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ADB Financial Products

LIBOR-Based Loan Product


Local Currency Loan Product
Debt Management Products

Treasury Department
Asian Development Bank
Asian Regional Public Debt Management Forum
Kuala Lumpur, Malaysia
3-5 November, 2009
Agenda

¾ Overview of ADB’s Financial Products for OCR Borrowers

¾ LIBOR-Based Loan (LBL) - Risk Management Features

¾ Local Currency Loan (LCL)

¾ Debt Management Products

2
Overview: ADB Financial Products

LIBOR-Based Loan Debt Management


Foreign Currency
Products
¾ Cost-efficient access to Liability Management
foreign currencies
¾ Allow active portfolio risk
¾ Long tenors management of currency and
¾ Wide choice of currencies interest rate exposure
¾ Flexible repayment terms Borrower’s
¾ Debt management features Debt Management
Strategy
Risk Mitigation
Credit
Local Currency Enhancement
Local Currency Loan Products

¾ Currency-matched funding ¾ Addresses specific


for local currency projects risks to lower funding
costs or extend tenors
¾ ADB can swap dollars or
issue local bonds whatever is ¾ Can help to provide
cheaper access to new markets

3
LIBOR-based loan (LBL): Main Features for
Sovereign borrowers
••USD Other currencies
USD
••JPY in which ADB
JPY
••Euro can efficiently
Euro
intermediate Fixed
Fixedatatloan
loansigning
signing
Fixed
Fixed •• Annuity
Annuity
Rate
Rate •• Straight-line
Straight-line
SRF
SRF •• Custom-tailored
SRF
SRF Custom-tailored
by
by Currency
Currency •• Bullet
by
by Bullet
Amount
Amount Composition
Composition
Period
Period
Interest
Interestrate
rate
Conversion Amortization Linked to
Conversion Amortization
Schedule actual
Schedule disbursements

Currency
Currency Conversion
Conversion
Conversion
Conversion Options
Options
LBL
LBL
Front-end
Front-end
Fee
Fee
Waiver
Waiver

Local
Local
Currency Cap
Currency Capand
and
Conversion
Conversion Collar
Collar Commitment
Commitment
Charge Waiver
Waiver
Charge

6-month
6-monthLIBOR
LIBOR//
6-month EURIBOR/ Lending Effective
Effective
6-month EURIBOR/ Cost
CostBase
Base Lending
Floating Rate Contractual
Contractual
Floatingrate
rate Rate
Rate Rate
benchmark
benchmarkfor forother
other
Spread
Spread
currencies
currencies

Rebate
Rebateor
or Rebate
Rebateor
or
Surcharge
Surcharge Waiver*
Waiver* Surcharge
Surcharge

4 * Applicable only to sovereign LBLs that carry a lending spread of 0.60% per annum.
LIBOR-based loan (LBL): Loan terms for
Sovereign borrowers
USD, JPY, Euro, and other
LBL Negotiated
Currency currencies in which ADB can
after 1 Oct 2007
efficiently intermediate
Item Project/Program
Normally 5 - 25 years depending on
A. Interest Maturity
Loan Type
Cost Basis
Normally 3 - 5 Years depending on
(Adjusted every 6 months 6-Month Grace Period
Loan Type
on every Interest Payment LIBOR
Date)
Fixed at Loan Signing
Funding - Annuity
Rebate/Surcharge - Straight - line
Cost
(Adjusted every 6 months Amortization - Custom - tailored
Under/Over
as calculated by ADB) - Bullet
LIBOR
Effective Contractual Linked to Actual Disbursements
20
Spread (bps) - Straight - line
B. Front-End Fee (bps) 0 Interest Rate Conversion
C. Commitment Charge (bps) From floating to fixed or vice versa; or
(Applied on full amount 15 establish an interest rate cap or collar
of undisbursed balance) Conversion on floating rate.
Options
Currency Conversion
For all or part of both undisbursed
and disbursed loan amounts.

