IBRD Lending Rates and Spreads Applicable January 1, 2013

Size: px

Start display at page:

Download "IBRD Lending Rates and Spreads Applicable January 1, 2013"

Camron McDonald
5 years ago
Views:

1 From: The President January 30, 2013 I. Introduction IBRD Lending Rates and Spreads Applicable January 1, 2013 IBRD semi-annually provides an update of the lending rates and spreads by loan product as set out in the terms of each product. This paper summarizes the lending rates and spreads applicable to IBRD loans outstanding as of January 1, II. The Structures of IBRD Lending Rates and Spreads The structure of lending rates and spreads applicable to the IBRD loans outstanding can be broadly grouped into three categories: fixed spreads over a market reference rate (the Reference Rate), variable spreads over the Reference Rate, and currency pool based rates. Fixed spreads and variable spreads are currently offered under IBRD Flexible Loan (IFL) product which consolidated the two previously offered LIBOR products: Variable Spread Loan (VSL) and Fixed Spread Loan (FSL). 1 In addition, there are other LIBOR based products 2 and currency pool based products in IBRD s portfolio. Those products have been discontinued for new loan commitments but will continue to require rate resetting for outstanding loans. The rate structure of each product group is described below. IFL Fixed Spread The IFL fixed spread over the Reference Rate consists of five components: (i) a contractual lending spread, (ii) a maturity premium (where applicable), (iii) the Bank s projected funding cost relative to the Reference Rate, (iv) a market risk premium, and (v) a basis swap adjustment for some currencies other than US dollars. Where: IFL Rate with Fixed Spread = RR + cls + mp + pfc + mrp + bpa RR = Reference Rate which varies by currency choice Spread cls = contractual lending spread which is approved by IBRD s Executive Directors and reviewed annually mp = maturity premium charged on loans with average maturities greater than 12 years which is approved by IBRD s Executive Directors and reviewed annually pfc = projected USD funding spread to the Reference Rate where IBRD expects, on average, to be able to fund over the lifetime of the loan mrp = market risk premium reflecting funding and refinancing risks involved in providing loans with a fixed spread at commitment bpa = conservatively projected basis swap spread applied to EUR and JPY loans to adjust the projected USD funding spread for EUR or JPY funding 1 In addition, IBRD offers other financial products including: hedging products, guarantees, and disaster risk financing. 2 Aside from VSLs and FSLs, in FY07, IBRD offered the borrowers of currency pool and US dollar pool loans the option to convert their terms to a LIBOR based loan with a spread of 100 basis points fixed for the remaining life of the converted loans.

2 Because IBRD absorbs the full risk of future financing costs for the fixed spread loans, the pricing principle of the fixed spread is to cover the IBRD s projected funding cost for the life of the loan. Accordingly, IBRD regularly reviews the technical components 3 of the fixed spread to ensure that these reflect underlying market conditions. The current level of IFL fixed spread has been in effect since April 5, The fixed spread for a loan is determined at loan signing and remains constant over the life of the loan. Variable Spread: IFL and VSL The pricing principle of the variable spread is to pass through the benefits and risks of changes in IBRD s cost of borrowing to the borrowers. The variable spread consists of (i) the Bank s contractual lending spread, (ii) a maturity premium (where applicable), and (iii) IBRD s average funding cost margin relative to the Reference Rate. Where: IFL/VSL Rate with Variable Spread = RR + cls + mp + cm RR = Reference Rate which varies by currency choice cls = contractual lending spread which is approved by the IBRD s Executive Directors and reviewed annually mp = maturity premium charged on loans with average maturities greater than 12 years which is approved by IBRD s Executive Directors and reviewed annually cm = IBRD s average funding cost margin relative to the Reference Rate which is calculated every January 1 and July 1 based on the actual cost incurred during the previous six months for funding the loans The variable spread is applicable to the lending rate reset dates in the following six months. Currency Pool Products Spread The Currency Pool products, offered between 1982 and 2001, are based on the pools of borrowings either in a basket of currencies or in a single currency and their lending rates are derived from the pooled cost of borrowings allocated to each product pool. The pooled cost of borrowings for each pool is calculated at the end of each semester and the semester rate is equitably charged to all remaining loans in the pool for rate setting for the subsequent semester. 2 3 The technical components include the projected funding cost, the market risk premium, and the basis swap adjustment.

