LIBOR-Based Loan (LBL)

• Treasury Department• Controller’s Department• Office of the General Counsel

Introduction to Maturity-based Pricing

Agenda

Main Features of LBL

Maturity-based Pricing

• Background and Rationale

• Maturity Premium

• Average Loan Maturity

• Repayment Terms

Sample Calculations

Comparison with MDBs

Summary

Q & A

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LBL Main Features

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Background

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In the past, ADB has not differentiated its sovereign loan pricing according to the tenor of its loans.

Same lending spread is charged for a loan with 10-year maturity and 25-year maturity

Issues:• Price distortions• Lack of incentives to optimize loan terms• De facto subsidization among borrowers

Rationale

Consistent with the pricing practices in the financial markets

Encourages borrowers to select a debt management approach driven more by a cost-benefit analysis

Improves economic efficiency, ensuring maturity and repayment profile of a loan properly reflect the actual cash flow requirements of the project

Eliminates the de facto subsidies that are implicit in the undifferentiated pricing structure.

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Maturity Premium(Sovereign and sovereign-guaranteed borrowers, other than project design facility)

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Average Loan MaturityMaturity Premiuma

Less than or equal to 13 years NIL

Greater than 13 years up to 16 years 0.10%

Greater than 16 years up to 19 years 0.20%

• Applicable to loans for which formal loan negotiations are completed on or after 1 April 2012

• The average loan maturity is subject to a limit of 19 years.

a To be applied for the entire life of the loan

Average Loan Maturity

The weighted average time to repay a loan.

Considers both repayment dates and amounts to provide a better estimation of how quickly a loan is repaid

Average Loan Maturity = Sum of Weighted Repayments

Sum of Total Repayments

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Sample Calculation of Average Loan Maturity

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Loan Amount: US$ 60 millionLoan Term (inc. Grace Period):5 yearsGrace Period: 2 yearsRepayment Term: Straight-Line

Semi-Annual Frequency

Principal Repayments

Weighted Repayments

(A) (B) C = (A x B)Grace Period0.501.001.502.00Repayment Period2.50 10.00 25.00 3.00 10.00 30.00 3.50 10.00 35.00 4.00 10.00 40.00 4.50 10.00 45.00 5.00 10.00 50.00

Sum 60.00 225.00

3.75 years= Sum of C / Sum of B= 225.00 / 60.00 Average Loan Maturity

LBL Repayment Terms - Considerations

Economic life of the project

Financial condition of the borrower

Revenue earning capacity of project

Debt service capacity of borrowing DMC

Borrower Flexibility to tailor repayment terms during loan

preparations

Repayment schedules cannot be changed after loan

signing

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Fixed at loan signing Annuity with discount rate in any percentages

Straight-line

Bullet repayment

Custom-tailored repayment

Linked to disbursement in tranches Straight-line

LBL Repayment Terms

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Repayment Terms

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Repayment Methods Annuity 'A' Annuity 'B'