Note: 1 basis point (bp) is equal to 0.01%


Loan charges are reviewed periodically by Board of Directors.
LBL Net Lending Rate
Example:
Interest period: 15 Oct 2009 ̶ 15 Apr 2010 USD
6-month LIBOR ( as of 13 Oct 2009) 0.59563%
Less: Rebate on funding cost margin -0.31%
Effective contractual spread 0.20%
Net lending rate 0.48563%

Example:
Interest period: 15 Oct 2009 ̶ 15 Apr 2010 JPY
6-month LIBOR ( as of 13 Oct 2009) 0.54%
Less: Rebate on funding cost margin -0.35%
Effective contractual spread 0.20%
Net lending rate 0.39%
Comparative Sovereign MDB Loan Charges
(USD) as of 05 August 2009
LIBOR-Based USD Loans
(basis points)
IBRD IADB AfDB EBRD ADB
Fixed Spread
10 years Greater than Greater
Variable or less 10 and up to than 14
Spread 14 years years
Interest Spread:
Contractual Spread 50 50 50 50 95 40 100 20
Risk Premium -- 10 10 15 -- -- --
Funding Cost Margin -33 30 55 75 -4 -16 -- -31
Net Spread over LIBOR (I)
17 90 115 140 91 24 100 -11
Charges:
Commitment Fee -- -- -- -- 25 -- 50 15
Spread Eqv. of
Commitment Fee(II) -- -- -- -- 9 0 17 5
Front-End Fee for IBRD Loans without a Deferred Drawdown Option:
Contractual
Front-End Fee 25 25 25 25 0 0 100 --
Spread Eqv. of
Front-End Fee (III) 3 5 3 2 0 0 10 0
Total Spread-
Equivalent over LIBOR
(I+II+III) 20 95 118 142 100 24 127 -6
7 Source: World Bank Website 05 August 2009
LBL Amortization Schedule Options
Annuity at 10% discount rate * Straight-line Custom-tailored
Installment Installment Installment
Repayment Share Share Share
Date (Expressed in %) Amount (Expressed in %) Amount (Expressed in %) Amount
15 Jun 2015 0.93 465,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Dec 2015 0.97 485,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Jun 2016 1.02 510,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Dec 2016 1.07 535,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Jun 2017 1.13 565,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Dec 2017 1.18 590,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Jun 2018 1.24 620,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Dec 2018 1.31 655,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Jun 2019 1.37 685,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Dec 2019 1.44 720,000.00 2.63 1,315,000.00 1.00 500,000.00
15 Jun 2020 1.51 755,000.00 2.63 1,315,000.00 2.00 1,000,000.00
: : : : : : :
: : : : : : :
: : : : : : :
: : : : : : :
15 Dec 2031 4.65 2,325,000.00 2.63 1,315,000.00 4.00 2,000,000.00
15 Jun 2032 4.88 2,440,000.00 2.63 1,315,000.00 4.00 2,000,000.00
15 Dec 2032 5.12 2,560,000.00 2.63 1,315,000.00 4.00 2,000,000.00
15 Jun 2033 5.38 2,690,000.00 2.63 1,315,000.00 4.00 2,000,000.00
15 Dec 2033 5.66 2,830,000.00 2.63 1,315,000.00 7.00 3,500,000.00
Subtotal 100.00 50,000,000.00 100.00 50,000,000.00 100.00 50,000,000.00

* Any discount rate may be used (before 1 Jan 2007, the discount rate is fixed at 10%).
8 ** Final installment is adjusted.
LBL Amortization Schedule
- Repayment Linked to Disbursement in Tranches
Straight-line Method
Effective Date- 15 Jun 2009- 15 Jun 2011- 15 Dec 2012- 15 Jun 2015-
Due Date % % % % % Total
14 Jun 2009 14 Dec 2009 14 Dec 2011 14 Jun 2013 14 Dec 2015
1 15-Dec-2009 Grace
2 15-Jun-2010 Grace Grace
3 15-Dec-2010 Grace Grace
4 15-Jun-2011 Grace Grace
5 15-Dec-2011 Grace Grace
6 15-Jun-2012 Grace Grace Grace Grace
7 15-Dec-2012 Grace Grace Grace Grace
8 15-Jun-2013 Grace Grace Grace Grace
9 15-Dec-2013 Grace Grace Grace Grace
10 15-Jun-2014 Grace Grace Grace Grace
11 15-Dec-2014 Grace Grace Grace Grace
12 15-Jun-2015 Grace Grace Grace Grace
13 15-Dec-2015 Grace Grace Grace Grace Grace 131,578.95
14 15-Jun-2016 1/38 131,578.95 Grace Grace Grace Grace 394,736.84
15 15-Dec-2016 1/38 131,578.95 1/38 263,157.89 Grace Grace Grace 394,736.84
16 15-Jun-2017 1/38 131,578.95 1/38 263,157.89 Grace Grace Grace 394,736.84
17 15-Dec-2017 1/38 131,578.95 1/38 263,157.89 Grace Grace Grace 394,736.84
18 15-Jun-2018 1/38 131,578.95 1/38 263,158.00 1/38 394,736.84 Grace Grace 789,473.84
: : : : : : : : : : : : :
: : : : : : : : : : : : :
46 15-Dec-2032 1/38 131,578.95 1/38 263,157.89 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 1,315,789.47
47 15-Jun-2033 1/38 131,578.95 1/38 263,157.89 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 1,315,789.47
48 15-Dec-2033 1/38 131,578.95 1/38 263,157.89 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 1,315,789.47
49 15-Jun-2034 1/38 131,578.95 1/38 263,157.89 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 1,315,789.47
50 15-Dec-2034 1/38 131,578.95 1/38 263,157.89 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 1,315,789.47
51 15-Jun-2035 1/38 1/38 263,157.07 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 1,315,789.47
52 15-Dec-2035 1/38 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 921,052.63
53 15-Jun-2036 1/38 1/38 394,736.84 1/38 131,578.95 1/38 394,736.84 921,052.63
54 15-Dec-2036 1/38 1/38 394,737.84 1/38 131,578.95 1/38 394,736.84 921,052.63
: : : : : : : : : : : : :
62 15-Dec-2040 1/38 1/38 394,736.92 394,736.92
TOTAL 38/38 5,000,000.00 38/38 10,000,000.00 38/38 15,000,000.00 38/38 5,000,000.00 38/38 15,000,000.00 50,000,000.00

