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 July 1, 2014 IBRD offers various financial products to meet the financing and risk management needs of development programs. Semi-annually, IBRD provides an update of the lending rates and spreads applicable to its financing products as set out in the terms of each product. The purpose of this paper is to summarize the lending rates and spreads applicable to IBRD loans outstanding as of July 1, 2014. The complete pricing terms of currently available IBRD financial products are provided in Annex 1. II. The Structures of IBRD Lending Rates and s 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 the IBRD Flexible Loan (IFL) product which consolidated the two previously offered LIBOR products: the Variable Loan (VSL) and the Fixed Loan (FSL). In addition, there are other LIBOR based products 1 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. Fixed The IFL fixed spread over the Reference Rate consists of five components as shown below: Where: IFL Rate with Fixed = RR + cls + mp + pfs + mrp + bsa RR = Reference Rate which varies by currency choice 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 8 years which is approved by IBRD s Executive Directors and reviewed annually pfs = 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 bsa = projected basis swap spread applied to non-usd loans (currently EUR and JPY) to adjust the projected USD funding spread for other currencies 1 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 2 of the fixed spread to ensure that these reflect underlying market conditions. The current level of the technical components has been in effect since July 1, 2014. The fixed spread for a loan is determined at loan signing and remains constant over the life of the loan. Variable 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 following components: IFL Rate with Variable = RR + cls + mp + afs Where: 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 8 years which is approved by IBRD s Executive Directors and reviewed annually afs = IBRD s average funding spread 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 determined on the lending rate reset dates and is applicable for the following six months. Currency Pool Products 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. Only a few currency pool loans remain outstanding and will soon mature. As of June 30, 2014, the currency pool products which have not been converted to LIBOR based pricing have outstanding balances of less than $150 million and all will mature by FY2017. 2 The technical components include the projected funding cost, the market risk premium, and the basis swap adjustment.
3 III. Lending rates and spreads applicable to fixed and variable spread IFL as of July 1, 2014 The lending rates and spreads applicable to IFLs as of July 1, 2014 are summarized below. 3 For variable spread, these spreads will be used for rate resetting dates between July 1, 2014 and December 31, 2014. (For historical spread analysis of the IFL, please see Annex 2.) Box 1. IFL Lending s Applicable as of July 1, 2014 a (in basis points) Loan Currency b Reference Rate c IFL Fixed (IFL FS) USD 6-month LIBOR Average Maturity 8 years and below Greater than 8 and up to 10 years Greater than 10 and up to 12 years Greater than 12 and up to 15 years Greater than 15 and up to 18 years Greater than 18 and up to 20 years Projected Funding 0 5 5 15 20 20 Market Risk Premium 10 10 10 10 15 15 Contractual Lending 50 50 50 50 50 50 Maturity Premium 0 10 20 30 40 50 Total Current 60 75 85 105 125 135 Total Prior 65 65 65 85 105 N/A Reference Rate at July 1, 2014 33 33 33 33 33 33 Indicative Total Lending Rate d 93 108 118 138 158 168 Average Maturity 8 years and below IFL Variable (IFL VS) Greater than 8 and up to 10 years Greater than 10 and up to 12 years Greater than 12 and up to 15 years Greater than 15 and up to 18 years Greater than 18 and up to 20 years Actual Funding -20-20 -20-20 -20-20 Contractual Lending 50 50 50 50 50 50 Maturity Premium 0 10 20 30 40 50 Total Current 30 40 50 60 70 80 Total Prior 27 27 27 37 47 N/A Reference Rate at July 1, 2014 33 33 33 33 33 33 Indicative Total Lending Rate d 63 73 83 93 103 113 a. Loans for which the Invitation to Negotiate was issued on or before June 30, 2014 and approved by the Executive Directors on or before September 30, 2014, include an annual maturity premium of 0.10% for loans with average repayment maturities of greater than 12 to 15 years, or 0.20% for loans with average repayment maturities of greater than 15 to 18 years. b. A basis swap adjustment of -0.05% is applicable to EUR fixed spread and -0.15% is applicable to the JPY fixed spread. The current fixed spread for loans denominated in GBP is set at the same rate as the fixed spread for loans denominated in USD. c. All euro-denominated loans for which the invitation to negotiate is issued on or after July 31, 2010 have EURIBOR as the reference rate. d. The total lending rate is only indicative. The lending rate of a loan is determined based on the Reference Rate effective on the reset date. 3 Please see Annex 3 for the listing of the additional variable rates and spreads applicable to IFLs and discontinued products for rate resetting dates between July 1 and December 31, 2014.
