Conversion of Financial Terms of IBRD and IDA Loans and Financing Instruments (illustrative examples)

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1 Bank Guidance Conversion of Financial Terms of IBRD and IDA Loans and Financing Instruments (illustrative examples) Bank Access to Information Policy Designation Public Catalogue Number TRE7.02-GUID.104 Issued July 19, 2018 Effective July 19, 2018 Content This Guidance sets out illustrative examples of certain conversions of the financial terms of the Bank s financing instruments Applicable to IBRD,IDA Issuer Director/Global Head of Capital Markets, CMD Sponsor Head of ALM, CMD

2 SECTION I PURPOSE AND APPLICATION 1. This Guidance sets out illustrative examples of certain Conversions offered by the Bank to its Clients in connection with the Loan Agreements of IBRD and Non-concessional Financing Agreements of IDA. 2. This Guidance applies to the Bank. SECTION II DEFINITIONS 3. As used in this Guidance, the capitalized terms and acronyms have the meanings set out in the (a) Directive: Conversion of Financial Terms of IBRD and IDA Loans and Financing Instruments, or (b)below: Directive means the Bank Directive Conversion of Financial Terms of IBRD and IDA Loans and Financing Instruments, as may be amended from time to time. SECTION III SCOPE This Guidance supplements some of the key areas outlined in the Directive, by providing some examples of how the Bank effects certain Conversions of financial terms of IBRD loans and IDA financing instruments, as provided in the Directive. Annex A sets forth the list of such examples but does not provide an exhaustive list of all possible Conversions and is intended for illustrative purposes only. SECTION IV OTHER PROVISIONS N/A SECTION V TEMPORARY PROVISIONS N/A SECTION VI EFFECTIVE DATE This Guidance is effective as of the date on its cover page. SECTION VII ISSUER The Issuer of this Guidance is Director, Capital Markets Department. SECTION VIII SPONSOR The Sponsor of this Guidance is Head, Asset Liability Management, Capital Markets Department. 2

3 SECTION IX RELATED DOCUMENTS The Bank Directive, Conversion of the Financial Terms of IBRD and IDA Loan and Financing Instruments ANNEX(ES) Annex A Illustrative Examples of Conversions Questions regarding this Guidance should be addressed to the Sponsor. 3

4 Annex A ILLUSTRATIVE EXAMPLES OF CONVERSIONS The examples shown below explain how the Bank could effect certain most common types of Conversions. The actual execution of a Conversion could differ from these examples. 1. Interest Rate Conversions (a) Interest Rate Conversion from Variable Rate with a Reference Rate and Fixed spread to Fixed Rate (interest rate fixing) Loan $100 million Floating interest rate under the Loan LIBOR + 80bps floored at 0% Current market fixed rate v. USD LIBOR 4% Client requests Conversion to Fixed Rate. The Bank enters into a Market Transaction as follows: Market counterparty pays variable rate at USD LIBOR + 80bps + transaction fee. Market counterparty receives fixed rate at 4.85%. The Client s new Fixed Rate is 4.85% with transaction fee included 1,2. (b) Interest Rate Conversion from Fixed Rate to Variable Rate with Fixed Spread (interest rate unfixing) Loan $100 million Fixed rate under the Loan 2% Current market fixed rate v. LIBOR 4% Floating interest rate under loan prior to Conversion LIBOR + 80bps floored at 0% Client requests a Conversion to Variable Rate. The Bank enters into a Market Transaction as follows: Market counterparty pays fixed rate at 2%.+ transaction fee Market counterparty receives the rate of USD LIBOR minus 1.97%. The Client s new Variable Rate is USD LIBOR less 1.97% floored at 0% including transaction fee. 1 Transaction fees are published on the World Bank Treasury website ( and may change from time to time. 2 For the avoidance of any doubt, all applicable rates in the illustrative examples are floored at zero, excluding any transaction fee. 4

5 In cases where there is an Unwinding in the Bank s favor, the Client could opt for paying the mark-to-market (MTM) to the Bank for the unfixing instead of adjusting the initial spread under the loan. In this case, the Client will pay USD LIBOR + 80 bps (floored at 0%) + transaction fees during the remaining life of the Loan plus the MTM of the unwind at the time of execution. 2. Currency Conversions of Unwithdrawn s in lending currencies Conversions of unwithdrawn amounts are only allowed for the Bank s lending currencies: USD, EUR, GBP and JPY. (a) Currency Conversion of unwithdrawn amount of EUR Loan with Reference Rate and Fixed Spread into USD Loan with Reference Rate and Fixed Spread. Interest Rate of the Loan prior to conversion (EUR): EURIBOR + 95bps (floored at 0%) Basis adjustment as of the Execution Date: from EUR to USD (+15bps) Interest rate after the conversion: USD LIBOR bps (equals to 95bps + 15 bps), floored at 0%. An upfront transaction fee applies. The Bank would not enter into a Market Transaction for this Conversion, and would apply a spread reflecting the difference in pricing between Fixed Spread Loans in the two currencies, prevailing at time of execution. (b) Currency Conversion of unwithdrawn amount of EUR Loan with Reference Rate and Variable Spread into USD Loan with Reference Rate and Variable Spread Interest rate of the Loan prior to Conversion: EURIBOR + 56bps (floored at 0%) The Bank does not apply a basis adjustment to the Variable Spread. Interest rate after the Conversion: USD LIBOR + 56 bps (floored at 0%) An upfront transaction fee applies. The amount of the Variable Spread applicable will not be affected and the Bank would not enter into a Market Transaction for this Conversion. 5

