Writing Currency Events Into the Documents

A convertibility event is the inability to exchange local currency for hard currency. A transfer event is the inability to move funds out of the jurisdiction. They are distinct, they can occur separately, and both have occurred in several African markets within recent memory.

Neither is an abstract risk, and the documentation should not treat it as one.

Offtake and concession agreements. Whether the offtaker's obligation is denominated in hard currency or in local currency at an index. Whether the government provides a convertibility undertaking, and what happens if it is not honoured.

Financing documents. Whether inability to convert is an event of default, a mandatory prepayment trigger, or a standstill. Treating it as a default accelerates debt at the moment the borrower can least respond.

Hedging. Non-deliverable structures settle in hard currency offshore and therefore survive a transfer event that would break a deliverable hedge. The pricing differs accordingly.

Account structures. Offshore collection of hard currency revenue before onshore remittance changes the exposure materially, where the regulatory regime permits it.

• Distinguish convertibility from transfer and from devaluation; each needs its own treatment
• Define the event by reference to observable facts, not to a party's assertion
• Provide a cure or standstill period rather than immediate acceleration
• Set out the order in which available hard currency is applied across obligations
• Address what happens to accrued but unremitted amounts when the event ends

Debt service reserves are frequently sized against operational interruption. In markets with convertibility history they should also be sized against a period of restricted transfer. Three months is a common figure and it may be short; the historical episodes have run longer.

A project cannot document its way out of a currency crisis. What documentation can do is decide, in advance and calmly, who bears the consequence, how long the structure can survive without a remedy, and what each party must do while it lasts. Structures that left this to be resolved at the time have generally resolved it badly.