3 3 III. Summary of Lending Rates and Spreads applicable as of January 1, 2013 The lending rates and spreads applicable as of January 1, 2013 are summarized below. For variable spread and pool lending rates, these spreads will be used for rate resetting dates between January 1, 2013 and June 30, (For the historical spread analysis of the IFL, please see Annex 1.) Table 1. Lending Rates and Spreads Applicable as of January 1, 2013 a Loan Currency Reference Rate Average Maturity 6-month LIBOR 6-month EURIBOR b 6-month LIBOR IFL FIXED SPREAD (basis points) USD EUR JPY Projected Funding Cost Market Risk Premium Basis Swap Adjustment Contractual Lending Spread c Maturity Premium d TOTAL CURRENT SEMESTER Total - Prior Semester VARIABLE SPREADS (basis points) Loan Product IFL VSL Loans for which Invitation to Negotiate was issued Loans for which Invitation to Negotiate was issued: Eligibility Criteria Loans approved after June 30, 2010 (i) on or after July 23, 2009; or (ii) prior to July 23, 2009, and which were not approved by November 30, 2009 Prior to July 23, 2009, and which were approved by November 30, 2009 Loans signed on or after September 28, 2007 On or after July 31, 1998 and signed before September 28, 2007 Prior to July 31, 1998 Average Maturity all all all all Cost margin Contractual Lending Spread c Maturity Premium d n/a n/a n/a n/a n/a TOTAL CURRENT SEMESTER Total - Prior Semester all Pool Loan Product e Eligibility Criteria SCPD USD POOL LENDING RATES (percentages) SCPM EUR Invitation to Negotiate date issued prior to July 31, 1998 VLR89 Invitation to Negotiate date issued on or after July 31, 1998 Cost of Qualified Borrowings Contractual Lending Spread TOTAL CURRENT SEMESTER Total - Prior Semester 5.24 f g a. Rates do not take interest waivers into account for loans signed before September 28, Interest waivers do not apply on loans signed on or after September 28, b. All euro-denominated loans for which the invitation to negotiate is issued on or after July 31, 2010 have Euribor as the reference rate. c. Effective July 1, 2008, as part of the migration into a unified loan product (IFL), all loans under the IFL program,and VSLs signed on or after September 28, 2007, have a contractual lending spread that is not adjusted for day count (see R ). The total spread for other variable spread loans is adjusted to account for the different day conventions between borrowing transactions and the Bank's loans. d. IBRD offers different pricing tiers according to average repayment maturity for IFL. IFL loans approved after June 30, 2010 with maturities greater than 12 years are subject to a maturity premium. e. The Variable Lending Rate (VLR82) is no longer reported as the only remaining loan is currently in non-accrual status. f. As the currency pool products are close to their final maturity, the proportion of fixed rate debt and floating rate debt will significantly impact the overall funding cost. g. Single Currency Pool Loan Product denominated in EUR (SCPM) is currently funded by floating rate debt only.

4 4 IV. Notification to Borrowers The Bank will notify current borrowers, as required, of the rates and spreads (both inclusive of waivers for eligible borrowers) applicable for interest periods beginning on or after January 1, Jim Yong Kim President by Charles A. McDonough Acting Chief Financial Officer

