Domestic Foreign Currency-Denominated Bonds (DFCBs) are debt financial instruments issued by a domestic entity (such as corporations or governments), within the local market but denominated in a foreign currency. These bonds are governed by the domestic market’s regulations and are typically aimed at local investors, providing exposure to international currencies like the U.S. dollar (USD) or Euro (EUR). The Nigerian Government recently issued its first Domestic US Dollar Denominated Bond with a 5-year tenure at a 9.75% coupon rate to support the development of key infrastructure in critical sectors of the economy.

Benefits of DFCB

1. Currency Hedging: They allow investors to hedge against exchange rate volatility, reducing the risk of local currency depreciation by holding assets in foreign currencies.
2. Diversification: Investing in foreign currency bonds allows investors to diversify their portfolios by gaining exposure to different currencies.
3. Inflation Protection: Domestic foreign currency-denominated bonds offer inflation protection by providing returns in a relatively stable foreign currency, thereby preserving investment value.
4. Access to Foreign Currency: Issuing bonds in a foreign currency, such as U.S. dollars or euros, allows the issuer to raise capital in hard currency, which can be used to finance imports, repay foreign debt, or stabilize foreign reserves.

Risks

• Currency Risk: If the domestic currency appreciates against the foreign currency, the bond’s value will decrease in term of the domestic currency. Also, debt servicing costs and debt value will increase if the domestic currency depreciates.
• Credit Risk: As with other bond issuances, the issuer may default on the bond as it is denominated in foreign currency. This risk is more likely in emerging markets.
• Reinvestment Risk: The investor may face the challenge of re-investing the principal at a lower interest rate at maturity if market conditions change

 Difference Between DFCB and Eurobonds

Domestic foreign currency-denominated bonds are issued within a country’s own financial market but are denominated in a foreign currency, such as U.S. dollars or Éuros. These bonds cater primarily to local investors who seek exposure to foreign currencies while staying within their home market, and they are regulated by domestic financial authorities.
In contrast, Eurobonds are issued in international markets and are denominated in a currency different from the issuing country’s currency. They are sold to a global investor base and are governed by international regulations rather than domestic ones.

Other Issuers

In 2021, the Ghanaian government successfully issued a 6% five-year domestic USD-denominated Treasury bond, raising $168.98 million. The bond primarily targeted investors residing in Ghana and non-resident Ghanaian investors.

Argentina also issued three series of dollar-denominated bonds with maturities in 2025, 2026, and 2027, offering interest rates of 0%, 3%, and 5%, respectively. These bonds could also be purchased using Pesos.

How can MCL Help?

Meristem Capital Limited can provide expert advisory services, ensuring proper pricing and structuring, and facilitating access to the bond market. We also offer insights on managing currency risks, ensure regulatory compliance.