4 IV. Notification to Borrowers IBRD 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 July 1, 2014. Jim Yong Kim President by Bertrand Badré Managing Director, Finance & World Bank Group CFO
5 Loan Charges Fixed Variable Fixed Variable Private Projects Front-end Fee b 25 25 100 25/50 c 25/50 c 25 25 Commitment Fee/ Stand-by Fee 25 25 25 50 c 50 c 25 25 Renewal Fee (CAT DDO only) b 25 c 25 c Initiation/Processing Fee b Interest over Reference Rate/Guarantee Fee e,f,g Average Maturity: 8 years and below 60 30 Minimum of 200 h 60 30 50 50 Greater than 8 and up to 10 years 75 40 75 40 60 60 Greater than 10 and up to 12 years 85 50 85 50 70 70 Greater than 12 and up to 15 years 105 60 105 60 80 80 Greater than 15 and up to 18 years 125 70 125 70 90 90 Greater than 18 and up to 20 years 135 80 135 80 100 100 Conversion Fees for the IBRD Flexible Loan (IFL) Interest Rate Conversion Initial rate fixings No Charge 2 Additional rate fixing/unfixing 1 3 Interest Rate Caps/Collars i 12.5 12.5 Currency Conversion Annex 1. Pricing Terms of Currently Available IBRD Financial Products as of July 1, 2014 (in basis points per annum, unless otherwise noted) IBRD Flexible Loan Of undisbursed loan amounts i 12.5 12.5 Of disbursed loan amount 2 4 Automatic currency conversion to local currency 1 3 Changing from variable spread to fixed spread N/A 3 Special Development Policy Loan Deferred Drawdown Option Credit Enhancement Product a (Guarantee) 15/50 d Public Projects Stand-alone Hedging Product j Swap Transaction Fees Major Currencies Local Currencies Currency Swaps k 2 10 2 Interest Rate Swaps 1 3 1 Interest Rate Caps/Collars l Commodity Swaps l On Liabilities to IBRD 12.5 37.5 On Liabilities to Others a. Includes IBRD Enclave Guarantees for IDA countries. In certain cases, IBRD enclave guarantees may have higher pricing than IBRD guarantees. b. Expressed as a percentage of the loan/guarantee amount involved, payable as a lump sum. c. Regular DDOs carry a 0.25% front-end fee, plus a stand-by fee of 0.50%. Catastrophe Risk DDOs (Cat DDO) carry a 0.50% front-end fee, plus a 0.25% renewal fee. d. The initiation fee is 15 basis points of guaranteed amount or $100,000, whichever is greater. Processing fee is determined on a case by case basis and may be lower or higher than 50 basis points of the guaranteed amount. e. Average maturity buckets are based on the new IFL term effective July 1, 2014 and not applicable to the grandfathered IFLs. values shown for USD denominated loans only. f. For fixed spread IFLs denominated in currencies other than USD, the fixed spread will include an additional currency-specific basis swap adjustment. g. For variable spread IFLs denominated in local currency, the spread is a result of local currency conversion and the variable portion of loan charges as determined by currency conversion terms. h. The maximum maturity of Special Development Policy Loans is 10 years. i. Charged as lump-sum fees based the transaction amount. In addition, conversions for IBRD variable spread loans will include a transaction fee of 0.02% per annum to be added to the interest rate. j. Stand-alone hedges are not explicitly linked to an IBRD loan and may be executed in respect of debt owed to a third party. k. An additional fee for convertibility risk may apply for local currency swaps. The amount of this fee will be determined on a country-by-country basis. l. Charged as lump-sum fees based the transaction amount.
