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IBRD Flexible Loan Lending Rate Basics

IBRD Flexible Loan Lending Rate Basics. Banking and Debt Management (BDM) World Bank Treasury December 31, 2009. Roadmap. Basics of IBRD lending rates Links between lending rates and current financial market conditions Attractiveness of IBRD lending rates for clients.

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IBRD Flexible Loan Lending Rate Basics

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  1. IBRD Flexible LoanLending Rate Basics Banking and Debt Management (BDM)World Bank Treasury December 31, 2009

  2. Roadmap • Basics of IBRD lending rates • Links between lending rates and current financial market conditions • Attractiveness of IBRD lending rates for clients

  3. IBRD borrows and onlends to clients;Financial market conditions affect lending rates Capital Market Borrowings IBRD Loans

  4. The lending rate consists of a floating base rate plus a spread 1: Base Rate 6-month LIBOR LIBOR(London Interbank Offered Rate) is afloatinginterest rate. It is the rate at which banks can borrow unsecured funds from other banks in the London wholesale money market. Variable Spread Recalculated every six months Fixed Spread Remains fixed over the life of the loan 2: Lending Spread

  5. How are spreads determined? Why and how often do they change? Variable Spread Recalculated every six months Fixed Spread Remains fixed over the life of the loan Contractual Spread Contractual Spread Monitored by management: Can change at any time Re-calculated every semester: January 1& July 1 Projected Funding Cost Actual Funding Cost Market Risk Premium Reviewed annually by Board Front end Fee: 0.25%

  6. Current variable spreads are lower than fixed spreads Borrower is exposed to changes in IBRD funding spreads to LIBOR in the longer term Borrowers have two choices of spread over LIBOR Variable Spread Option • No embedded risk management tools • Can switch to fixed spread later at prevailing fixed spread plus a fee • Fixed for life of loan once set at the date of loan signing* • Maturity dependent • Current spreads reflect higher IBRD borrowing costs at long terms Fixed Spread Option • Embedded flexibility to fix rates or convert currencies *Fixed Spreads for DDOs are determined at time of disbursement

  7. Current USD Lending Spreads: December 31, 2009 Fixed Spread Variable Spread Average Maturity (Years): Up to 10 10 to 14 Over 14 Average Maturity (Years): Up to 18 0.40% 0.20% ProjectedFunding Spread 0.00% ActualFunding Spread - 0.33% + Market Risk Premium 0.10% 0.15% 0.10% + + Contractual Spread 0.50% Contractual Spread 0.50% 0.50% 0.50% LIBOR + 0.17% LIBOR +0.60% +0.80% +1.05% + Front-end Fee 0.25%

  8. Lending spreads may be different for loans in Euros or Japanese yen What does this mean in lending rates???? December 31, 2009

  9. For a rough idea of where current rates are, add spread to 6 month LIBOR in relevant currency + 0.43% +0.17% 0.60% 0.43% +0.60% 1.03% 0.43% +0.80% 1.23% 0.43% +1.05% 1.48% December 2009

  10. IBRD remains an attractive source of financing... Compared to other MDBs Fixed Spread Variable Spread 10 December 2009

  11. …compared to what many middle income borrowers face in the market Funding Cost Comparison Spreads over USD LIBOR December 1, 2009 11

  12. Main Messages • Clients have a choice between the variable and fixed spread for IBRD Flexible Loans. There are cost and risk tradeoffs with each. • Fixed spread offered for new loans fluctuates to reflect expected funding costs, risks and market volatility at different maturities. Spread is not locked in until a loan is signed. • Variable spread resets semi-annually. • The contractual spread component of the lending spread is subject to adjustment during annual review process. • Beyond attractive pricing, IBRD loans come with technical expertise.

  13. For more information Email: bdm@worldbank.org Web: http://treasury.worldbank.org

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