84520 From: The President January 30, 2014 IBRD Lending Rates and Spreads Applicable January 1, 2014 I. Introduction IBRD offers various financial products to meet the needs of financing and risk management of development programs. IBRD semi-annually 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 January 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 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). In addition, there are other LIBOR based products1 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 as shown below: IFL Rate with Fixed Spread = RR + cls + mp + pfc + mrp + bsa Spread Where: 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 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 bsa = projected basis swap spread applied to EUR and JPY loans to adjust the projected USD funding spread for EUR or JPY funding 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 components2 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 26, 2013. 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 following components: IFL/VSL Rate with Variable Spread = RR + cls + mp + afc Spread 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 12 years which is approved by IBRD’s Executive Directors and reviewed annually afc = 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 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 December 31, 2013, the currency pool products which have not been converted to LIBOR based pricing have the outstanding balances of less than $300 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 January 1, 2014 The lending rates and spreads applicable as of January 1, 2014 are summarized below.3 For variable spread, these spreads will be used for rate resetting dates between January 1, 2014 and June 30, 2014. (For the historical spread analysis of the IFL, please see Annex 2.) Box 1. IFL Lending Spreads Applicable as of January 1, 2014 IFL FIXED SPREAD (basis points) a Loan Currency USD EUR JPY Reference Rate 6-month LIBOR 6-month EURIBORb 6-month LIBOR Greater than Greater than Greater than Greater than Greater than Greater than 12 yrs. or 12 yrs. or 12 yrs. or Average Maturity 12 yrs. 15 yrs. 12 yrs. 15 yrs. 12 yrs. 15 yrs. less less less up to 15 yrs. up to 18 yrs. up to 15 yrs. up to 18 yrs. up to 15 yrs. up to 18 yrs. Projected Funding Cost 0 10 15 0 10 15 0 10 15 Market Risk Premium 10 10 15 10 10 15 10 10 15 Basis Swap Adjustment 0 0 0 -5 -5 -5 -15 -15 -15 Contractual Lending Spread c 50 50 50 50 50 50 50 50 50 Maturity Premium d 0 10 20 0 10 20 0 10 20 Total Spread – Current 60 80 100 55 75 95 45 65 85 Total Spread – Prior 60 80 100 55 75 95 45 65 85 Reference Rate at January 1, 2014 35 35 35 39 39 39 21 21 21 e Indicative Total Lending Rate 95 115 135 94 114 134 66 86 106 VARIABLE SPREADS (basis points) Loan Product IFL VSLf Loans for which Invitation to Negotiate Loans for which Invitation was issued to Negotiate was issued: Loans signed Loans approved Prior to July on or after On or after Eligibility Criteria (i) on or after July 23, 2009; after June 30, 2010 23, 2009, and September July 31, 1998 or (ii) prior to July 23, 2009, which were 28, 2007 and signed Prior to July and which were not approved by before 31, 1998 approved by November 30, November September 2009 30, 2009 28, 2007 Greater than Greater than 12 yrs. or Average Maturity 12 yrs. 15 yrs. all all all all all less up to 15 yrs. up to 18 yrs. Actual Funding Cost -23 -23 -23 -23 -23 -23 -23 -23 Contractual Lending Spread c 50 50 50 50 30 30 74 49 Maturity Premium d 0 10 20 n/a n/a n/a n/a n/a Total Spread – Current 27 37 47 27 7 7 51 26 Total Spread – Prior 27 37 47 27 7 7 51 26 Reference Rate at January 1, 2014 35 35 35 35 35 35 35 35 e 62 72 82 62 42 42 86 61 Indicative Total Lending Rate a. The current fixed spread for loans denominated in GBP is set at the same rate as the fixed spread for loans denominated in USD. 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 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. 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 total lending rate is only indicative. The lending rate of a loan is determined based on the Reference Rate effective on the reset date. f. 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. 3 The lending rates of the legacy currency pool loans applicable as of January 1, 2014 are: 7.79% for VLR89 Currency Pool Loans, 10.05% for Single Currency Pool loans denominated in USD, and 0.53% for Single Currency Pool loans denominated in Euro. 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 January 1, 2014. Jim Yong Kim President by Bertrand Badré Managing Director, Finance & World Bank Group CFO 5 Annex 1. Pricing Terms of Currently Available IBRD Financial Products (in basis points) as of January 1, 2014 Deferred Credit Enhancement IBRD Drawdown Product Flexible Loan Special Option (Guarantee) Development Policy Loan Partial Partial Variable Variable Fixed Spread Fixed Spread Risk/Credit/ Risk Spread Spread Policy-based Enclave a Loan Charges Front-end Feeb 25 25 100 25/50c 25/50c 25 25 Stand-by Fee (DPL DDO only) 50 50 Renewal Fee (CAT DDO only)b 25 25 Guarantee Initiation Fee b 15d 15d Guarantee Processing Fee b up to 50 up to 50 Interest Spread over Reference Rate /Guarantee Feee,f ,g Maturity - up to 12 years 60 27 M inimum of 200h 60 27 50 200 Maturity - 12 to 15 years 80 37 80 37 60 210 Maturity - 15 to 18 years 100 47 100 47 70 220 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 Of undisbursed loan amounts j 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 On Liabilities to Others On Liabilities Stand-alone Hedging Producti to IBRD Major Local Currencies Currencies Swap Transaction Fees Currency Swaps k 2 10 2 Interest Rate Swaps 1 3 1 Interest Rate Caps/Collars i 12.5 Commodity Swaps i 37.5 a. IDA countries only. b. Expressed as a percentage of the loan/guarantee amount involved, payable as a lump sum. c. The front-end fee of 25 basis points is applicable to the regular DDO; the front-end fee of 50 basis points is applicable to the Catastrophe DDO. d. 15 basis points of guaranteed amount or $100,000, whichever is greater, applicable on partial risk gaurantees. e. Spread 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. Other conversion and swap transaction fees are added to the semi-annual 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. 6 Annex 2. Historical Trend of IFL Spreads 160 C E 140 H 120 I 100 Fixed 15 -18 yrs* J 80 Fixed 12-15yrs* 60 D Fixed upto 12yrs* 40 B F Var 15-18yrs Var 12-15yrs Var upto 12yrs 20 A 0 G -20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 *The old average maturity tier system applies to fixed spread between March 2009 and June 2010. (See section C and G for further 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, 2009. The three average maturity tiers were organized as (i) 10 years or less, (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 less, 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, 2009. 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, 7 2009; or (ii) prior to July 23, 2009, and which were not approved by the Executive Directors by November 30, 2009. 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 less 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, 2009. 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 2009. 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 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. 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 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. J. On April 26, 2013, Management increased the technical components of the fixed spread over the Reference Rate by 10 basis points for IBRD IFLs with average repayment maturities of 15 years or less due to an increase in projected funding costs for these loans. This change affects all fixed spread IFLs signed on or after April 27, 2013.