6 3. Currency Conversions of Withdrawn s in Bank s lending currencies (a) Currency Conversion of USD Loan with Reference Rate and Variable Spread into EUR Loan with Reference Rate and Variable Spread: Loan : Variable Rate under the Loan: 0%) $100 million USD LIBOR + 38bps (Variable Spread) (floored at Client requests Conversion into EUR with a Variable Spread. The Bank does not apply a basis adjustment to the Variable Spread. Therefore, assuming an exchange rate of 1.33 USD per EUR, the new terms of the Loan are: Loan : EUR75 million Variable Rate: EURIBOR + 38 basis points (Variable Spread) (floored at 0%) + transaction fee The Bank would not enter into a Market Transaction for this Conversion. (b) Currency Conversion of USD Loan with Reference Rate and Variable Spread into EUR Loan with Fixed Reference Rate and a Variable Spread: Loan : Variable Rate under the Loan: 0% $100 million USD LIBOR + 38bps (Variable Spread), floored at Client requests Conversion into EUR with a Fixed Reference Rate and a Variable Spread. The Bank does not apply a basis adjustment to the Variable Spread, and first converts the USD Loan to a EUR Loan as describes above, from USD LIBOR + 38bps (Variable Spread), floored at 0% to EURIBOR + 38 basis points (Variable Spread) floored at 0% + transaction fee. The Bank then enters into a Market Transaction to fix the interest rate in EUR as follows: Market counterparty pays the rate fixed at Euribor + transaction fee. Market counterparty receives the rate of 2.5% in EUR. Assuming an exchange rate of 1.33 USD per EUR, the new terms of the Loan in EUR are: Loan : EUR75 million Variable Rate: {2.5% (transaction fee included) + 38bps (Variable Spread)} 6

7 4. Local Currency Conversions Loan : $100 million Variable Rate under the Loan: USD Libor + 38bps (Variable Spread) floored at 0% Variable Spread: 28bps of hedging base 10bps of Residual Spread This Residual Spread will be adjusted to reflect foreign exchange movements as well as changes in the Bank s funding cost. (a) Local Currency Conversion of USD Loan with Reference Rate and Variable Spread into MXN with Reference Rate and variable Residual Spread: Client requests a Conversion into Mexican Peso (MXN) with a Reference Rate and a Variable Spread. The Bank enters into a Market Transaction as follows: Market counterparty pays USD LIBOR + 28bps + transaction fee Market counterparty receives MXN TIIE 15bps Assuming an exchange rate of 18.6 MXN per USD, the new terms of the Loan are: Loan : Variable Rate under the Loan: equivalent MXN1.86 billion TIIE 15bps (transaction fee included) + MXN of USD 10bps (variable Residual Spread) in MXN, subject to a floor (b) Local Currency Conversion of a USD loan based on a Reference Rate and a Variable Spread into MXN with Fixed Reference Rate and variable Residual Spread Client requests Conversion into Mexican Peso (MXN) with a Fixed Reference Rate plus a variable Residual Spread. The Bank enters into a Market Transaction as follows: Market counterparty pays USD LIBOR + 28bps+ transaction fee Market counterparty receives MXN Fixed Rate of 7% Assuming an exchange rate of 18.6 MXN per USD, the new terms of the Loan are: Loan : MXN1.86 billion Variable Rate: 7% (transaction fee included) + MXN equivalent of USD 10 bps (variable Residual Spread) 5. Partial Maturity Conversions (a) Partial Maturity Currency Conversion with no roll-over 7

