Loan Currency Switch
Diversify your loan portfolio currency and utilize global market opportunities.
A loan currency switch offers leverage clients the possibility to book cross currency loans and to convert their loan currency.
Citibank N.A., UAE offers major currencies for the term loan (such as USD, EUR, GBP, CHF, JPY, AUD, CAD). Depending on your investment objectives or hedging strategy, you may convert the current loan currency to another currency after a discussion with your Relationship Manager or Treasury Specialist.
Assuming you have a loan of USD 100,000 at an interest of 2% per annum, with the expectation of JPY depreciating against USD, you may convert your USD loan to JPY for the lower interest rate of 1% per annum, at the prevailing foreign exchange (FX) rate.
The table below illustrates the performance of the loan after the currency conversion.
|Loan Switch Trade||To convert loan of USD 100,000 to JPY 10,500,000 at USD/JPY = 105 (client rate) (USD 100,000 X 105 = JPY 10,500,000)|
|Loan principal + interest after 1 month||
|Client FX Rate (Inclusive of bank spread) after 1 month||Scenario 1: JPY appreciates against USD by 2% to USD/JPY 102.90||Scenario 2: JPY is unchanged against USD at USD/JPY 105||Scenario 3: JPY depreciates against USD by 2% to USD/JPY 107.1|
|USD Loan Amount if JPY Loan is converted back to USD Loan after 1 month||USD 102,125.85 (JPY 10,508,750/102.90)||USD 100,083.33 (JPY 10,508,750/105)||USD 98,120.92 (JPY 10,508,750/107.10)|
|Total Gain/Loss||Total Loss = USD 1,959.18 (USD 100,166.67 minus USD 102,125.85)||Total Gain = USD 83.34 (USD 100,166.67 minus USD 100,083.33)||Total Gain = USD 2,045.75 (USD 100,166.67 minus 98,120.92)|
The rates quoted in the illustration above are (a) assumed to included bank spread; and (b) not indicative of past of future interest rates or spot FX rates.
Please note the following points when doing loan currency conversions:
- Ability to do loan currency conversions is subject to your portfolio having sufficient margin. Margin shortfall due to appreciation in current loan currency will impact ability to do loan currency conversions. Margin call can result from loan currency conversions due to FX fluctuations resulting in the appreciation of the new loan currency against your previous loan currency.
- Different loan currencies offer different interest rates, some higher and some lower on relative terms.
- Every loan currency conversion will involve a spot FX transaction where the FX quoted to you includes the bank spread.
- Funds will be debited from your checking/savings account to service your loan interest. If the currency of your checking/savings account is different from the currency of the loan, FX conversions (inclusive of bank spread) will be carried out to convert your funds to service your loan interest.
- Your monthly statement will show your outstanding loan amounts. For details of your loan switch transactions, please refer to your FX transaction advices.
- If you choose to opt for an FX order watch instruction, the loan currency conversion will occur if the chosen target Fx rate is reached during the validity period. The maximum order validity is 1 month. The client FX rate is the target interbank rate plus Citi’s FX spread. Post the validity period the order will automatically expire and not auto renew. You are required to provide new instructions to proceed with renewal of the order if you so desire.
The below table illustrates the Order watch actions for a loan swap instruction placed on 1st April 2022 at a target client rate of USD/JPY = 105 for a period of calendar 30 days on an USD loan:
|USD/JPY rate movement||Rate doesn’t reach USD/JPY = 105 in the next 30 days||Rate reaches USD/JPY =105 on 20th April||Rate reaches USD/JPY = 105 on 2nd May (post order expiry time)|
|Impact on Loan||No Impact, Loan is not converted||Loan is converted from USD to JPY||No impact, Loan is not converted as order has expired|
Foreign Exchange and Interest rate risks
- The Foreign Exchange market is volatile, and investing in foreign currencies can be risky. Commensurate with these risks, is the potential for higher returns but also higher losses. When you switch your loan currency, you will suffer losses if your new loan currency appreciates against your original loan currency, even if the interest rate charged on the new loan currency may be lower. You are subject to margin call and you may be required to top up your account if there is insufficient margin.
- Please be reminded that when you switch your loan currency, you may suffer losses if your new loan currency appreciates against your previous loan currency, even if the interest rate on the new loan currency may be lower. This is illustrated in Scenario 1 above.
- The FX rate quoted to you when confirming the transaction details will include the bank spread.
- When the currency of your loan is different from the currency of your underlying collateral, the lending value of your portfolio will be subject to cross-currency hair-cuts. In addition, if the currency of your loan appreciates against the currency of your underlying collateral, you may experience a loss when you convert your underlying collateral to the currency of your loan to repay the outstanding loan amount.
