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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

IBRD Flexible LoanLending Rate Basics

Banking and Debt Management (BDM)World Bank Treasury

December 31, 2009

roadmap
Roadmap
  • Basics of IBRD lending rates
  • Links between lending rates and current financial market conditions
  • Attractiveness of IBRD lending rates for clients
ibrd borrows and onlends to clients financial market conditions affect lending rates
IBRD borrows and onlends to clients;Financial market conditions affect lending rates

Capital Market

Borrowings

IBRD

Loans

the lending rate consists of a floating base rate plus a spread
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

how are spreads determined why and how often do they change
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%

borrowers have two choices of spread over libor
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

current usd lending spreads december 31 2009
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%

lending spreads may be different for loans in euros or japanese yen
Lending spreads may be different for loans in Euros or Japanese yen

What does this mean in lending rates????

December 31, 2009

for a rough idea of where current rates are add spread to 6 month libor in relevant currency
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

ibrd remains an attractive source of financing
IBRD remains an attractive source of financing...

Compared to other MDBs

Fixed Spread

Variable Spread

10

December 2009

compared to what many middle income borrowers face in the market
…compared to what many middle income borrowers face in the market

Funding Cost Comparison

Spreads over USD LIBOR

December 1, 2009

11

main messages
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.
for more information
For more information

Email: bdm@worldbank.org

Web: http://treasury.worldbank.org