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World Bank Debt Servicing

Handbook

Loan Services GroupAccounting Department

The World Bank

March 2005

Contents

ii

List of Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi

I World Bank Lending Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1A. Investment loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1B. Development policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

II Project Preparation Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

III Financial Products and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5A. IBRD Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

1. Fixed-Spread Loans (FSLs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52. Deferred Drawdown Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83. Variable-Spread Loans (VSLs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94. Currency Pool Loans (CPLs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105. IBRD Hedging Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

B. IDA development Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13C. World Bank Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

1. IBRD Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142. IDA Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153. Fees & Pricing on World Bank Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

D. IDA Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

IV Overdue and Sanction Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17A. Reminders and Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

V Partial Waiver of Loan Charges Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

VI Prepayment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22A. IBRD Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22B. IDA Development Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

VII Billing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

VIII Frequently Asked Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

AttachmentsA. Currency Pool Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35B. Prepayment of IBRD Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Bibliography and other useful information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

iii

Abbreviations and Acronyms

iv

ACTCF Accounting Department, Loan Client Services Group AER Applicable Exchange RateAPL Adaptable Programmatic LoansARF Automatic Rate FixingCPA Currency Purchase AgreementCPL Currency Pool LoanDDO Deferred Drawdown OptionDPL Development Policy LoanDSL Debt Sustainability AnalysisERL Emergency Recovery LoanEUR EuroFEF Front-End FeeFIL Financial Intermediary LoanFSCL Fixed Rate Single Currency LoanFSL Fixed-Spread LoanIBRD International Bank for Reconstruction and DevelopmentIDA International Development AssociationIMF International Monetary FundJPY Japanese YenLIBOR London Inter-Bank Offered RateLIL Learning and Innovation LoanLLDCs Least Developed CountriesLRP Level Repayment of PrincipalMDA Master Derivative AgreementPPF Project Preparation FacilityPSAL Programmatic Structural Adjustment LoanRIL Rehabilitation LoanSAL Structural Adjustment LoanSCP Single Currency Pool LoanSDRs Special Drawing RightsSECAL Sector Adjustment LoanSIL Specific Investment LoanSIM Sector Investment and Maintenance LoanSDPL Special Development Policy LoanSNAL Subnational Adjustment Loan

TAL Technical Assistance LoanTTL Task Team LeaderUSD United States DollarVLR Variable Lending RateVSL Variable-Spread Loan

v

Introduction

This Handbook is designed as a resource forborrowers and World Bank staff who wish tounderstand the World Bank’s policies and pro-cedures regarding debt servicing on its finan-cial products. These products include loans,credits, guarantees, and hedging products.

The Accounting Department is responsi-ble for administering the accounts of WorldBank borrowers. The Loan Services Group ofthe Accounting Department (ACTCF) pro-vides information and technical assistance toborrowers and World Bank staff, as necessary,to enable them to understand matters relatedto debt servicing.

In this Handbook, the term World Bankrefers collectively to the International Bank for

Reconstruction and Development (IBRD) andthe International Development Association(IDA). Where the discussion pertains to onlyone of these entities, that entity is explicitlynamed.

Loan Services GroupAccounting Department

The World Bank1818 H Street, N.W.

Washington, D.C. 20433Telephone: 202-458-8330Facsimile: 202-522-3428

Email: [email protected]

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Chapter I

World Bank Lending Instruments1

The World Bank has two broad categories oflending instruments: investment loans; anddevelopment policy loans.

