The International Bank for Reconstruction and Development (IBRD), a member of the World Bank Group, today announced new loan and hedging products for its borrowers, expected to be introduced on September 1, 1999.
"These products are a direct response to client demand for more flexible financial products and risk management tools, and will substantially raise the value added to borrowers from the IBRD's financial intermediation," said World Bank President James D. Wolfensohn, announcing the new products. "Within a broader development context, they will promote client countries' access to, and institutional capacity to utilize, market-based instruments to manage their financial risks."
The new financial products are:
- A fixed-spread LIBOR-based loan, with increased flexibility for borrowers to tailor loan maturities and to manage currency and interest rate risks over the life of the loan; and,
- Free-standing hedging products linked to borrowers' existing IBRD loans to assist borrowers in managing their currency, interest rate and commodity price risks.
The fixed-spread loan will have the following features:
- An interest rate based on LIBOR, plus a spread that would be fixed for the life of the loan;
- A choice of currencies, including the euro, Japanese yen and U.S. dollar. Other currencies may be available upon request;
- Flexibility for borrowers to fix, cap, or collar the interest rate on disbursed amounts at any time during the life of the loan;
- Flexibility to unfix or refix the rate on disbursed amounts at any time during the life of the loan;
- Flexibility to change the currency of disbursed and/or undisbursed loan amounts during the life of the loan; and,
- Flexibility, at the time a loan is made, to tailor the loan repayment terms within financial policy limits to enable borrowers to meet the needs of a specific project or country debt management strategy.
The free-standing hedging products to be introduced would enable borrowers to manage currency, interest rate, and commodity price risk. These are:
- Currency swaps for all IBRD loans;
- Interest rate swaps, caps, and collars for existing single currency loans and fixed-spread loans; and,
- Commodity swaps, on a pilot basis, for existing single currency loans and fixed-spread loans, to be negotiated case by case.
The IBRD intends to make use of master derivatives agreements to enable borrowers to modify the financial terms of their outstanding IBRD obligations. Hedges would be available at borrowers' request, for amounts and periods chosen by borrowers. The IBRD expects to offer hedges on loan maturities of up to 10-12 years.
Longer IBRD loan maturities could be hedged depending on the maturities available in the swap markets for the currency involved. Fixed-spread loan conversions and free-standing hedging products will be priced to recover the IBRD's financial cost of providing the hedge, pluscharged a transaction fee ranging from 1/8 percent to 3/8 percent of the principal amount involved.
The IBRD will continue to offercurrency pool loans andalso offers multicurrency pool loans, LIBOR-based variable-spread single currency loans. loans whose spread is recalculated semi-annually, and fixed-rate The existing fixed-rate single currency loans whose rate is determined for disbursed amounts as they disburse over time. The IBRD will continue to offer the first two of these products alongside the new fixed-spread loan, but the existing fixed-rate loan product will be withdrawn as a choice for new loan commitments as of December 1, 1999.
The launch of the new financial products will be accompanied by an extensive borrower outreach campaign to promote borrower understanding of the new loan and hedging products and informed decision-making, so they can fully benefit from the broad flexibility offered by these products.
The new loan and hedging products being introduced are a natural extension of a client-driven product design process that started in 1993 with the introduction of single currency loans and was followed by the offer of currency choice on currency pool loans extended to borrowers from 1996 to 1998. Since 1996, IBRD borrowers have selected single currency loan terms for over 95 percent of their IBRD loan commitments. Borrowers also converted $67 billion equivalent (58 percent) of their currency pool loans to single currency terms under the conversion offer that concluded July 1, 1998.