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Risk Management and Prepayment Options for Retired IBRD Loans

 

Variable Spread Loan (VSL) and Fixed-rate Single Currency Loan (SCL) are no longer available for new commitments. Borrowers have options for managing financial risks and/or prepayment.

Scroll down for options for
Fixed-rate Single Currency Loan.

 

Related Links

Stand-alone Hedging Products

Hedging Guidelines and Forms

Hedging Transaction Fees

 

Options for Variable Spread Loan (VSL)

As of February 12, 2008, Fixed Spread Loan (FSL) and VSL are no longer available for new loan commitments. The International Bank for Reconstruction and Development (IBRD) consolidated its loan offerings, the FSL and VSL, into one product line - the IBRD Flexible Loan (or IFL).

Currency and Interest Rate Hedging: A borrower may transform the currency of denomination, the reference rate (typically LIBOR or EURIBOR) portion or the spread portion of the interest rate applicable to the obligation. To access these options a borrower must amend the relevant loan agreements. Alternatively a borrower may enter into free-standing IBRD currency or interest rate swaps by first signing a Master Derivative Agreement (MDA) with IBRD.

Interest Rate Caps/Collars: A borrower that is interested in setting limits on the reference rate portion of the interest rate may purchase a cap (upper limit) or collar (upper and lower limits) from IBRD. To access these options a borrower must amend the relevant loan agreements. Alternatively a borrower may enter into free-standing IBRD caps or collars by first signing a MDA with IBRD.

Prepayment Options: The borrower may prepay all or any part of the disbursed and outstanding loan balance at any time.

Prepayment charges may apply. The prepayment premium will consist of IBRD’s redeployment cost of the prepaid loan amount and an unwinding amount, if applicable, as reasonably determined by IBRD. The redeployment cost is derived from the difference between the contractual lending spread and maturity premium (if any) of the prepaid loan and the contractual lending spread and maturity premium (if any) in effect for loans with a variable spread in the currency of the prepaid loan at the date of prepayment. In the event of currency substitution, no prepayment fee would be charged while a substitute currency is outstanding. In the event of prepayment of amounts that were swapped under a currency or interest rate hedge, the swap will be terminated automatically and the borrower would (i) pay a transaction fee and (ii) pay, if applicable, an unwinding amount arising from the unwinding of any transaction related to any swap in effect with the borrower.

Options for the Fixed Rate Single Currency Loan

As of December 1999, Fixed-rate SCLs are no longer available for new loan commitments. A Fixed-rate SCL may be transformed to a Fixed Spread Loan (FSL) through amendments to the relevant Loan Agreements in order to introduce embedded options (currency or interest hedges, or interest rate caps and collars). The interest rate for a Fixed-rate SCL shall remain fixed as if an interest rate conversion had occurred immediately upon the Fixed-rate SCL’s transformation to an FSL. An additional fee of 0.03% per annum will apply. Alternatively, a borrower may enter into free-standing IBRD currency swaps, interest rate swaps, or interest rate caps/collars by first signing a MDA with IBRD.

Prepayment: The borrower may prepay all or any part of the disbursed and outstanding loan balance at any time. The prepayment premium is based on the cost of redeploying the full amount of the loan to be prepaid from the date of prepayment to the original maturity date. In the event of currency substitution, no prepayment fee would be charged while a substitute currency is outstanding. In the event of prepayment of amounts that were swapped under a currency or interest rate hedge, the swap will be terminated automatically and the borrower would (i) pay a transaction fee and (ii) pay, if applicable, an unwinding amount arising from the unwinding of any transaction related to any swap in effect with the borrower.