A. Investment loansInvestment loans have a long-term focus

(5 to 10 years); they finance goods, works, andservices in support of economic and socialdevelopment projects in a broad range of sec-tors. Funds are disbursed against specific for-eign or local expenditures related to the invest-ment project, including pre-identified civilworks, equipment, materials, technical andconsulting services, and incremental recurringcosts. Investment loans are available to IBRDand IDA borrowers not in arrears with theWorld Bank. Over the past two decades, invest-ment lending has accounted, on average, for75-80% of total Bank lending. Currently, seventypes of investment lending instruments areavailable:

Adaptable Programmatic Loans (APLs)provide phased support for long-term develop-ment programs. They involve a series of loansthat build on lessons learned from the previousloan(s) in the series. APLs entail agreementbetween the borrower and the World Bank on(a) the phased long-term development pro-gram supported by the loan, (b) sector policiesrelevant to the supported phase, and (c) prior-ities for sector investments and recurrent

expenditures. Progress in each phase of the pro-gram is reviewed and evaluated, and additionalanalysis undertaken as necessary, before thesubsequent phase is initiated.

Emergency Recovery Loans (ERLs) sup-port the restoration of assets and productionlevels immediately after an extraordinaryevent—such as war, civil disturbance, or natu-ral disaster—that seriously disrupts a bor-rower’s economy. They are also used tostrengthen the management and implementa-tion of reconstruction efforts and to developdisaster-resilient technology and early warningsystems to prevent or mitigate the impact offuture emergencies.

Financial Intermediary Loans (FILs) pro-vide long-term resources to local financialinstitutions to finance real sector investmentneeds. FILs support financial sector reforms—interest rate policies, subsidies, measures toenhance financial system competitiveness,institutional development of financial inter-mediaries—that have a direct and substantialbearing on the operational efficiency of finan-cial intermediaries.

Learning and Innovation Loans (LILs)support small pilot-type investment andcapacity-building projects that, if successful,could lead to larger projects that would main-stream the learning and results of the LIL. Typ-ically, LILs do not exceed USD 5 million; they

1

are generally implemented over 2 to 3 years.All LILs include an effective monitoring andevaluation system to capture lessons learned.

Specific Investment Loans (SILs) supportthe creation, rehabilitation, and maintenanceof economic, social, and institutional infra-structure. In addition, SILs may finance con-sultant services and management and trainingprograms.

Sector Investment and MaintenanceLoans (SIMs) focus on public expenditureprograms in particular sectors. They aim tobring sector expenditures, policies, and per-formance in line with a country’s developmentpriorities by helping to create an appropriatebalance among new capital investments, reha-bilitation, reconstruction, and maintenance.

Technical Assistance Loans (TALs) pro-vide technical assistance to the borrower tobuild institutional capacity, with a focus onorganizational arrangements, staffing meth-ods, and technical, physical, or financialresources in key agencies.

B. Development policy loansDevelopment policy loans (DPLs) have a

short-term focus (1 to 3 years); they providequick-disbursing external financing to supportpolicy and institutional reforms. DPLs ensureexpedited assistance to countries with externalfinancing needs to support structural reforms.They support the policy and institutionalchanges needed to create an environment con-ducive to sustained and equitable growth.Over the past two decades, development policylending has accounted, on average, for 20-25%of total Bank lending.

On August 9, 2004, the Bank’s ExecutiveDirectors approved OP/BP 8.60, DevelopmentPolicy Lending,2 after extensive consultationswith both internal and external Bank stake-holders. The new policy uniformly applies toall development policy lending, thus eliminat-ing the distinctions among structural adjust-ment loans (SALs), sector adjustment loans(SECALs), subnational adjustment loans(SNALs), rehabilitation loans (RILs), and pro-grammatic structural adjustment loans(PSALs). The new policy also eliminates allprescriptive provisions of the policy on thecontent of the operations, providing space forstaff to assist countries in developing appro-priate programs suited to their specific devel-opment challenges. These changes will allowthe Bank to respond more effectively to thefinancing and development needs of our clientcountries. The term “development policy lend-ing” replaces “adjustment lending.” Develop-ment policy lending is also the sole instrumentfor policy-based lending.

Some key principles of the previous policyremain intact:

■ The Bank must make an assessmentthat an appropriate macroeconomicpolicy framework is in place.

