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Deferred Drawdown Option |
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Q: What is a DDO?
A: A DDO gives IBRD borrowers of a single-tranche adjustment loan the option of deferring the loan’s disbursement for up to three years, provided that overall program implementation and the macroeconomic framework remain adequate. An adjustment loan with a DDO, like other regular adjustment loans, would be included within the envelope of the Country Assistance Strategy (CAS) and would not constitute a window for additional resources. Exercising the DDO would give borrowers access to long-term IBRD resources to maintain ongoing structural programs if market borrowing becomes difficult and a financing need materializes. In this way, a DDO can facilitate a more effective response by the Bank in the event that temporary market access constraints might become prolonged and a borrower might need to rely more on the IBRD than previously anticipated to meet ongoing funding needs. At the same time, a loan with a DDO may provide a formal basis for continued engagement with the Bank through the CAS, Economic and Sector Work (ESW) and technical assistance.
Q: Who is eligible for a DDO?
A: The DDO is available to IBRD-eligible borrowers, including countries that borrow from both IBRD and IDA (“blend countries"), to whom IBRD makes a single-tranche adjustment loan.
Q: Who are the target clients?
A: Client country feedback suggests that this option could be a useful instrument for IBRD borrowers that:
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are eligible for IBRD adjustment lending;
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are accessing capital markets for a large part of their funding needs and have no interest in immediate disbursements from the Bank; and
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are interested in remaining engaged with the Bank and having access to a funding risk management tool associated with support for core structural programs.
Q: What are the prerequisites and operational arrangements for loans with a DDO?
A: The operational prerequisites and implementation arrangements for adjustment loans with a DDO are set out in Table I. They are broadly the same as for other single-tranche adjustment loans, with additional provisions on loan supervision and drawdown. If a DDO is exercised, following tranche release, IBRD together with the borrower reviews and gauges the need for potential additional IBRD support.
Q: What are the main financial terms of a loan with a DDO?
A: Table 2 provides the financial terms of an adjustment loan with a DDO. The main terms include a 3-year drawdown period and a repayment term, inclusive of a grace period, commencing from the beginning of the interest period following drawdown. Requests for extension of the drawdown period for an additional period of up to three years will be considered by the Board of Executive Directors if the implementation of the reform program and the macroeconomic framework remain satisfactory. Within existing policy limits for fixed-spread loans, borrowers can tailor the loan’s grace period, final maturity and repayment pattern to their needs. As an added flexibility, borrowers choosing a loan with a DDO can opt for a 3-year longer average repayment maturity than conventional loans subject to a 0.25% premium on the lending rate. The grace period, repayment pattern and final maturity chosen by the borrower must be specified in the loan agreement.
The only financial charge on a loan with a DDO, while it remains undrawn, is the commitment fee of 1% per annum (0.50% net of the prevailing commitment fee waiver). When a loan with a DDO is drawn down, the Bank’s s 1% front-end fee is charged on the withdrawn amount and normal lending rates and other FSL financial terms, including loan charge waivers, apply. As FSLs, loans with a DDO have the embedded currency and interest rate risk management tools that are integral features of this product, including the option of automatic rate fixing upon loan drawdown, which can be requested by the borrower either as part of the loan agreement or at any time during the life of the loan.
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Table 1
Operational Prerequisites and Implementation Arrangements for
IBRD loans with a DDO |
| Prerequisites. Adjustment loans with a DDO will be made within the Country Assistance Strategy envelope. Like all single-tranche adjustment operations, they will be based on (i) a satisfactory macroeconomic framework, including domestic and external debt sustainability; (ii) the up-front completion of a set of specific structural reform measures (“prior actions”) before Board presentation; and (iii) receipt of an acceptable Letter of Development Policy (LDP) setting out the government’s program of actions (prior actions and any other actions), objectives and policies designed to achieve structural adjustment. As for all adjustment loans, the Fund’s assessment of macroeconomic policies –normally in the context of a Fund arrangement—would be taken into account in the Bank’s assessment. 1
Drawdown Period and Conditions. A loan with a DDO has a drawdown period of three years beginning at loan signing, during which the borrower may elect to draw on the loan when a financing need arises – provided that: (i) the macroeconomic framework remains satisfactory; and (ii) the borrower continues to adhere to the overall program set out in the LDP.
Signing and Effectiveness. Signing of the loan agreement providing for a loan with a DDO should take place as soon as possible after Board approval. If the Loan Agreement is not signed within six months after Board approval, the Bank would withdraw the loan. All specific policy reform conditions for an adjustment loan with a DDO must be met before Board presentation; no such conditions should be included as effectiveness conditions in the Loan Agreement. As in the case for all Bank loans, a loan with a DDO becomes effective when the conditions for effectiveness as set forth in Article XII of the General Conditions have been met.