Discount Rate : 10.00% 5.00%

11.05 10.66 10.25 10.70 15.00Time

(Years)Repayment Date

0.5-5.0 Oct-15-2012 to Apr-15-2017

5.5 Oct-15-2017 1,814,555 2,348,828 3,000,000 2,000,000

6.0 Apr-15-2018 1,905,283 2,407,548 3,000,000 2,000,000

6.5 Oct-15-2018 2,000,547 2,467,737 3,000,000 2,500,000

7.0 Apr-15-2019 2,100,574 2,529,431 3,000,000 2,500,000

7.5 Oct-15-2019 2,205,603 2,592,666 3,000,000 2,500,000

8.0 Apr-15-2020 2,315,883 2,657,483 3,000,000 2,500,000

8.5 Oct-15-2020 2,431,678 2,723,920 3,000,000 3,000,000

9.0 Apr-15-2021 2,553,261 2,792,018 3,000,000 3,000,000

9.5 Oct-15-2021 2,680,925 2,861,819 3,000,000 3,000,000

10.0 Apr-15-2022 2,814,971 2,933,364 3,000,000 3,000,000

10.5 Oct-15-2022 2,955,719 3,006,698 3,000,000 3,000,000

11.0 Apr-15-2023 3,103,505 3,081,866 3,000,000 3,000,000

11.5 Oct-15-2023 3,258,680 3,158,912 3,000,000 3,500,000

12.0 Apr-15-2024 3,421,615 3,237,885 3,000,000 3,500,000

12.5 Oct-15-2024 3,592,695 3,318,832 3,000,000 3,500,000

13.0 Apr-15-2025 3,772,330 3,401,803 3,000,000 3,500,000

13.5 Oct-15-2025 3,960,947 3,486,848 3,000,000 3,500,000

14.0 Apr-15-2026 4,158,994 3,574,019 3,000,000 3,500,000

14.5 Oct-15-2026 4,366,944 3,663,370 3,000,000 3,500,000

15.0 Apr-15-2027 4,585,291 3,754,954 3,000,000 3,500,000 60,000,000

Total 60,000,000 60,000,000 60,000,000 60,000,000 60,000,000

Custom

Average Loan Maturity

Bullet

Grace Period

Straight / Equal

Loan Amount:US$ 60 million

Loan Term(inc. Grace Period):15 years

Grace Period:5 years

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Sample Average Loan Maturity and Maturity Premium Computation:

Loan amount: US$ 60 millionLoan Term(inc. Grace Period): 20 yearsGrace Period: 5 years

Average Loan Maturity (10% Annuity):14.52 yearsMaturity Premium:0.10%

Average Loan Maturity (Equal Repayments):12.75 yearsMaturity Premium:NIL

Repayment Methods Annuity 'A'Discount Rate : 10.00%

14.52 12.75Time

(Years)Repayment Date 0.10 % Premium NIL

Start Apr-15-2012

0.5-5.0 Oct-15-2012 to Apr-15-2017

5.5 Oct-15-2017 903,086 2,000,000

6.0 Apr-15-2018 948,240 2,000,000

6.5 Oct-15-2018 995,652 2,000,000

7.0 Apr-15-2019 1,045,435 2,000,000

7.5 Oct-15-2019 1,097,707 2,000,000

8.0 Apr-15-2020 1,152,592 2,000,000

8.5 Oct-15-2020 1,210,222 2,000,000

9.0 Apr-15-2021 1,270,733 2,000,000

9.5 Oct-15-2021 1,334,269 2,000,000

10.0 Apr-15-2022 1,400,983 2,000,000

10.5 Oct-15-2022 1,471,032 2,000,000

11.0 Apr-15-2023 1,544,584 2,000,000

11.5 Oct-15-2023 1,621,813 2,000,000

12.0 Apr-15-2024 1,702,904 2,000,000

12.5 Oct-15-2024 1,788,049 2,000,000

13.0 Apr-15-2025 1,877,451 2,000,000

13.5 Oct-15-2025 1,971,324 2,000,000

14.0 Apr-15-2026 2,069,890 2,000,000

14.5 Oct-15-2026 2,173,384 2,000,000

15.0 Apr-15-2027 2,282,054 2,000,000

15.5 Oct-15-2027 2,396,156 2,000,000

16.0 Apr-15-2028 2,515,964 2,000,000

16.5 Oct-15-2028 2,641,762 2,000,000

17.0 Apr-15-2029 2,773,850 2,000,000

17.5 Oct-15-2029 2,912,543 2,000,000

18.0 Apr-15-2030 3,058,170 2,000,000

18.5 Oct-15-2030 3,211,079 2,000,000

19.0 Apr-15-2031 3,371,633 2,000,000

19.5 Oct-15-2031 3,540,214 2,000,000

20.0 Apr-15-2032 3,717,225 2,000,000

Total 60,000,000 60,000,000

Straight / Equal

Average Loan Maturity

Average Loan Maturity Table(Annuity-type Repayment – 10% Annuity)

