Motivations for Swap-Covered Foreign Currency Borrowing

We explore the motivations for borrowers to raise foreign currency debt and swap the proceeds into local currency, rather than borrowing the local currency directly. The growing, and in some markets large, volume of such opportunistic swap-covered borrowing, suggests that it can be a cost-effective means of raising local currency funding, yet the motivation to borrow this way is not adequately explained in the literature. We consider several market frictions that can explain this borrowing behaviour, focusing on potential differences in the market access of two natural counterparties to a swap: residents issuing foreign currency bonds and non-residents issuing local currency bonds. Based on a sample of 13 Asia-Pacific countries, we find that the characteristics of foreign currency bonds issued by residents and local currency bonds issued by non-residents differ in ways that are consistent with these issuers overcoming market limitations and arbitraging cost differentials