MICROCAPITAL BRIEF: International Finance Corporation (IFC) Considering $10m Investment in Cygma for Foreign Currency Hedges for Microfinance Investors

The International Finance Corporation (IFC), an arm of the World Bank, is considering making a USD 10 million investment in the USD 50 million Cygma Fund, which will offer foreign currency hedges to investors looking to make local currency investments in microfinance institutions in developing countries. The ten-year, close-ended Luxembourg Fonds Commun de Placement (FCP) fund will be managed by Cygma Corporation, which is affiliated with Chatham Financial, both of which have operations in the United States, the United Kindom and Singapore. The instrument will also enjoy a guarantee from the Overseas Private Investment Corporation (OPIC), an agency of the United States government.

Sources and resources:

Cygma Financial:
http://www.cygmafinancial.com/

Overseas Private Investment Corporation
http://www.opic.gov/

Source article from the International Finance Corporation (IFC):

Cygma will be a ten-year close-ended Luxembourg Fonds Commun de Placement (FCP) fund. The fund’s total capital of US$50 million is projected to back up to US$500 million of hedge notional in a portfolio of emerging market FX derivatives. The capital will serve as a reserve to function as a needed counterparty in FX transactions. Cygma will offer its investors leveraged exposure to a diversified portfolio of long positions in illiquid exotic currencies not available anywhere else.

The portfolio will consist of multiple forward exchange contracts in the frontier currencies of Latin America, Eastern Europe, Central Asia, South and Southeast Asia, Middle-East / North Africa, and sub-Saharan Africa. These forward exchange contracts will in turn serve as foreign exchange hedges for microfinance investors seeking to make local currency investments that support the establishment and expansion of microfinance institutions in these countries. The capital raised will serve as a financial backstop to the portfolio of foreign exchange forward contracts, providing liquidity of last resort to the settlement of these contracts. To ensure the preservation of this capital, it will be invested in AA or higher-rated securities. All returns generated during the investment period will be reinvested in the financial backstop until the end of the ten-year period. This backstop will be guaranteed by the Overseas Private Investment Corporation (OPIC), which has the full backing of the U.S. government. This will enable the Fund to obtain a credit rating and present itself to its counterparties as a creditworthy entity.

IFC proposes to invest up to $10 million representing 20% of the total fund size (US$6 million in the first closing). The Fund is being set-up as a transparent and cost-effective risk management and hedging platform in mobilizing sustainable local currency financing to MFIs that normally don’t have access to such tools, particularly in IDA and frontier markets. A key complementary element to the Cygma Fund is the Advisory Services that Cygma Corp (Fund manager) can provide to IFC and its microfinance clients (MIVs & MFIs). Services include, risk management strategies, FX risk assessment and monitoring for debt & equity funds, and loan-level hedging.

Source: http://www.ifc.org/IFCExt/spiwebsite1.nsf/f451ebbe34a9a8ca85256a550073ff10/0db786266650d2ff85257680007bc5d5?OpenDocument

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