5 5 Annex 1. Historical Trend of IFL Spreads C E H I Fixed yrs* A D B F G Fixed 12-15yrs* Fixed upto 12yrs* Var 15-18yrs Var 12-15yrs Var upto 12yrs -20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 *The old average maturity tier system applies to fixed spread between March 2009 and June (See section C and G for further detail.) A. Effective February 12, 2008, IBRD s Executive Directors approved the IBRD Flexible Loan (IFL), which consolidates two loan products previously offered, namely the Fixed Spread Loan (FSL) and the Variable Spread Loan (VSL). B. Management increased the technical components of the fixed spread over the Reference Rate twice at the end of 2008 reflecting the changes in market conditions that necessitated a revision in the projected funding cost and risk premium: for loans signed on or after November 14, 2008 the fixed spread increased by 25 basis points and for those signed on or after December 16, 2008 the fixed spread increased by 45 basis points. C. IBRD started offering different pricing tiers with market risk premium determined by average repayment maturity for IFL fixed spread loans signed on or after March 29, The three average maturity tiers were organized as (i) 10 years or, (ii) greater than 10 and up to 14 years, and (iii) greater than 14 and up to 18 years. This change also included an upward revision in the fixed spread according to each maturity tier. D. On June 13, 2009, the fixed spread decreased across all maturity categories as a result of the improvement in the projected funding cost. The specific decreases were 40 basis points for loans with average repayment maturities of 10 years or, 30 basis points for loans with average repayment maturities greater than 10 years and up to 14 years, and 25 basis points for loans with average repayment maturities greater than 14 years and up to 18 years. This change affects all loans signed on or after June 14, E. On August 5, 2009, IBRD s Executive Directors approved an increase of the contractual lending spread for loans under the IFL program of 20 basis points to 50 basis points. The new pricing applies to regular loans and guarantees for which: the Invitation to Negotiate (or the functional equivalent in respect of guarantees) was issued: (i) on or after July 23, 2009; or (ii) prior to July 23, 2009, and which were not approved by the Executive Directors by November 30, 2009.

6 6 F. On September 23, 2009, the fixed spread decreased across all maturity categories as a result of the improvement in the projected funding cost. The specific decreases were 30 basis points for loans with average repayment maturities of 10 years or and 35 basis points for loans with average repayment maturities greater than 10 years and up to 18 years. This change affects all loans signed on or after September 24, G. On June 22, 2010, IBRD s Executive Directors approved the introduction of a maturity premium for all loans and guarantees with maturities greater than 12 years. All loans and guarantees approved after June 30, 2010 will be subject to a 10 basis point (0.10%) annual premium for average maturities greater than 12 years and up to 15 years, and a 20 basis point (0.20%) annual premium for average maturities greater than 15 years and up to 18 years (the maximum average maturity available). The introduction of a maturity premium required a corresponding realignment of the average maturity buckets introduced for IFL fixed spread loans in March H. On August 12, 2010 and on May 4, 2011, Management reduced the technical components of the fixed spread over the Reference Rate for IBRD Flexible Loans (IFLs) with average repayment maturities greater than 12 years due to a reduction in projected funding costs for these loans. On both occasions, the specific decreases were 5 basis points for loans with average repayment maturities greater than 12 years and up to 15 years, and 10 basis points for loans with average repayment maturities greater than 15 years and up to 18 years. The pricing for loans with average repayment maturities of 12 years or remains unchanged. These changes affected all loans signed on or after August 13, 2010 for changes announced on August 12, 2010 and all loans signed on or after May 6, 2011 for the changes announced on May 4, I. On April 5, 2012, Management further reduced the technical components of the fixed spread over the Reference Rate for IBRD IFLs across all maturity categories. The decrease was made up of lower projected funding costs for all currencies by 10 basis points for loans with average repayment maturities of 15 years or and 5 basis points for loans with average repayment maturities greater than 15 years and up to 18 years. In addition, for euro and yen denominated loans, the projected basis swap adjustment was lowered by 5 basis points compared to the previous level. This change affects all fixed spread IFLs signed on or after April 6, 2012.

IBRD Lending Rates and Spreads Applicable July 1, 2014

IBRD Lending Rates and Spreads Applicable July 1, 2014 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized From: The President July 24, 2014 I. Introduction IBRD Lending Rates and s Applicable