The variable spread has three components:
i.IBRD’s contractual lending spread, which is fixed during the loan’s life;
ii.The maturity premium, which depends on the country’s lending group and average maturity of the loan and is also fixed during the loan’s life; and
iii.IBRD’s average cost of funding relative to the reference rate. The reference rate varies by currency (SOFR for USD, TONA for JPY, SONIA for GBP and EURIBOR for EUR). It slowly passes through to borrowers IBRD’s actual cost of funding in the market and is revised every quarter.
For latest information on loan spreads, please visit: IBRD Lending Rates.
The reference rate for US dollar denominated loans is the Secured Overnight Financing Rate (SOFR). SOFR is a broad measure of the cost of overnight borrowing collateralized by the U.S. Treasury securities in the repurchase agreement market. The Federal Reserve Bank of New York publishes SOFR based on actual transactions, making SOFR a backward looking, secured interest rate.
The reference rate for EUR denominated loans is the Euro Interbank Offered Rate (EURIBOR). EURIBOR rates are based on the average interest rates at which a large panel of European banks borrow funds from one another. Euribor is determined and published by the European Money Markets Institute.
The reference rate for Pound Sterling denominated loans is the Sterling Overnight Index Average (SONIA). SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors. SONIA is administered and published by the Bank of England.
Japanese Yen denominated loans is the Tokyo Overnight Average Rate (TONA). TONA is a measure of the cost of borrowing in the Japanese yen unsecured overnight money market. TONA (sometimes referred to as “TONAR”) is administered and published by the Bank of Japan.
The average repayment maturity (ARM) reflects the time it takes to repay the full loan amount. Rather than looking at years to final maturity and the grace period separately, the concept of average repayment maturity, which takes into account both the repayment dates and the repayment amounts, is a better estimation of how quickly the loan is being repaid.
ARM is calculated as the average of the number of years until each principal repayment amount is due, weighted by the principal repayment amounts. For example, a bullet loan that pays the entire principal in year 18 has an ARM of 18 years. Similarly, a loan that pays half of the principal amount in year 16 and the second half in year 20 also has an ARM of 18 years.
A borrower can compute the ARM for multiple combinations of loan terms (e.g. choice of spread, grace period, years to repayment, and repayment schedule) using the Repayment Profile Calculator. Before signing the loan, a borrower may change the amortization schedule (combinations of grace period and years to repayment needed to pay off the loan) for an IBRD Flexible Loan, whether with a fixed or a variable spread, without requiring Board approval where such change does not otherwise affect the developmental objectives of the project. However, the loan repayment schedule cannot be modified after the loan has been signed.
In the event that payments on IBRD Flexible Loans during the amortization period are received after 30 days after the due date, a late service charge of 0.50% will apply to all principal overdue. In addition, the partial waiver of interest on outstanding loans will not be granted if the late payment falls within the six months prior to an interest payment date.
Borrowers should contact IBRD’s Loan Client Services about loan prepayment askloans@worldbank.org.Provided that they are current on their obligations, borrowers can partially or fully prepay a loan on a 45-day notice. Partial prepayment of the withdrawn loan balance is applied in the manner specified by the borrower or, in the absence of any specification, in inverse order of the principal installments due.
When contacted about prepayment, Loan Client Services will send borrowers an estimate of the prepayment premium and other charges that they would have to incur if they chose to go through with the prepayment. The actual premium and charges to be paid upon prepayment might be different from the estimates provided.
The premium covers the cost to IBRD of redeploying prepaid funds. The prepayment premium charged is based on the difference between the spread of the prepaid loan and the spread of the new loan to which the funds are redeployed.
If the borrower chooses to repay a loan that has not been converted, the following applies:
(a) Compute the difference between the basis fixed spread of the loan being prepaid and the prevailing basis for fixed spread loans on the date of prepayment (assumes the prepaid loan to be fully funded to maturity). For variable spread loans (VSLs), compute the difference between the contractual lending spread of the prepaid loan and the contractual lending spread in effect for VSLs in the currency of the prepaid loan at the date of prepayment. For FSLs in non USD currencies, the difference should be adjusted for the difference in the corresponding "basis swap" costs.
(b) Based on the maturities being prepaid, compute the present value of the stream of costs to the Bank using the difference in the cost basis computed in (a). The discount rate used in the present value computation is the prevailing cost basis for loans (adjusted for basis swap cost).
(c) The present value computed in (b) is the premium the borrower is charged by the Bank. If the present value computed in (b) is negative or zero, no charges will apply.
If the borrower chooses to repay a loan that has been converted, the following applies:
(a) The prepayment premium is paid on account of the underlying floating rate loan as outlined in (a) and (b) above.
