Foreign Exchange Risk in Microfinance

BlueOrchard Finance S.A. Ann Miles October 2006

Foreign Exchange Risk in Microfinance
• In October 2005 we discussed this same issue • Since then, we have made some significant progress in addressing this problem for MFIs • We have also identified investors who may be willing to take some FX exposure

Foreign Exchange Risk in Microfinance
• In April 2006 we closed BOLD (BlueOrchard Loans for Development), our 2nd Collateralized Debt Obligation for $99 Million • 20% of the BOLD transaction was in local currency for rates fixed for a period of 5 years • The currency risk was completely hedged for the investors with the use of swaps • The currencies included Mexican and Colombian pesos and Russian rubles

Foreign Exchange Risk in Microfinance
• In mid-2006 we arranged a FX line for forwards and swaps for our flagship fund, the Dexia Microcredit Fund • Our first transaction in local currency was completed last week for a major Latin American MFI • We are exploring opportunities to do same in other countries where there are forward markets

Foreign Exchange Risk in Microfinance
• Other product developments underway include:
– Creation of new global fund that will fund completely in local currency with some portion allocated for unhedged currency positions – Creation of a regional fund that will also display same characteristics – Creation of another CDO for 2007 that will have a larger component of local currency financing