9
LIBOR-based loan (LBL): Main Features for
Sovereign borrowers
••USD Other currencies
USD
••JPY in which ADB
JPY
••Euro can efficiently
Euro
intermediate Fixed
Fixedatatloan
loansigning
signing
Fixed
Fixed •• Annuity
Annuity
Rate
Rate •• Straight-line
Straight-line
SRF
SRF •• Custom-tailored
SRF
SRF Custom-tailored
by
by Currency
Currency •• Bullet
by
by Bullet
Amount
Amount Composition
Composition
Period
Period
Interest
Interestrate
rate
Conversion Amortization Linked to
Conversion Amortization
Schedule actual
Schedule disbursements

Currency
Currency Conversion
Conversion
Conversion
Conversion Options
Options
LBL
LBL
Front-end
Front-end
Fee
Fee
Waiver
Waiver

Local
Local
Currency Cap
Currency Capand
and
Conversion
Conversion Collar
Collar Commitment
Commitment
Charge Waiver
Waiver
Charge

6-month
6-monthLIBOR
LIBOR//
6-month EURIBOR/ Lending Effective
Effective
6-month EURIBOR/ Cost
CostBase
Base Lending
Floating Rate Contractual
Contractual
Floatingrate
rate Rate
Rate Rate
benchmark
benchmarkfor forother
other
Spread
Spread
currencies
currencies

Rebate
Rebateor
or Rebate
Rebateor
or
Surcharge
Surcharge Waiver*
Waiver* Surcharge
Surcharge

10 * Applicable only to sovereign LBLs that carry a lending spread of 0.60% per annum.
Risk Management

Currency Risk Interest Rate Risk

11
Risk
Management
LBL Risk Management Features

On behalf of borrowers, ADB accomplishes risk


management activities through the use of interest
rate and cross currency swaps and other derivatives

12
Risk
Management
ADB’s Advantages
By using the interest rate and currency conversion and
options embedded in LBL, borrowers enjoy the following
main advantages:
¾ ADB’s AAA Credit Rating ensures that the borrower get favorable
pricing and terms with no additional credit spread/premium
charges.
¾ Since such derivatives features are embedded in the LBL product,
they are considered an integral part of the loan, therefore, no
additional credit approval is required for such request.
¾ ADB’s transparent cost-pass through treatment ensures that the
borrower achieve satisfactory terms and pricing and take full
advantages of ADB’s extensive and sound banking networks.
¾ ADB is not profit-driven but aims to help the borrowers to achieve
their debt management goals using available risk management
features under LBL.
Risk
Management Interest Rate Conversions

With LBL,
Borrowers may change the interest rate basis of their loan at
any time following disbursement

¾ For all or part of disbursed balance or remaining life


¾ After conversion new lending rates would reflect cost
of corresponding hedge transaction
LBL Net Lending Rate – after conversion
Before Conversion
Example:
Interest period: 15 Oct 2009 ̶ 15 Apr 2010 USD
6-month LIBOR ( as of 13 Oct 2009) 0.59563%
Less: Rebate on funding cost margin -0.31%
Effective contractual spread 0.20%
Net lending rate 0.48563%
After Conversion to Fixed Interest rate

Example:
Interest period: 15 Oct 2009 ̶ 15 Apr 2010 USD
“Fixed” interest Rate based on loan amortization ( as of 3.63%
13 Oct, 2009)
Less: Rebate on funding cost margin -0.31%
Effective contractual spread 0.20%
Net lending rate 3.52%
Risk
Management Currency Conversions
With LBL,
¾ Borrowers may change the denomination of their
original loan to Euro, JPY, USD, GBP, AUD, NZD or any
currency that ADB can successfully intermediate.