- You should therefore determine whether any foreign currency loan is suitable for you in the light of your financial circumstances, needs and objectives
- You understand that the Foreign Exchange Order Watch Service allows you to place a Limit Order to buy and/or sell specific foreign currencies. Each Limit Order placed by you is valid for a specific period as confirmed to you. The Limit Order will be executed only if the market price (as determined by you) reaches the customer price (which is inclusive of bank commission). Under certain adverse market conditions, it may be difficult or impossible to execute the Limit Order. Orders are live during market hours, and are not executable when the underlying interbank market is closed. You are fully responsible for all orders that are placed, and any cost resulting from any unwinding of any order will be borne by you.
- “Limit Order” means an order that you place to buy or sell a financial instrument at its specified price limit and for a specified size. The Limit Order will be triggered for execution when the price of that financial instrument reaches the specified level and the specified size of the order is available. Subject to the paragraph above, once the Limit Order has been triggered at the specified level and size, the order will be executed at the same price specified in the Limit Order.
Click here to view the loan currency switch fact sheet.
Benefits of Loan Currency Switch
- Diversify your loan currency holdings and utilize market opportunities
- Hedge the foreign exchange risk in the underlying investment by changing the currency of the accompanying loan
- Benefit from lower interest rate if target loan currency carries a lower interest rate
- Line reduction if the target loan currency depreciates against the initial loan currency
Our dedicated Treasury Sales Officers are members of your Relationship Services Team, who will support you with updates on foreign exchange markets and Citi foreign exchange forecasts.
Because currency markets fluctuate, there is always a risk with any FX product that you could lose some of your capital if you make a trade and then decide to immediately switch back to your original currency. For this reason, our FX solutions, including Loan Currency Switch, are best suited to experienced investors, those who already operate in more than one currency, or those who are prepared to accept the risk that currencies can fluctuate.
How to Apply for Loan Currency Switch?
Please contact your Relationship Manager.
- Please take note that that foreign currency investments are subject to rate ﬂuctuations which may provide you both opportunities and risks. You may experience a loss when you convert foreign currencies. Exchange controls may be applicable from time to time to certain foreign currencies. You should therefore determine whether any foreign currency investment is suitable for you in the light of your investment objectives, your ﬁnancial means and your risk proﬁle.
- Loan currency switch is available to IR5 and IR6 Citigold and Citigold Private clients only.
- The Facility denominated in the Converted CCY shall be governed by same Terms & Conditions and other related security documentation executed in favour of the Bank for the Original CCY Facility.
- Please note that for x-currency lending, a 10% haircut applies to the prevailing Loan To Value (LTV) ratios when the loan and collateral currencies are not the same.
- The loan will continue to be subject to margin call and you may be required to top up your Collateral if there is insufﬁcient Collateral assigned to your loan at all times.
- You will pay Citibank interest on any utilization of the Leverage Facility and/or the Overdraft Facility at the rate for the respective facility currency, which is the sum of the Margin and the monthly base rate for the respective facility currency as determined and announced from to time by Citibank with reference to the relevant interbank market rate ("Reference Rate") and if that rate is less than zero, the Reference Rate shall be deemed to be zero. In the event the Reference Rate is unable to be determined by Citibank for whatever reasons (whether or not due to market disruption) or the Reference Rate does not represent Citibank’s cost of funds, Citibank shall be entitled to adopt a substitute basis for determining the rate of interest and notify the same to you.
- The FX rate and initial and target loan values will be conﬁrmed to you on a recorded call back before the loan currency swap processing. Please note that if you decide to cancel your instructions after conﬁrming the foreign exchange rate, you may incur a loss should the rate move adversely when bank cancels the FX position on your behalf.
- The call back to clients for loan swap is restricted to working days, Monday – Friday. Settlement of the loan may take up to next working day. During this time, the client may be liable for accrued interest in the source currency.
- In the event of market volatility, Citibank N.A., UAE has the right to unilaterally cancel any swap transaction requested for by the Client without notice, notwithstanding the Client instructions to book the swap transaction.
- Client acknowledges the above risks and conﬁrms his understanding of FX Loan Swap. Client also acknowledges that Citibank will not be in a position to advise on the loan swap transaction or verify its suitability for the client. Client understands and accepts the above risks and based on such understanding chooses to proceed.
- Client hereby acknowledges that the loan currency conversion facility is not to serve speculative purposes.
- Citibank N.A. UAE is licensed with UAE Securities and Commodities Authority (“SCA”) to undertake the financial activity as a Promoter under license number 602003’
- This product/service may be affected by changes in foreign currency exchange rates
- When a client initiates a transaction of converting his holdings from his Currency into another currency, he runs the risk of the other Currency depreciating, thus leading to a reduction in assets in the home currency. Similarly, when a client converts a liability from one currency to another, he runs the risk of the resultant Loan CCY appreciating leading to a higher liability when converted back to the original currency.
- We would like to remind you that if the new loan currency appreciates against your original loan currency, you may suffer a loss, even if the interest rate on the new loan currency may be lower.