We spoke with Joseph Khalil, Director at MFX Currency Risk Solutions, a socially-oriented company that supports impact investing with tailored hedging products and risk management education.
Can you tell us a bit about MFX Currency Risk Solutions?
We were formed in 2009 by a group of micro-SME funds that wanted better hedging solutions so as to be able to provide local currency loans to their customers in developing countries. The biggest problems MFX’s founders faced were: 1) access to hedging in illiquid currencies that banks wouldn’t cover including most African currencies and 2) the high cost of collateral which can require the lender to set aside up to 30% of the loan amount in spare liquidity.
To solve these problems, MFX was set up to create a single platform to allow impact lenders to hedge in almost any currency with very low collateral requirements. With MFX’s help, lenders and borrowers are able to eliminate the mismatch between their local currency revenues and hard currency financing while keeping more of their capital to put toward their mission.
While MFX was created to serve the microfinance industry, over the years we have expanded to serve all types for impact investment including clean energy, housing, agriculture and health. MFX has hedged more than $2.5 billion of loans for over 100 impact investors in almost 60 currencies. About 25% of MFX’s business has been helping clients hedge African currencies from larger markets such as Kenya, South Africa, Nigeria and the CFA zone to more frontier currencies like Sierra Leone, Mozambique and Malawi.
MFX works with clients of all sizes and can hedge deals from $50,000 to $50 million.
Why is hedging such an important tool for African companies when bringing on investment?
Historically large swings in African currency rates have presented a major obstacle for African companies seeking to borrow to fund growth. Often, financing is only available in dollars or euros but the company must repay those loans with revenues generated in local markets. A company may do everything right on the business side but find that its borrowing costs skyrocket in local currency terms due to devaluation. Historically, hedging was not available in most African countries which left lenders and borrowers with an impossible choice of which one would carry the currency risk. Often deals simply would not be made since there was no way to limit the potential risk.
With hedging, a company can fix its borrowing cost in the local currency, eliminating uncertainty from market swings. This allows companies to focus on their business, and free themselves from outside risks they can’t control.
Where do you see the greatest challenges between setting up counterparties and finalising the transaction process in Africa?
MFX’s mission is to make hedging simple. We often work with counterparties who are new to hedging and help them through the process. Managing collateral can be a challenge so we look to structure deals to minimize the need for cash transfers.
How do you work with funds, microfinance and other financial institutions to help them manage their currency portfolio?
First, we aim to understand the client’s business to find the right strategy and hedging products, either cross-currency swaps, currency forwards, or currency options. Where needed, MFX also can help develop a portfolio risk strategy. Since MFX’s pricing policy is fully transparent – such as a simple spread on MFX’s own hedging cost– our only goal is to find the best-priced solution for our client.
Do you set collateral requirements for funds or corporate clients?
MFX has different collateral requirements depending on the counterparty:
- For funds or SPVs that have a diversified international loan portfolio, MFX requires no margin account, just a 2% deposit which is returned at the end of the transaction
- For local financial institutions that are less diversified, MFX requires collateral of 5% initial margin + variable margin (mark-to-market)
How does Orbitt help you with your African business development process?
Both MFX and Orbitt help make deals possible. By making African dealmakers aware of the latest products that can help them manage currency risk, MFX and Orbitt are removing the hurdles for global investors and African companies to getting deals done.