(b) Moreover, for unwinding each conversion the borrower will be charged a transaction fee plus or minus the mark-to-market value of any swap transacted with a market counterparty. The transaction fee is applied to the amount of the principal that is being prepaid. The unwinding of any market swap can result in a cost or gain to the Bank ("unwinding amounts"). Any such cost will result in an additional amount payable by the borrower to the Bank and any such gain will be subtracted from the amount to be prepaid or paid by the borrower.
To request a loan conversion, borrowers must submit a Conversion Request Form. The request must include a rationale for the conversion, conversion terms being requested, and specific IBRD loan(s) to be converted. Incomplete requests may not be executed. For any questions related to conversions, borrowers can contact the Financial Advisory and Banking team at any time (fp@worldbank.org).
Conversion Request Forms as well as the Guidelines for Conversion of Loan Terms can be downloaded from Treasury’s website at Conversion Options for the IBRD Flexible Loan and, once prepared, should be sent to askloans@worldbank.org
IBRD will make reasonable efforts to execute approved conversions within 15 business days. During the approval process, the borrower may be contacted for more information or clarification.
For information on drawdown requirements for DDOs, please see the Terms and Conditions applicable to DDOs on Treasury’s website at Major Terms and Conditions of the DDO.
A country is expected to have an adequate disaster risk management program to be eligible for a Cat DDO. A good basis for a disaster risk management program would be the Hyogo Framework of Action (HFA 2005-2015) which was adopted by 168 governments in January 2005 at the World Conference on Disaster Reduction, held in Kobe, Hyogo, Japan. The HFA is a global blueprint for disaster risk reduction efforts designed to reduce disaster losses by 2015 in lives and in the social, economic, and environmental assets of communities and countries. The HFA offers guiding principles, priorities for action, and practical means for achieving disaster resilience for vulnerable communities.
In particular, having an adequate DRM program implies the following:
Disaster risk reduction is treated as a major development agenda and is well integrated in national strategies such as the PRSP, CAS, and socio-economic plans. Also, disaster risk is integrated in the poverty, environment, and economic diagnostics of the country.
The country must have developed a Strategic National Action Plan (SNAP) for the implementation of the Hyogo Framework of Action.
Most sectoral policies and programs integrate disaster risk reduction elements such as in housing, transport, health, education, infrastructure, water, and urban development.
Strong institutional and comprehensive legal frameworks exist.
Periodical risk assessments are carried out such as assessment of vulnerability, economic resilience, capacity, and climate change risks.
Transparent financial mechanisms apart from the expected DDO are in place, such as risk transfer mechanisms, private insurance, insurance for public assets, and disaster funds.
Long-term risk reduction measures are implemented, such as early warning systems, building code enforcement, avoidance of high risk areas, and hazard buffer zones.
A strong emergency management system is in place such as contingency plans, regular training drills, and post-disaster communication systems.
there is a commitment to ensure disaster recovery plans to integrate risk reduction
In addition to major currencies, IBRD financing is available in a growing list of local currencies. For information on loan currency, please visit Local Currency Financing.
For IBRD Flexible Loans (IFL), borrowers may request to have all or a portion of disbursed loan balances converted into a local currency for which swap markets exist and are sufficiently liquid. Two mechanisms are available:
- Conversion request: request the conversion of all or a portion of the disbursed amounts into local currency, at any time during the life of the loan.
- Automatic currency conversion upon disbursement: each disbursement and its currency of repayment are automatically converted into a new currency, including local currency, at the time of disbursement.
For all other IBRD loans as well as for debt obligations owed to lenders other than IBRD, the borrower can access stand-alone currency swaps, upon signing a Master Derivatives Agreement with the Bank, to transform their foreign currency debt obligations into local currency. Information on currency swap terms and request procedures, please see ‘Hedging Products’ section.
The availability of local currency financing is subject to IBRD’s access to the borrower’s local currency market and the market’s liquidity. IBRD investigates the market, on a case-by-case basis, to determine the feasibility of accessing the market, as well as the maturity and cost of the transaction.
Where swap markets are illiquid, some local currencies may be available through back-to-back financing (i.e. by issuing a local currency bond and using the proceeds to lend to the government). In this case, IBRD will pass through to the borrower the actual pricing of the bond issuance plus the costs associated with the transaction and the IBRD margin. Back-to-back financing will depend on the legal and institutional framework of the domestic markets and may require early Treasury involvement to assess feasibility and work with the relevant government regulatory bodies.