8 Original Loan is a USD 100 million fully disbursed with a final maturity of 10 years with a single amortization repayment at maturity (bullet). The Client requests a Conversion from USD 6m LIBOR bps (Fixed Spread) to a Fixed Rate in Mexican Pesos (MXN) only for the first 5 years of the Conversion. Assuming the MXN/USD exchange rate is MXN/USD, the new terms of the Loan are: MXN Loan : MXN1.86 billion Fixed Rate under the Loan: 7.70% Conversion Period: 5 years only As there are no amortizations in this Loan until maturity, the MXN notional will remain the same during this 5 years period. After year 5, assuming no roll-over, the Loan will be redenominated in USD at the exchange rate prevailing at the end of the Conversion Period. The Client has one of the following 2 scenarios at the end of the partial maturity conversion period: 1) Depreciation of the MXN vs. USD at year 5, for example to 25 MXN/USD New USD Loan notional: USD 74.4 million Interest Rate: USD LIBOR +100 bps Term to Repayment: 5 years The Client is exposed to exchange rate risk after the end of the Conversion Period, as the Loan Currency reverts back to USD. Year Loan Terms if NO CONVERSION Loan Terms if CONVERSION for 5 years Loan Interest Rate Loan Interest Rate 0 USD 100 USD LIBOR bps MXN 1, % 1 USD 100 USD LIBOR bps MXN 1, % 2 USD 100 USD LIBOR bps MXN 1, % 3 USD 100 USD LIBOR bps MXN 1, % 4 USD 100 USD LIBOR bps MXN 1, % 5 USD 100 USD LIBOR bps MXN 1, % 6 USD 100 USD LIBOR bps USD 74.4 USD LIBOR +100 bps 7 USD 100 USD LIBOR bps USD 74.4 USD LIBOR +100 bps 8

9 8 USD 100 USD LIBOR bps USD 74.4 USD LIBOR +100 bps 9 USD 100 USD LIBOR bps USD 74.4 USD LIBOR +100 bps 10 USD 100 USD LIBOR bps USD 74.4 USD LIBOR +100 bps 2) Appreciation of the MXN vs. USD, for example to 12.2 MXN/USD New USD Loan notional: Interest Rate: Term to Repayment: USD million USD LIBOR +100 bps 5 years The Client is exposed to exchange rate risk after the end of the Conversion Period. Loan Terms if NO CONVERSION Loan Terms if CONVERSION for 5 years Loan Interest Rate Loan Interest Rate Year 0 USD 100 USD LIBOR bps MXN 1, % 1 USD 100 USD LIBOR bps MXN 1, % 2 USD 100 USD LIBOR bps MXN 1, % 3 USD 100 USD LIBOR bps MXN 1, % 4 USD 100 USD LIBOR bps MXN 1, % 5 USD 100 USD LIBOR bps MXN 1, % 6 USD 100 USD LIBOR bps USD USD LIBOR +100 bps 7 USD 100 USD LIBOR bps USD USD LIBOR +100 bps 8 USD 100 USD LIBOR bps USD USD LIBOR +100 bps 9 USD 100 USD LIBOR bps USD USD LIBOR +100 bps 10 USD 100 USD LIBOR bps USD USD LIBOR +100 bps (b) Partial Maturity Currency Conversion with Roll over until maturity The original Loan is a USD 100 million fully disbursed with a final maturity of 10 years bullet at USD LIBOR 6m+100 bps (Fixed Spread). The Client requests a Currency Conversion from USD to a Fixed Rate MXN for the first 5 years. Before the end of the Conversion Period, the Client decides to roll over the Conversion until maturity. 9

10 Assuming an exchange rate of 18.6 MXN per USD, the new terms of the Loan are: MXN Loan : MXN1.86 billion for the 10 years Fixed Rate: 7.70% for 5 years only New Fixed Rate to be determined after year 5 for the rest of the rolled-over Conversion Period. As there are no amortizations in this Loan until maturity, the MXN notional will remain the same during the life of the Loan assuming that the new Conversion is effected at the maturity of the previous Conversion, regardless of the exchange rate levels, therefore exposure to currency risk is hedged by the Client. However, the Client remains exposed to interest rate risk at the end of the Conversion Period, as the interest rate to be paid after the first conversion will be revised to market levels prevailing at the time of the roll-over. MXN Loan : MXN 1,860 million during the whole life of the Loan Interest Rate: 7.70% for the first 5 years. A new Fixed Rate is to be determined at year 5 (it could be below or above the previous rate of 7.70% regardless of changes in exchange rates). Loan Terms if NO CONVERSION Loan Terms if CONVERSION for 5 years and ROLL-OVER until maturity Loan Interest Rate Loan Interest Rate Year 0 USD 100 USD LIBOR bps MXN 1, % 1 USD 100 USD LIBOR bps MXN 1, % 2 USD 100 USD LIBOR bps MXN 1, % 3 USD 100 USD LIBOR bps MXN 1, % 4 USD 100 USD LIBOR bps MXN 1, % 5 USD 100 USD LIBOR bps MXN 1, % 6 USD 100 USD LIBOR bps MXN 1,860 New Fixed Rate 7 USD 100 USD LIBOR bps MXN 1,860 New Fixed Rate 8 USD 100 USD LIBOR bps MXN 1,860 New Fixed Rate 9 USD 100 USD LIBOR bps MXN 1,860 New Fixed Rate 10 USD 100 USD LIBOR bps MXN 1,860 New Fixed Rate 10

Conversion of Financial Terms of IBRD and IDA Loans and Financing Instruments. Bank Access to Information Policy Designation Public

Bank Directive Conversion of Financial Terms of IBRD and IDA Loans and Financing Instruments Bank Access to Information Policy Designation Public Catalogue Number TRE7.02-DIR.102 Issued July 11, 2018 Effective