound
Indian rupee
Indonesian rupiah
Kazakhstan tenge
Kenyan shilling
Kuwaiti dinar
Mexican peso

Moroccan dirhamNigerian naira
Peruvian soles
Philippine peso
Polish zloty
Romanian lei
Russian ruble
South African rand
Thai baht
Turkish lira
Uruguayan peso
Vietnamese dong

Click here for forms and conversion and hedging guidelines
Click here for more case studies on other financial solutions by the World Bank Treasury
https://treasury.worldbank.org/en/about/unit/treasury

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.

Deferred Drawdown Option: Major Terms & Conditions

Updated as of April 2021