IFC, Mizuho in groundbreaking currency swap deal

The IFC has sold to Mizuho a funded risk participation in US dollars for a portion of an Indian rupee-denominated loan used to finance India’s first electricity transmission project. The deal is expected to pave the way for foreign banks to help fund projects in emerging markets without any need to fund in local currency.

The International Finance Corporation (IFC), part of the World Bank Group, and Japanese bank Mizuho have entered into a groundbreaking currency swap deal that may become a template for foreign investors wishing to fund deals in emerging markets without having to do so in local currency.

The deal – which both institutions say is “the first of its kind to be executed globally” – “allows a bank to invest in US dollars to participate in a local currency loan [enabling] Mizuho to invest in Indian infrastructure projects,” said Takeshi Kurita, general manager of the bank’s global structured finance division.

This is done via a $30 million risk participation scheme that allows Mizuho to buy into a 15-year loan granted by the IFC in 2004 to a consortium of Tata Power and the Power Grid Corporation of India – with the IFC repaying the principal and interest to Mizuho in US dollars (see diagram below).

The original loan was used to finance India’s, and south-east Asia’s, first public-private partnership in the electricity transmission sector – a build-own-operate-transfer transmission line to move electricity from Siliguri, in eastern India, to Mandaula, in Uttar Pradesh, near New Delhi, over more than 1,100 kilometres.

The parties hope the deal will serve “to help foreign commercial banks to enter the infrastructure market in India and other emerging markets where the demand for project financing is continuously expanding but where funding is normally done in the local currency”.