WASHINGTON, DC September 30, 2016 - IBRD loans have a floor of zero on the overall interest rate (LIBOR/EURIBOR + spread). While the floor applies to all loans, US dollar and Japanese yen denominated loans are currently not affected as the 6-month LIBOR rate is positive. However, EURIBOR rates have been going into the negative territory since late 2015. As a result, the zero floor on the overall interest rate of a few IBRD loans were activated. Activation of the floor has also had an impact on how IBRD structures swap transactions for conversion options currently offered to borrowers.
When a borrower wishes to exercise conversion options under an IBRD loan, Treasury will hedge IBRD’s market exposure by executing a swap transaction with a market counterparty that matches the terms of the loan being converted, except for the floor. The floor (which is expensive and in some cases illiquid) will not be embedded in the swap.
In order for conversions to be risk neutral for IBRD, the transaction fees for interest rate conversions have been increased to 0.05 percent per annum in USD and by 0.10 percent per annum in EUR and JPY effective September 30, 2016. An additional 0.01 percent per annum will apply for currency conversions. The new transaction fees (see table below) will apply to all new conversions as of the effective date noted above and not retroactively to previously executed conversions.
Transaction Fees on Conversions as of September 30, 2016 | ||
Transaction Type | For Fixed and | |
Interest Rate Conversion | USD (1) | EUR (1), JPY (1) |
Rate fixings of disbursed amounts | 0.050% | 0.100% |
Interest rate caps/collars of disbursed amounts | On a case-by-case basis | |
Currency Conversion | ||
Of undisbursed loan amounts (2) | 0.125% | |
Of disbursed loan amounts | 0.060% | 0.110% |
Automatic currency conversion to local currency | ||
Changing from variable spread to fixed spread | 0.030% | |
Note: For loans for which theLIBOR/EURIBOR + spread is lower than zero during the current interest rate period, transaction fees will be calculated on a case-by-case basis.
Transaction Fees for Early Termination: For early termination of a conversion (a currency, or interest rate conversion, or an interest rate cap/collar) a transaction fee of 2bp p.a will apply. Transaction fees expressed as a percentage per annum will be converted to a lump sum.
IBRD loan conversion guidelines and hedging guidelines effective September 30, 2016 are being updated and will be posted on the Treasury website.
Please contact Miguel Navarro-Martin for more information.
(1) Currency of the loan prior to the conversion.
(2) Expressed as a percentage of the principal amount involved, and payable as a lump sum.