Borrowers can access stand-alone hedging products at any time during the life of a loan - other than the IBRD Flexible Loan and the Fixed Spread Loan - after signing a Master Derivatives Agreement with the Bank. A borrower may choose to use IBRD Hedging Products to effectively transform its loans, on one or more occasions, whether to fix, unfix, or re-fix the interest rate, to establish caps or collars on a variable rate, to change the currency of obligation, or to link debt service payments to the spot price of a particular commodity or commodities.
IBRD Hedging Products are also available for debt owed by IBRD sovereign clients to creditors other than IBRD. Currently, the instruments offered for non-IBRD debt are interest rate and currency swaps as well as stand-alone weather hedges to mitigate losses related to adverse weather conditions such as droughts.
Under non-IBRD hedging, countries that satisfy the client eligibility criteria established by IBRD are able to access both currency and interest rate swaps on their non-IBRD debt, subject to overall program limits as well as country-specific volume limits as approved by the Executive Board. Currency swap volume limits for each country are based on the size and maturity structure of that country’s outstanding IBRD loan portfolio. Interest rate swaps may be substituted for currency swaps at a rate of five to one.
For information on pricing, currency, maturities, and amounts of IBRD Hedging Products, please see Financial Risk Management.
In the case of stand-alone hedging products, the borrower must enter into a Master Derivatives Agreement (MDA) with IBRD. The borrower must also provide to IBRD (and keep up-to-date) a list of signatures of officers authorized to enter into IBRD hedge transactions.
After the MDA is in place, the borrower must submit a hedge request form. The request must include a rationale for use of IBRD Hedging Products, hedge terms being requested, and specific IBRD or non-IBRD loan(s) to be hedged. Incomplete requests may not be executed. For any questions related to hedging products, borrowers can contact the Banking and Debt Management team at any time.
Request Forms can be downloaded from Treasury’s web site at Hedge Request Forms and, once prepared, should be sent to askloans@worldbank.org
IBRD will make reasonable efforts to execute a borrower's hedge request within 15 business days from the day a request is received by Loan Client Services in form and substance acceptable by the IBRD. During the approval process, the borrower may be contacted for more information or clarification. The IBRD reserves the right to reject a request for a hedge transaction. Once the request is executed, the borrower will be notified by Loan Client Services and billed the upfront transaction fee, if applicable. The hedge will become effective on the next interest payment date of the loan. If the hedge is related to a non-IBRD debt, the hedge will become effective on the date indicated by the borrower in the request.
Provided the request has not yet been executed by IBRD, a borrower may cancel a request at any time by notifying IBRD's Loan Client Services.
If the market moves in an unfavorable direction while IBRD is processing the request, one alternative would be to cancel the request by notifying IBRD to this effect, provided the IBRD has not already executed it. The other alternative would be to submit a request with certain conditions relating to the terms of the hedge requested ("conditional request"). If the borrower is requesting an interest rate swap, it may specify the maximum fixed interest rate or spread over reference rate to be payable by the borrower following the swap. If the borrower is requesting a currency swap, it may specify limits upon the interest rate and the exchange rate at which IBRD may execute the swap. If IBRD is unable during the 15-business day execution period to execute the swap on the conditional terms set by the borrower, the conditional request will expire, and IBRD will promptly notify the borrower about this. The minimum amount of a loan that may be covered by a conditional request is USD 3 million.
Borrowers are expected to enter into a market-based Master Derivatives Agreement (MDA) with IBRD prior to using any of stand-alone hedging products. This agreement provides the contractual framework between the borrower and IBRD. Once this agreement is in place, each hedge transaction executed by the borrower and IBRD will be documented by a confirmation, which will form part of the master agreement.
It is expected that in most cases, the ISDA Master Agreement (Multicurrency-Cross Border) published by the International Swaps and Derivatives Association (ISDA) in 1992 will be used.
In special circumstances, IBRD may consider entering in an individual (stand-alone) agreement to document one single hedge transaction.
Before entering into any of the above derivatives agreements, the borrower and IBRD must review whether the borrower has the power and is authorized to enter into derivatives transactions, and otherwise is in a position to enter into derivatives transactions such as IBRD’s Hedging Products.
Prior to executing a MDA, with a specific borrower, IBRD will undertake a legal review regarding the enforceability of the provisions of the MDA with that borrower.
Defaults under a derivatives agreement may be treated in the same manner as defaults under a Loan Agreement.
Borrowers with VSLs have two options to manage their currency and interest rate risks: (1) request currency and / or interest rate conversions following amendments to the relevant loan agreements; and (2) sign a Master Derivatives Agreement with IBRD to access stand-alone currency and interest rate swaps.
Contact Loan Client Services about loan accounting issues such as billing, loan obligations, etc. by sending an email to: askloans@worldbank.org
For more information, please contact the World Bank Treasury at fp@worldbank.org.