Country Dialogue and Loan Supervision During Drawdown Period. Throughout the drawdown period, the borrower and the Bank maintain a close policy dialogue. Also, as part of regular loan supervision, Bank staff periodically: (i) consult with the Fund on the adequacy of the macroeconomic framework; and (ii) monitor the borrower’s continuing adherence to the overall program. As long as both drawdown conditions remain satisfied, such periodic monitoring normally takes place semiannually, although monitoring may be more frequent at the request of either the Bank or the borrower. If at any time during the drawdown period the Bank concludes that one or both drawdown conditions are not met, the Bank promptly advises the borrower of the need for a subsequent review to confirm that both conditions are satisfied before it would be able to grant a request for drawdown. In this case, follow-up monitoring will be at least quarterly until a review confirms that both drawdown conditions are met.
Request and Decision on Drawdown. The Bank responds rapidly to the borrower's request to draw on the loan. If the Bank has not previously had to advise the borrower of the need for a subsequent review to confirm that both conditions are met as a prerequisite for a drawdown, the Bank would quickly re-confirm whether the two conditions remain satisfied. If the Bank had previously advised the borrower of the need for such a subsequent review, the Bank conducts a full review of the macroeconomic framework and overall program implementation as early as possible upon receipt of the borrower’s drawdown request. To determine whether the two drawdown conditions are met, Bank staff examine and Bank management makes a judgment on the adequacy of macroeconomic policies, taking into account the Fund’s assessment, and on the continued consistency of government actions and policies with the objectives of the program agreed at negotiations and set out in the LDP. Depending on country and external developments, government actions may remain consistent with the objectives of the program even if one or more prior actions might have been partly or fully reversed. In such a case, Management would consider the drawdown condition on adherence to the program fulfilled. If both drawdown conditions are met, the Bank grant the borrower's request to draw on the loan.
Case when Drawdown Conditions are not Met. If Management determines that one or both drawdown conditions are not met, the Bank advises the borrower promptly of the reasons for its determination and works with the borrower – if macroeconomic policies are not found adequate, in close consultation with the IMF – to help fulfill the conditions for drawdown. In principle, the same policies and procedures on waivers of conditions apply to adjustment loans with a DDO as to adjustment loans without a DDO. In particular, any waiver would require Board approval. However, for adjustment lending in general, Management does not expect to recommend to the Board a waiver of conditionality on the adequacy of macroeconomic policies and overall program implementation.
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| 1 As stated in Operational Directive 8.60, “Adjustment lending is not normally undertaken unless an appropriate Fund arrangement is in place. If there is no Fund arrangement, Bank staff should ascertain, before making their own assessment, whether the Fund has any major outstanding concerns about the adequacy of the country’s macroeconomic policies.” See Operational Directive 8.60, Adjustment Lending Policy, December 1992. See also Operational Memorandum Clarification of Bank Policy on Adjustment Lending, June 5, 2000. |
Table 2
Financial Terms of IBRD Adjustment Loans with a Deferred Drawdown Option (DDO) |
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Financial Terms |
Normal-Maturity Loans with a DDO |
Extended Maturity Loans with a DDO |
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Currency |
Any currency that the IBRD can efficiently intermediate |
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Drawdown |
Multiple drawdowns on a single tranche up to the full loan amount at any time within three years from loan effectiveness. Requests for extension of the drawdown period for an additional period of up to three years may be considered by the Board of Executive Directors if the implementation of the reform program and the macroeconomic framework remain overall satisfactory. |
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Repayment Terms |
Fixed-spread loan (FSL) disbursement-linked schedules subject to a final maturity of 25 years and a limit on average repayment maturity plus drawdown period of:
- 14.25 years (country categories I-II),
- 11.25 years (country category III), and
- 10.25 years (country categories IV-V).
Borrowers can tailor grace period, total repayment term and repayment method to their needs subject to these limits.1, 2 |
FSL disbursement-linked schedules subject to a final maturity of 25 years and a limit on average repayment maturity plus drawdown period of:
- 17.25 years (country categories I-II),
- 14.25 years (country category III), and
- 13.25 years (country categories IV-V).
Borrowers can tailor grace period, total repayment term and repayment method to their needs subject to these limits.1, 2 |
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Lending Rate Base Rate |
6-month LIBOR |
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Lending Rate Spread |
Same as FSL |
FSL spread + 0.25% |
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Front-End Fee |
1% of the amount drawn down, payable upon drawdown. FEF may be capitalized or paid by the borrower from their own proceeds. |
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Commitment Fee |
1% on undisbursed amounts, beginning 60 days after the loan agreement is signed, payable during the drawdown period while DDO is not exercised. |
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Loan Charge Waivers |
Eligible, as determined annually by the Executive Directors |
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Currency Conversions, Interest Rate Conversions, Caps, Collars, Payment Dates, Conversion Fees, Prepayment |
Same as for FSLs, refer to IBRD Financial Products: The Fixed Spread Loan brochure, August 1999, |
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1 For purposes of administering the repayment term flexibility for DDO loans, a 1.5 year expected average disbursement period will be assumed.
2 At present, FSL disbursement-linked schedules can only accommodate level principal and bullet repayments. Tailored and annuity disbursement-linked repayment schedules and tailored prepayment options for FSLs, including DDO loans, would be made available subsequently.
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For more information, borrowers may contact:
Banking and Debt Management
The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: 202-458-1122
Fax: 202-522-2102
Email: bdm@worldbank.org
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