¾ Available for:
ƒ Un-disbursed and/or disbursed balances
ƒ Full or partial maturity
¾ Borrower may also choose to convert the original loan
currency to its local currency provided:
ƒ Loan is fully disbursed and outstanding
ƒ Currency Swap is available in such local market
Considerations during loan conversion
decision making process

¾ Asset-Liability Management
¾ Target / Benchmark portfolio
¾ Currency and Interest rate composition
¾ Capacity and management of internal
operations (ex: process and procedures, accounting, valuation,
accountability, system, staff)

¾ Market movements (ex: timing, current rates, yield curve,


volatility, opportunity gain/loss or risk based decision, scenario
analysis)

17
Conversions and local currency financing to date
USD Equivalent
Country CCY # of Trans. (mln) Loan / Project

INTEREST RATE CONVERSIONS


Afghanistan USD 1 33.33 Roshan Phase III Expansion Project
Malaysia USD 4 21.75 Klang River Basin Environmental Improvement and Flood Mitigation Project
Technical Education
Mongolia USD 1 8.00 Khan Bank
Philippines USD 6 1,007.58 Masinloc Power Partners Company Ltd.
Development Policy Support Program
Financial Market Regulation and Intermediation Program
Power Sector Development Program
Manila North Tollways Corporation
People's Republic of China USD 11 36.46 Chengdu Water Project
Sri Lanka USD 1 10.00 People's Leasing Company Ltd.
Viet Nam USD 1 19.55 State-owned Enterprise Reform and Corporate Governance Program
Philippines JPY 5 23.67 Development of Poor Urban Communities Sector
Fund for Technical Education and Skills Development
Indonesia IDR 1 13.01 West Jakarta Water Supply Development
India INR 10 98.56 Tata Power Wind Energy Financing Facility
Power Links Transmisson Limited
People's Republic of China CNY 1 22.23 Municipal Gas Infrastructure Development Project

TOTAL 42.00 1,294.14

LOCAL CURRENCY FINANCING (Loans / Conversions)


Indonesia USD-IDR 1 49.32 West Jakarta Water Supply Development
India USD-INR 3 171.13 Dahej Liquefied Natural Gas Terminal Expansion
Tata Power Wind Energy Financing Facility
INR Bond 2 93.05 Dewan House Finance Corp.
Power Links Transmisson Limited
Kazakhstan KZT Bond 1 48.56 JSC Bank Center Credit
People's Republic of China CNY Bond 1 22.23 Municipal Gas Infrastructure Development Project
Philippines PHP Bond 1 45.47 Balikatan Housing Finance Inc.
USD-PHP 2 62.38 Manila North Tollways Corporation
Masinloc Power Partners Company Ltd.
TOTAL 11.00 492.14
Overview Agenda

¾ Overview of ADB’s Financial Products for OCR Borrowers

¾ LIBOR-Based Loan (LBL) - Risk Management Features

¾ Local Currency Loan (LCL)

¾ Debt Management Products

19
Availability of the LCL Product
• Both public and private sector borrowers are
eligible for the LCL product
• The LCL product is now becoming available
in a number of member countries
2004
• India
2005
• China, People’s Republic of
• Philippines
2006
• Indonesia
2007
• Kazakhstan
Rationale for Introducing the LCL

• Increased choice and flexibility for Borrowers


• Reducing currency mismatches
• Catalyzing local currency financing
cooperating closely with local financial
institutions
• Furthering capital market development
through ADB local currency funding activities
Main Funding Options
• ADB has two main funding options to source local
currency, subject to approvals by the Government:
- ADB bond issues
- Cross-currency swaps with commercial
counterparties

• ADB will work with the market, the borrower and the
Government to determine the most cost-efficient
funding option
Pricing: Sovereign-guaranteed Loans

Lending rate: Cost base rate + Lending spread

Cost base rate: comprises ADB’s cost of


funding transaction, including related swap
costs
Effective Contractual Spread: 20 basis
points*
Commitment charge: 15 basis points on
undisbursed portion of the loan*

