Mexico’s federal mortgage corporation needed to reduce the rollover risk and asset-liability mismatch on its balance sheet. IBRD provided a 30-year US$1 billion loan (roughly 13% of Sociedad Hipotecaria Federal’s (SHF) total balance sheet). A customized package of financing and risk management tools allowed SHF to extend the maturity of its debt portfolio and mitigate exposure to foreign currency and interest rate risks. in local currency to extend the maturity structure of its portfolio and avoid the foreign currency exposure Mexico’s federal mortgage corporation, Sociedad usually related to external financing. It also needed Hipotecaria Federal (SHF), grants loans and tools to manage interest rate risk over time as on- guarantees to mortgage intermediaries in Mexico. lending to financial intermediaries materialized. SHF also plays a crucial role as market maker by providing liquidity to the market, buying and selling mortgage securities. An IBRD Flexible Loan for US$1 billion (roughly 13% of SHF’s total balance sheet) with a 30-year maturity, In order to continue supporting the development of including a 5-year grace period, allowed SHF to the domestic housing finance market, SHF needed extend the maturity of its debt portfolio to attain a to strengthen its balance sheet. At the same time, it more stable risk profile. The IBRD loan has risk was important for SHF to reduce its vulnerability to management tools, which SHF accessed to mitigate the rollover risk and mismatch of financial terms that its exposure to foreign exchange and interest rate resulted from using short-term borrowings to fund volatility. longer term lending operations. IBRD Customized the loan per SHF’s request with a mix of fixed and floating interest rates in Mexican SHF needed access to flexible, long-term financing pesos. SHF has the option to change the mix of fixed to variable interest rates in the future for the full or partial maturity of the loan, in order to match the Amount US$1 billion interest rate risk on its balance sheet (see Figure 1). Maturity 30-yr final maturity; 5-yr grace period The World Bank Treasury customized a package of USD Interest Floating rate (6-month financing and risk management tools for SHF that Rate LIBOR1 + fixed spread) Currency allowed it to strengthen its balance sheet and attain MXN Conversion a more stable risk profile in terms of maturity, MXN Interest Floating rate (28-day TIIE2 + interest rate basis, and currency mix. IBRD acted as Rate spread) and fixed rate a market intermediary, accessing long-term cross- Risk Currency and interest rate country and interest rate swaps in the market at Management hedging more favorable rates than SHF would have been 1. LIBOR (London Interbank Offered Rate) is a floating able to obtain had it accessed the market directly. reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market. 2. TIIE (Tasa de Interés Interbancaria de Equilibrio) is a benchmark Mexican peso floating rate índex. Figure 1: Illustration of Currency and Interest Rate Risk Management Transactions 3. SHF executed partial maturity fixings of a portion of the Mexican peso floating rate financing for periods of 12 and 15 years. Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 Photo Credits Front: Curt Carnemark / World Bank