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1 2 3 4 5 6 7 812345 3.38 3.82 4.28 4.76 6 3.95 4.38 4.82 5.28 5.76 7 4.54 4.95 5.38 5.82 6.28 6.76 8 5.14 5.54 5.95 6.38 6.82 7.28 7.76 9 5.76 6.14 6.54 6.95 7.38 7.82 8.28 8.76

10 6.40 6.76 7.14 7.54 7.95 8.38 8.82 9.28 11 7.05 7.40 7.76 8.14 8.54 8.95 9.38 9.82 12 7.71 8.05 8.40 8.76 9.14 9.54 9.95 10.38 13 8.39 8.71 9.05 9.40 9.76 10.14 10.54 10.95 14 9.09 9.39 9.71 10.05 10.40 10.76 11.14 11.54 15 9.79 10.09 10.39 10.71 11.05 11.40 11.76 12.14 16 10.52 10.79 11.09 11.39 11.71 12.05 12.40 12.76 17 11.25 11.52 11.79 12.09 12.39 12.71 13.05 13.40 18 12.00 12.25 12.52 12.79 13.09 13.39 13.71 14.05 19 12.76 13.00 13.25 13.52 13.79 14.09 14.39 14.71 20 13.53 13.76 14.00 14.25 14.52 14.79 15.09 15.39 21 14.31 14.53 14.76 15.00 15.25 15.52 15.79 16.09 22 15.11 15.31 15.53 15.76 16.00 16.25 16.52 16.79 23 15.91 16.11 16.31 16.53 16.76 17.00 17.25 17.52 24 16.73 16.91 17.11 17.31 17.53 17.76 18.00 18.25 25 17.55 17.73 17.91 18.11 18.31 18.53 18.76 19.00 26 18.39 18.55 18.73 18.91

Loan Term(inc. Grace period)

Grace Period

Loan Term(inc. Grace Period): 20 yearsGrace Period: 5 years

Average Loan Maturity (10% Annuity):14.52 years

Average Loan MaturityMaturity Premium

≤ 13 years NIL

> 13 years up to 16 years 0.10%

> 16 years up to 19 years 0.20%

Average Loan Maturity Loan (Equal Repayments)

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1 2 3 4 5 6 7 812345 3.25 3.75 4.25 4.75 6 3.75 4.25 4.75 5.25 5.75 7 4.25 4.75 5.25 5.75 6.25 6.75 8 4.75 5.25 5.75 6.25 6.75 7.25 7.75 9 5.25 5.75 6.25 6.75 7.25 7.75 8.25 8.75

10 5.75 6.25 6.75 7.25 7.75 8.25 8.75 9.25 11 6.25 6.75 7.25 7.75 8.25 8.75 9.25 9.75 12 6.75 7.25 7.75 8.25 8.75 9.25 9.75 10.25 13 7.25 7.75 8.25 8.75 9.25 9.75 10.25 10.75 14 7.75 8.25 8.75 9.25 9.75 10.25 10.75 11.25 15 8.25 8.75 9.25 9.75 10.25 10.75 11.25 11.75 16 8.75 9.25 9.75 10.25 10.75 11.25 11.75 12.25 17 9.25 9.75 10.25 10.75 11.25 11.75 12.25 12.75 18 9.75 10.25 10.75 11.25 11.75 12.25 12.75 13.25 19 10.25 10.75 11.25 11.75 12.25 12.75 13.25 13.75 20 10.75 11.25 11.75 12.25 12.75 13.25 13.75 14.25 21 11.25 11.75 12.25 12.75 13.25 13.75 14.25 14.75 22 11.75 12.25 12.75 13.25 13.75 14.25 14.75 15.25 23 12.25 12.75 13.25 13.75 14.25 14.75 15.25 15.75 24 12.75 13.25 13.75 14.25 14.75 15.25 15.75 16.25 25 13.25 13.75 14.25 14.75 15.25 15.75 16.25 16.75 26 13.75 14.25 14.75 15.25 15.75 16.25 16.75 17.25 27 14.25 14.75 15.25 15.75 16.25 16.75 17.25 17.75 28 14.75 15.25 15.75 16.25 16.75 17.25 17.75 18.25 29 15.25 15.75 16.25 16.75 17.25 17.75 18.25 18.75 30 15.75 16.25 16.75 17.25 17.75 18.25 18.75

