Data Sheet for the loans

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Data Sheet for the loans (Amount in millions of USD as of June 6,2006) Loan Number IBRD 4021A IBRD 4243 IBRD Project Number PO06872 PO06891 PO Borrower the municipality of the municipality of the department of Bogota Antioquia Cartagena Country DO Amount Repaid Amount Undisbursed Colombia Colombia Colombia Amount I I I I

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3 Colombia Bogota Urban Transport Project (Loan No. 4021A-CO) Antioquia Education Project (Loan No ) Cartagena Water Suply, Sewerage and Environmental Management Project (Loan No CO) 1. Introductory Statement Proposed Amendment to the Loan Agreement This Project Paper seeks the approval of the Executive Directors for the amendment of the financial clauses of three Variable Spread Loans (VSLs); (i) Loan No. 4021A- CO (Bogota Urban Transport Project), 4243-CO (Antioquia Education Project) and (ii) Loan No CO (Cartagena Water Supply, Sewerage and Environmental Management Project). Effectively the proposed amendments would convert the existing VSLs into Fixed Spread Loans (FSLs). The proposed changes will provide the Borrowers and the Republic of Colombia with access to IBRD s financial products for the purpose of managing the interest rate and currency exposure they have in US Dollars under the existing VSLs. The proposed amendments would allow the Borrowers to (i) change the currency of denomination of the loans; (ii) change the interest rate basis of the loans from floating rate to fixed rate and vice versa; and (iii) place a cap or a collar on the interest rate applicable to the loans. 2. Background and Reasons for the Proposed Amendments The municipalities of Bogota and Cartagena and the department of Antioquia in Colombia each are the borrower-of-record for a US$-denominated VSLs signed with the IBRD. These three loans do not incorporate in the loan documentation the risk management tools to manage the volatility of interest and currency rates that were subsequently introduced by IBRD for its Fixed Spread Loans (FSL). However, these three Borrowers have approached the Treasury Financial Advisory Team working with Colombia and expressed their wish to reduce the interest rate and currency exposure inherent in these three loans by changing their currency of denomination from US$ to Colombian Peso (COP) Under the IBRD s current operational procedures, the currency of denomination of existing VSLs can only be changed through a currency swap, which transforms, on a net basis, future loan servicing obligations from one currency to another. In order to enter into such currency swap, it is necessary for the IBRD and a borrower to sign a Master Derivatives Agreement (MDA) that provides the legal and operational framework for entering into such currency swap transaction. Although such an MDA has already been signed between the IBRD and the Republic of Colombia, the borrowers-of-record for the three loans in question are local authorities, none of whom has signed an MDA with the IBRD. The laws and regulations of Colombia do not permit the republic to act as a financial intermediary between the local authorities and a third party. The option of having Colombia enter into a currency swap with the

4 IBRD on the one hand and into an off-setting currency swap with the local authorities on the other is therefore not legally feasible. As a result, the Borrowers have so far been hampered in the pursuit of their stated objective of mitigating the interest rate and currency risk inherent in these loans. 3. Proposed Changes Given the above considerations, the parties (IBRD, the Republic of Colombia and the Borrowers) have agreed, subject to the approval of the Executive Directors, to amend the existing Loan Agreements to permit interest rate and currency conversions in accordance with procedures existing under the FSL framework, Through these proposed amendments, the existing VSLs will, from a financial perspective, be changed to FSLs by incorporating in the existing loan agreements the standard financial clauses allowing for currency conversions and changes in the interest rate basis for FSLs and the application of the General Conditions Applicable to Loan and Guarantee Agreements for FSLs to the said agreements. All other provisions in the existing loan agreements will remain unaffected. Once these amendments have been completed, the three VSLs will be legally and operationally converted into FSLs. The Ministry of Finance of Colombia and the Borrowers have agreed to the proposed amendments. 4. Expected Outcomes Once the amendments are executed, the interest rate and currency conversions can be implemented following standard operating procedures for such conversions2. 5. Advantages and Disadvantages of the Proposal The main advantages of this proposal are that it: (i) responds to the Borrowers needs in a timely manner; (ii) allows the Borrowers to fully hedge their currency and interest rate risk by converting their outstanding debt into fixed interest rate andor into other currencies, including Colombian Pesos; (iii) gives the Borrowers the possibility to manage the financial risks inherent in IBRD VSLs without the need for negotiating a Master Derivatives Agreement; (iv) facilitates the conversion of the loans into Colombian Pesos which will have, as a by-product, the added advantage of converting Colombia s contingent liability under the related guarantees into Colombian Pesos, thereby reducing Colombia s currency risk; and (v) allows the application of the process to disbursing as well as fully disbursed VSLs. In addition, these amendments will allow the World Bank to learn from the process and, potentially, offer these amendments as a facility aimed at offering added flexibility of our loan products to our clients. 1 The proposed changes have been approved by the Financial Instruments Sub-committee (FISC) on April 11, The borrower would have to submit a currency conversion request under the established FSL Conversion Guidelines.

5 Terms of IBRD Conversion of a Variable Spread Loan (VSL) into Fixed Spread Loan (FSL) Original Variable Spread Loan (VSL) Conversion to Fixed Spread Loan (FSL) FSL Conversion into Local currency3 Currency US Dollar (USD) Same as in the original VSL Local ~urrency~ Lending Rate (1) Base Index Rate (2) Spread Libor' Variable Spread Libor Fixed Spread6 Variable or Fixed' --- Fees (1) Commitment Fee 0.75% 0.85% on undisbursed amounts for first four yearsg; 0.75% thereafter. 0.85% on undisbursed amounts for first four years; 0.75% thereafter. (2) Front-End Fee (3) Transaction Fee for Conversion to FSL 1.OO% 0.03% (4) Transaction Fee for Currency conversion' 0.02% Waivers" (1) Commitment Fee (2) Front-End Fee (3) Interest Rate 0.50% 0.75% 0.25% Amortization Profile I Amount Based 0.50% 0.25% Percent Based' ' 0.50% 0.25% Percent Based This conversion feature in the FSL will enable the Borrower transform its obligation under the loan into local currency upon the Bank receiving a conversion request. The Borrower would be also able to manage the interest rate risk of its IBRD loan in addition to the currency risk. The local currency conversion option will be inserted into the Loan Agreements through the respective Amendment Letters and the disbursed and outstanding amount of the loan will be converted only upon request of the Borrower. The base index is the six-month LIBOR in USD. It is reset semiannually. The fixed spread that would apply to the newly converted FSL will be the fixed spread effective at the time of the conversion. As of today the spread is 0.50%. ' IBRD will pass on to the Borrower the rate obtained in the swap market at the time of conversion. The Borrower will start accruing interest on the disbursed amount in the local currency from the next service date of the loan. The day count convention will be 30/360 for fixed interest rate and ActuaV360 for floating interest rate. 8 Same as regular FSL fees for hedging products. Beginning 60 days after the original Loan Agreement is signed. lo As of June 6,2006. '' Same as regular FSL terms

6 Amortization Type Debt Service Dates Level Level Level Semi-annual Same as in the original VSL Same as in the original VSL ~~~ Pre-payments Borrowers may prepay Borrowers may prepay Borrowers may prepay based on VSL terms. based on FSL terms. based on FSL terms.