66682 From: The President January 31, 2012 IBRD Lending Rates and Spreads Applicable January 1, 2012 I. Introduction IBRD semi-annually provides an update of the lending rates and spreads by loan product as set out on the terms of each product. This paper summarizes the lending rates and spreads applicable to IBRD loans outstanding as of January 1, 2012. 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 Reference Rate, variable spreads over Reference Rate, and currency pool based rates. Fixed spreads and variable spreads are currently offered under IBRD Flexible Loan (IFL), a LIBOR based product, which consolidated the two previously offered LIBOR products: Variable Spread Loan (VSL) and Fixed Spread Loan (FSL). 1 In addition, there are other LIBOR based products2 and currency pool based products which were withdrawn from the IBRD menu of new loan commitments but still govern the rate resetting of some outstanding loans.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: (i) a contractual lending spread, (ii) a maturity premium (where applicable), (iii) the Bank’s projected funding cost relative to the Reference Rate, (iv) a market risk premium, and (v) a basis swap adjustment for some currencies other than US dollars. Because IBRD absorbs the full risk of future financing costs for the fixed spread loans, the pricing principle of fixed spread is to cover the IBRD’s projected funding cost for the life of the loan. Accordingly, IBRD regularly reviews the technical components3 of the fixed spread to ensure that these reflect underlying market conditions. The current level of IFL fixed spread has been in effect since May 4, 2011. Variable Spread: IFL and VSL The pricing principle of 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 (i) the Bank’s contractual lending spread, (ii) a maturity premium (where applicable), and (iii) IBRD’s average funding cost margin relative to the Reference Rate. The variable spread is recalculated every January 1 and July 1 based on the cost of the underlying funding for these loans. Currency Pool Products The Currency Pool products, offered between 1982 and 1993, 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. 1 In addition, IBRD offers other financing products including: hedging products, guarantees, and catastrophic risk financing. 2 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 fixed for the remaining life of the converted loans. 3 The technical components include the projected funding cost, the market risk premium, and the basis swap adjustment. 2 III. Summary of Lending Rates and Spreads applicable as of January 1, 2012 The Lending rates and spreads applicable as of January 1, 2012 are summarized as shown below. For variable spread and pool lending rates, these spreads will be used on rate resetting dates between January 1, 2012 and June 30, 2012. (For the historical spread analysis of IFL, please see Annex 1.) Table 1. Lending Rates and Spreads Applicable as of January 1, 2012 a IFL FIXED SPREAD (basis points) Loan Currency USD EUR JPY Base Rate 6-month LIBOR 6-month LIBOR (or 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 20 0 10 20 0 10 20 Market Risk Premium 10 10 15 10 10 15 10 10 15 Basis Swap Adjustment 0 0 0 0 0 0 -10 -10 -10 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 – CURRENT SEMESTER 60 80 105 60 80 105 50 70 95 Total - Prior Semester 60 80 105 60 80 105 50 70 95 VARIABLE SPREADS (basis points) Loan Product IFL VSL 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. Cost margin -22 -22 -22 -22 -22 -22 -22 -22 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 – CURRENT SEMESTER 28 38 48 28 8 8 52 27 Total - Prior Semester 29 39 49 29 9 9 53 28 POOL LENDING RATES (percentages) Pool Loan Producte SCPD SCPM VLR89 Invitation to Negotiate date Invitation to Negotiate date Eligibility Criteria USD EUR issued prior to July 31, 1998 issued on or after July 31, 1998 Cost of Qualified Borrowings 3.92f 1.63f 7.60 7.60 Contractual Lending Spread 0.50 0.50 0.50 0.75 TOTAL – CURRENT SEMESTER 4.42 2.13 8.10 8.35 Total - Prior Semester 6.29 6.09 8.07 8.32 a. 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. b. All new euro-denominated loans for which the invitation to negotiate is issued on or after July 31, 2010 have Euribor as the reference rate. c. All loans under the IFL program have a contractual lending spread that is not adjusted for day count. Previously, the total spread for variable spread loans was adjusted to account for the different day conventions between borrowing transactions and the Bank’s loans. d. IBRD offers different princing tiers according to average repayment maturity for IFL. IFL fixed spread loans signed on or after March 29, 2009 and IFL variable spread loans approved on or after June 30, 2010 are subject to maturity premium. e. The Variable Lending Rate (VLR82) is no longer reported as the only remaining loan is currently in non-accrual status. f. As the currency pool products are close to their final maturity, the proportion of fixed rate debt and floating rate debt will significantly impact the overall funding cost. 4 Annex 1. Historical Trend of IFL Spreads 160 140 C E H 120 Fixed 15 -18 yrs* 100 Fixed 12-15yrs* 80 60 Fixed upto 12yrs* D F Var 15-18yrs 40 B Var 12-15yrs Var upto 12yrs 20 A G 0 -20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 *The old average maturity tier system applies to fixed spread between March 2009 and June 2010. (See section C and G for further detail.) 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 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 according to 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, local time at the place of signing. 5 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, 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 14 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 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.