* Before rebates/surcharges.
Pricing: Non-Sovereign
guaranteed Loans

Lending rate: Cost base rate + Lending spread

Lending spread and other Fees1: Market-based

1 Other fees includes front-end fee and commitment charge


Debt Management Products :
Background

¾ Debt management products include interest


rate swaps and cross currency swaps
¾ Until recently, ADB only offered such products
in conjunction with its own loans
¾ Sovereigns requested ADB to intermediate
such swaps also for their third-party liabilities
¾ ADB’s Board approved this new product in
November 2006

25
What product is offered?

¾ ADB offers to intermediate interest rate or currency


swaps for the sovereign’s debt portfolio
¾ Such third-party liabilities include loans from
commercial financial institutions, outstanding bond
issues or bilateral loans (e.g. JBIC)
¾ ADB’s debt management products are only available
in conjunction with hedging requests linked to actual
liabilities to prevent speculative trades.

26
Benefits for the DMCs
Bypass the minimum credit rating requirement for the
comprehensive access of the debt management products.
Sovereign Credit Ratings Table (as of 9 October 2009 )
Country Long-Term Foreign Country Long-Term Foreign
Currency Rating Currency Rating
P.R. China A+ Viet Nam BB
Malaysia A- Cook Islands BB
Papua New Guinea B+ Indonesia BB-
Fiji B- Philippines BB-
Mongolia BB- Kazakhstan BBB-
Pakistan B- India BBB-
Sri Lanka B Thailand BBB+
Turkmenistan1 B2 Georgia B
Armenia1 Ba2 Azerbaijan1 Ba1

Source: Bloomberg; All ratings by S&P, except where indicated 1by Moody’s:
When to Use ADB Debt Products?

¾ Government may have a target sovereign benchmark


with respect to currencies and mix of floating/fixed
rates

¾ ADB debt products can help to rebalance the existing


portfolio to move closer to sovereign’s target portfolio

28
Required Actions for using debt
management products

¾ The client must submit formal request for such


debt management products with sound
justification and rationale.
¾ The client must enter into a Agreement with
ADB.
¾ One of the critical provisions in the agreement
is a cross-default clause linking the client’s
obligations under the debt management
products and all outstanding loans from ADB.

29
Summary

¾ LIBOR-Based Loans provide flexible embedded


options for managing interest rate and currency
risk
¾ ADB is offering sovereign clients debt management
products for their third-party liabilities

30
Thank You.

31
Appendix

¾ LBL Conversion Transaction fees


¾ Debt Management Products pricing
¾ Information on USD interest rate

32
LBL Conversion Transaction fees

Currency Conversions
¾ Un-disbursed loan amounts 0.0625%
¾ Disbursed loan amount 0.125%
¾ Local Currency conversion 0.02% p.a.

Interest Rate Conversions


¾ Initial rate fixings for up to the full maturity
of the loan for amounts up to the
outstanding loan amount No charge
¾ Additional rate fixing/unfixing 0.0625%

Interest Rate Caps and Collars 0.0625%


-----------------------------------------------------------------------------------------------
Conversion fees are expressed as percentage of the principal amount involved and it is a one-time fee
payable at the time of conversion except for local currency conversions.
For Local currency conversion, an annual fee of 0.02% of the outstanding principal hedged amount will
be charged to the borrower.

33
ADB’s Pricing on Debt Management Products
For debt management products on third-party
liabilities, ADB charges:

¾Interest Rate Swaps: 2 basis points per


annum of Principal amount being hedged

¾Cross Currency Swaps: 5 basis points per


annum of Principal amount being hedged

34
ADB’s Pricing on Debt Management Products
An Example for third-party interest rate swap:

Third party loan data:


¾ Third party loan is USD 10million with remaining life of 10 years
¾ Interest rate for this loan is floating rate based on 6m LIBOR
¾ Interest payment dates are every January 15 and July 15.

Client’s request for Interest rate fixing:


¾ The client request ADB to fix the interest rate for the entire
maturity of the loan via interest rate swap.

Pricing and Cashflow:


¾ The resulting fixed interest rate required by the interest rate swap
is 4%
¾ ADB charges 2bps per annum for this interest rate swap.
¾ Therefore, the client will pay 4.02% to ADB on every January 15
and July 15 by receiving 6m LIBOR from ADB.
USD 6 Month LIBOR : 1989-2009

36
USD 7 year Swap FIX Rate :1997-2009

37
Historical Yield Spread : USD 7 year Swap FIX rate
vs USD 6 month LIBOR

38
USD Swap yield curves

39
USD Bond Yield Forecast from Bloomberg

40