Narrative
Full Description
Project narrative
On October 10, 2018, the Central Bank of Egypt (CBE) agreed to enter into a new repurchase (‘repo’) transaction with a consortium of international banks for a total amount of $3.8 billion and a final maturity of 4.5 years and an average life of 3 years. The repo was collateralized against the entire amount of the Arab Republic of Egypt dollar-denominated sovereign bonds with maturities November 2024 and November 2028 in addition to to be issued Egypt dollar-denominated sovereign bonds maturing in 2026 and 2030, all of which were to be held by the CBE and listed on the Irish Stock Exchange. The members of the consortium included Citigroup Global Markets Limited, Credit Suisse AG, London Branch, Deutsche Bank AG, London Branch, First Abu Dhabi Bank PJSC, HSBC Bank plc, HSBC Bank Middle East Limited, ICBC Standard Bank plc, J.P. Morgan Securities plc, Natixis, and Nomura International plc. The repurchase transaction was expected to settle on November 19, 2018, following the CBE repayment of the total sum of $3.1 billion on November 15, 2018, honoring the terms of a previous repo transaction in November 2017 with a consortium of international banks. The November 2018 repo transaction sought to increase CBE’s foreign exchanges reserves and promote CBE’s objective of enhancing its liability management by extending the duration of its debt structure. In November 2020, the term of the repo agreement was extended by 1.5 years (effectively increasing the maturity from 4.5 years to 6 years).
Staff comments
1. The value of the contribution of ICBC Standard Bank to the $3.8 billion syndicated loan is unknown. For the time being, AidData assumes equal contributions across the 10 known members of the syndicate ($380,000,000 each). 2. According to a World Bank report (entitled 'Debt Transparency in Developing Economies'), '[a] repurchase agreement (“repo”) is the sale of securities to a counterpart in exchange for cash, under the agreement to repurchase the same or similar securities at an agreed price in the future. Repos are widely used in money markets including: (i) interbank lending, (ii) central bank open market operations with domestic commercial banks, and (iii) securities dealers to finance their inventories. Starting from the mid-90s, repos have been increasingly used in [low-income countries and developing countries] as they are a safer, more flexible, and often cheaper source of funding than unsecured borrowing for market makers […]. The “price differential” between the price at the start of the transaction and the price at the end of the transaction reflects the interest rate, whilst the “haircut” is the difference between the market value of the securities and the amount of cash lent against their transfer. The haircut depends on a number of variables such as maturity, quality, scarcity value, and price volatility of the underlying collateral; terms of the repo; and creditworthiness of the counterpart [...]. The economic nature of a repo is that of a collateralized loan. The market arrangements for repos, including the payments of margin, the ability to substitute securities, and the retention of market risk by the security provider, support the view that repos should be classified as loans, with the security remaining on the balance sheet of the security provider. However, from a legal perspective, a repo is a true sale/purchase of assets for a purchase price, with an agreement to re-purchase at a price differential; this is different to a loan that bears interest. As a result of this, the “legal owner” of the securities (i.e., the security receiver) in repos may differ from the “economic owner” for statistical purposes (i.e., the security provider). In the absence of adequate disclosure of the collateralization details, this difference may generate severe information asymmetries, particularly when the repo is overcollateralized and the securities used are not marketable. Overcollateralization of repos that utilize the seller’s own securities can lower the cost of borrowing by providing credit protection in case of default. [This report provides] examples of repos that, in contrast to normal repos (which use third party typically high-grade securities), utilized the countries’ own sovereign bonds as collateral for their borrowing with large haircuts. These repos—signed when the borrowers were experiencing difficult financial conditions—gave creditors the right to claim, in the case of default, a larger amount than was lent (i.e., paid as the initial purchase price), thus de facto diluting the rights of other creditors. Such transactions would only be cost-effective if the potential impact of the collateral in the case of a default (e.g., external securities increasing in value) is not observed by other investors. Otherwise, theoretically, their inclusion in the reported debt portfolio should trigger an increase in the cost of future un-collateralized debt.’ See https://documents1.worldbank.org/curated/en/743881635526394087/pdf/Debt-Transparency-in-Developing-Economies.pdf 3. The $3.8 billion repo agreement was first initiated as a $2 billion transaction using dollar-denominated sovereign bonds as collateral in November 2016 -- with a consortium nine (mainly international) banks. The November 2016 agreement was a key factor that helped unlock emergency support from the International Monetary Fund (IMF). See https://www.globalcapital.com/securitization/article/28mtq2tbssdo3lh9kiqrk/derivatives/emerging-market-structured-funding-expands-frontiers and https://www.risk.net/awards/5360881/deal-of-the-year-hsbc and https://www.centralbanking.com/central-banks/reserves/foreign-exchange/3792616/egypt-strikes-deal-for-increased-funding-from-global-banks