Grace Period

Loan Term(inc. Grace period)

Average Loan MaturityMaturity Premium

≤ 13 years NIL

> 13 years up to 16 years 0.10%

> 16 years up to 19 years 0.20%

Loan Term(inc. Grace Period): 20 yearsGrace Period: 5 years

Average Loan Maturity (Equal Repayments):12.75 years

Comparison of Current and Revised ADB, and Current IBRD Loan Pricing (in basis points)

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ItemADB

(Current)

ADB (Revised) IBRDa

≤ 13 years

> 13 years up to 16 years

> 16 years up to 19 years

up to12 years

12–15years

15–18years

A. Interest Spread          

1. Contractual spread 40 40 40 40 50 50 50

2. Maturity premium   10 20   10 20

3. Funding cost marginb (21) (21) (21) (21) (21) (21) (21)

4. Net spread over LIBOR (I) 19 19 29 39 29 39 49

(A.1 + A.2 + A.3)        

B. Commitment Charge 15 15 15 15      

Spread equiv. – commit. chargec (II)  10 13 12 11      

C. Front-End Fee     25 25 25

Spread equiv. of front-end feec (III)    5 4 4            D. Total Spread Equiv. over LIBOR (I + II + III) 29 32 41 50 34 43 53

a IBRD uses a variable spread loan charge based on average loan maturity.b Funding cost margin as of 1 July 2011c Based on disbursement profiles and repayment terms and could vary across MDBs.

Source: ADB Treasury Department.

(for loan with formal negotiations completed on or after 1 April 2012)Loan Charges Basis %

A. Net Lending Rate

Cost Base Rate Adjusted every 6 months 6-month LIBOR

Effective Contractual Spread

Fixed for the life of the loan(Loan Negotiation Date)

0.40%

Maturity PremiumFixed for the life of the loan

(Average Loan Maturity)

≤ 13 years NIL>13 years up to 16 years 0.10%> 16 years up to 19 years 0.20%(with limit of 19 years average loan maturity)

Rebate/Surcharge on Funding Cost Margin

Adjusted every 6 months(ADB calculation)

-0.19% (Applicable for 1 Jan – 30 Jun

2012)

B. Commitment ChargeApplied on full amount of

undisbursed balance0.15%

C. Front-End Fee (FEF) Eliminated J̶

Loan Charges (US$)(Sovereign and Sovereign-guaranteed LBLs)

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LBL Net Lending Rate(Sample pricing for a sovereign loan with a 15-year average loan maturity)

USDCost base rate 6-month LIBOR

Effective contractual spread 0.40%

Maturity premium 0.10%

Less: Rebate on funding cost margin -0.19%

Net lending rate 6-month LIBOR + 0.31%

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(for loan with formal negotiations completed on or after 1 April 2012)

Loan Processing

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• Borrowers should be notified by the project team of the applicability of the maturity premium as early as possible in the loan processing cycle.

• The maturity premium for a proposed LBL should be agreed with the Borrower during the loan fact-finding mission and reflected in the memorandum of understanding or aide-memoire for the fact-finding mission.

Summary

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• Applicable to loans with formal negotiations completed on or after 1 April 2012

• The average loan maturity is subject to a limit of 19 years.

Average Loan MaturityMaturity Premium

Less than or equal to 13 years NIL

Greater than 13 years up to 16 years 0.10%

Greater than 16 years up to 19 years 0.20%

A. Maturity-based Pricing

B. Choice of Repayment Terms is an important consideration given its effect on Average Loan Maturity

C. Project team should discuss with the borrower on the applicability of maturity premium in the early stage of loan processing.

Thank you.

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