6 Annex 2. Historical Trend of IFL s 160 140 120 100 A B C E F/G Fix 18-20y Fix 15-18y Fix 12-15y 80 60 40 20 D Fix 10-12y Var 18-20y Fix 8-10y Var 15-18y Fix upto 8y Var 12-15Y Var 10-12y Var 8-10y Var upto 8y 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 A. 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 2009. B. 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 less 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, 2011. C. 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 less 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.
7 D. On April 26, 2013, Management increased the projected funding spread component of the fixed spread over the Reference Rate by 10 basis points for IBRD IFLs with average repayment maturities of 15 years or less. This change affects all fixed spread IFLs signed on or after April 27, 2013. E. On April 22, 2014, Management increased the projected funding spread component of the fixed spread over the Reference Rate by 5 basis points for IBRD IFLs for all maturities. This change affects all fixed spread IFLs signed on or after April 23, 2014. F. On February 11, 2014, IBRD s Executive Directors approved the extension of the maximum maturity for loans and guarantees to 35 years with the revision to the maturity premium schedule. The revision of the maturity premium schedule required a corresponding realignment of the average maturity buckets set in June 2010. All eligible loans and guarantees will be subject to a 10 basis points annual premium for average maturities greater than 8 years and up to 10 years, a 20 basis points annual premium for average maturities greater than 10 years and up to 12 years, a 30 basis points annual premium for average maturities greater than 12 years and up to 15 years, a 40 basis points annual premium for average maturities greater than 15 years and up to 18 years, and a 50 basis point annual premium for average maturities greater than 18 years and up to 20 years (the maximum average maturity available). This change came into effect on July 1, 2014. It does not affect loans or guarantees for which (i) the Invitation to Negotiate was issued before June 30, 2014, and (ii) that have been approved by Executive Directors on or before September 30, 2014. G. As of July 1, 2014, the projected funding spread component of the fixed spread for average maturities 8 years and below has been set at zero basis point.
8 Annex 3. Additional Variable rates and spreads applicable to IFLs and discontinued products for rate resetting between July 1, 2014 and December 31, 2014 Loan Product Eligibility Criteria Funding Cost Contractual Lending Maturity Premium Total /Rate IFL VS a IFL VS a IFL VS a IFL VS IFL VS Loans approved between July 1, 2010 and June 30, 2014 with average maturity of 12 years or less Loans approved between July 1, 2010 and June 30, 2014 with average maturity greater than 12 years and up to 15 years Loans approved between July 1, 2010 and June 30, 2014 with average maturity greater than 15 years and up to 18 years Loans for which Invitation to Negotiate was issued (i) on or after July 23, 2009; or (ii) prior to July 23, 2009, and which were not approved by November 30, 2009 Loans for which Invitation to Negotiate was issued Prior to July 23, 2009, and which were approved by November 30, 2009-20 bps 50 bps 0 bps 30 bps -20 bps 50 bps 10 bps 40 bps -20 bps 50 bps 20 bps 50 bps -20 bps 50 bps N/A 30 bps -20 bps 30 bps N/A 10 bps VSL b Loans signed on or after September 28, 2007-20 bps 30 bps N/A 10 bps VSL b VSL b VLR89 VLR89 Loans for which Invitation to Negotiate was issued: On or after July 31, 1998 and signed before September 28, 2007 Loans for which Invitation to Negotiate was issued: Prior to July 31, 1998 Invitation to Negotiate date issued prior to July 31, 1998 Invitation to Negotiate date issued on or after July 31, 1998-20 bps 74 bps c N/A 54 bps -20 bps 49 bps c N/A 29 bps 7.01% 50 bps N/A 7.51% 7.01% 75 bps N/A 7.76% SCPD USD denominated 8.59% 50 bps N/A 9.09% SCPM EUR denominated 0.07% 50 bps N/A 0.57% a. Includes loans for which the invitation to negotiate was issued before June 30, 2014 and that have been approved by Executive Directors on or before September 30, 2014. b. Rates do not take interest waivers into account for loans signed before September 28, 2007. Interest waivers do not apply on loans signed on or after September 28, 2007. 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 R2008-0007). 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.