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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 Master Derivative Agreement (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 SCL are no longer available for new loan commitments.

The lending rate for each fixed-rate SCL is set on semiannual rate-fixing dates for loan amounts (Disbursed Amounts) disbursed during the preceding six-month period. The rate remains fixed for such Disbursed Amounts until they are repaid. In effect, a fixed-rate SCL is like a series of fixed-rate subloan, comprising as many fixed-rate subloan as semesters in which disbursements occur. The fixed lending rate is based on the fixed-rate equivalent of six-month LIBOR for the loan currency corresponding to the maturities of the Disbursed Amount on its rate-fixing date. It is not a direct pass-through of the Bank's funding costs, and it includes a risk premium to compensate the Bank for market risks incurred in funding these loans. For the interim period from the date each disbursement is made until its rate-fixing date, interest accrues at the same rate as is applicable to LIBOR-based single currency loan for such period.

Currency and Interest Rate Hedging: Fixed-rate SCL do not have embedded currency and interest rate conversion options. A borrower may transform the currency of denomination or the interest rate applicable to the obligation by entering into a currency or interest rate swap with IBRD. To access these free-standing hedge transactions, the borrower must first enter into a Master Derivatives Agreement (MDA) with IBRD.

Interest Rate Caps/Collars: As Fixed-rate SCL do not have embedded interest rate caps or collars, a borrower that is interested in setting limits on the variable interest rate may purchase an interest rate cap (upper limit) or collar (upper and lower limit) from IBRD under the terms of an MDA with IBRD.

Transformation to Fixed Spread Terms: Fixed-rate SCL may be transformed to Fixed Spread Loan (FSL) through amendments to the relevant Loan Agreements in order to introduce embedded options. 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. The borrower may access conversion options without the need for an MDA after transformation to fixed spread terms.

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.

Principal Terms and Conditions of the Fixed-Rate SCL
Borrowers
  • No longer available for new loan commitments.
  • Offered to all eligible borrowers for loans with an invitation to negotiate issued before December 1, 1999.
Loan Currencies
  • Committed and repayable in the currency of the loan, as selected by the borrower.
  • Offered in euro, Japanese yen, pounds sterling, Swiss francs and US dollars.
  • Borrowers may contract single currency loan in more than one currency tranche to obtain multicurrency liabilities in preferred currency compositions.
  • In the unlikely event the Bank is not able to obtain the loan currency, it retains the right to replace the loan currency by a substitute currency until the Bank's access to that currency is restored. The exchange risk and cost of currency substitution will be pooled and shared by all borrowers with single currency loans in the substituted currency.
Lending Rate
  • The fixed lending rate is comprised of a base rate and a total spread. It is set on the semiannual rate-fixing date for loan amounts disbursed during the preceding six-month period (Disbursed Amount). The lending rate remains fixed for each Disbursed Amount until it is repaid.
  • The base rate is defined as the equivalent of six-month LIBOR in the single currency for value on the rate-fixing date, expressed as a single fixed interest rate based on the fixed interest rates that correspond to the maturities of the Disbursed Amount. The total spread (determined each June 30 and December 31) comprises the Bank's cost margin for funding allocated to fixed-rate single currency loan in the loan currency, a market risk premium, and a lending spread. The contractual lending spread is 0.75% for loans with an invitation to negotiate issued on or after July 31, 1998 and 0.50% for loans with an invitation to negotiate issued before July 31, 1998.
  • For the interim period from the date each disbursement is made until its rate-fixing date, interest accrues at the same rate as is applicable to LIBOR-based single currency loan for such period.
Front-End Fee
  • Front-end fee of 1.00% of the loan amount is payable upon effectiveness of the loan. This fee may be financed out of the loan proceeds.
Commitment Fee
  • The contractual commitment fee is 0.75% per annum on undisbursed loan amounts, beginning 60 days after the loan agreement is signed.
Payment Dates
  • Debt service payments are due on the 15th of the month, in regular six-month intervals.
prepayment Premium
  • The repayment premium will be determined on the basis of the Bank's redeployment costs.
  • The premium will be waived if a substitute currency is outstanding.
Loan Charge Waivers
  • Waivers are determined annually by IBRD’s Board of Executive Directors.

Disbursement Period and Repayment Terms of IBRD Loans: All IBRD loans disburse as projects and programs are being implemented. The disbursement period for project loans frequently extends over six to nine years. Structural and sectoral adjustment loans and other non-project loans are usually disbursed more quickly than project loans (i.e., within one to three years).

Fixed-Rate Single Currency Loan: Repayment terms for fixed-rate single currency loan are determined by the length of the disbursed period expected at the time the loan is made, as shown below. The amortization pattern for fixed-rate single currency loan is level repayment of principal for each Disbursed Amount.

Expected total Disbursement Period (years)

Grace Period for each Disbursed Amount (years)

Final Maturity for each Disbursed Amount (years)

Final loan maturity from date of Approval (years)
0-3
3
12
12-15
3-6
3
9
12-15
more than 6
3
6
12-201

1 For middle and higher income borrowing members, overall loan repayment terms would be limited to 17 years and 15 years, respectively.