■ Conditionality is expected to continueto be streamlined, with a limited set ofconditions or triggers (expected prioractions) focusing on those actions mostcrucial for the success of the program.

■ The disbursement procedures and theBank’s auditing rights also remainunchanged.

2 World Bank Debt Servicing Handbook

Chapter II

Project Preparation Facility3

The Project Preparation Facility (PPF)advances money for project preparation whenthere exists a strong probability that the WorldBank will approve a loan for the project. A PPFadvance finances: (a) project preparation anddesign, as well as some initial implementationactivities; (b) the preparation of programs tobe supported by a development policy opera-tion; and (c) the design of training programs,as well as initial local staff training.

Refinancing/RepaymentThe Letter of Agreement between the World

Bank and the borrower details the purposes,terms, and conditions of the PPF advance, andspecifies a date by which the advance must berepaid—either out of the loan proceeds or, ifthe loan is not approved, through other meansof repayment according to a specified sched-uled. The refinancing date is the date on whichthe loan is expected to become effective for theproject under preparation. After this date, nowithdrawals of the advance are made, and anyamount not withdrawn is canceled.

If the loan is not made within the periodspecified in the Letter of Agreement, includingany extensions, the borrower is required torepay the advance (together with accruedinterest and service charges) in semiannualinstallments over the next 5 years (10 pay-ments in total). If the PPF disbursement is

USD 50,000 or less, the borrower is required torepay it in a lump sum within 60 days afternotification to the borrower that the loan willnot be refinanced.

The procedure for billing a PPF involvescoordination among several parties, includingthe Country Department, the Loan Depart-ment, and ACTCF. The assigned Task TeamLeader (TTL) notifies the Loan Client andFinancial Services Group and the Loan Depart-ment that the PPF will not be refinanced. Uponrequest from the TTL, ACTCF provides thedetails of the amount of the advance disbursedand outstanding and the accrued chargesamount. The TTL prepares an official notifica-tion, to be signed by the Country Director,informing the borrower that the PPF will not berefinanced and that billing will follow shortly.Upon receipt of a copy of the official notifica-tion, ACTCF will initiate the billing process.

PPF advances made by IBRD accrue inter-est at the variable six-month LIBOR rate plus afixed spread (see Table 1) in respect of US Dol-lars. For PPF advances by IBRD, the LIBORreset date means, in respect of any InterestPeriod, the day two London Banking Daysprior to January 1 or July 1, whichever dayimmediately precedes the said Interest Period.For PPF advances made by IBRD after August31, 1999, the lending rate is the same as thatapplicable to fixed-spread loans (FSLs).

3

For PPFs negotiated between January 1,1998, and August 31, 1999, the applicable lend-ing rate is the Variable Lending Rate 89(VLR89), the same rate applicable to currencypool loans (CPLs). For additional informationon FSLs and CPLs, refer to Chapter III.

PPF advances made by IDA carry the samerepayment terms as those made by IBRD,except that instead of accruing interest, thePPF advances under IDA carry a flat servicecharge of 75 basis points.


Table 1. Charges on Project Preparation Facility Advances, IBRD

If the PPF Advance was Negotiated: Type of RateBetween January 1, 1998, and August 31, 1999 VLR89 rate*

After August 31, 1999 FSL rate** The VLR89 lending rate is reset semiannually, on January 1 and July 1.It is the same rate applicable to pool loans negotiated between 1989and 2001; it reflects the average cost of currencies disbursed to borrow-ers on their IBRD loans. The FSL lending rate consists of a variable baserate (6-month LIBOR) and a fixed spread. The LIBOR is reset, in respect ofany Interest Period, as the day two London Banking Days prior to January1 or July 1, whichever day immediately precedes the said Interest Period.

Chapter III

Financial Products and Terms4

The terms and conditions differ for IBRDloans and IDA credits.

A. IBRD LoansIBRD currently offers two basic types of

loan terms, each denominated in the currencyor currencies chosen by the borrower providedit is a currency in which IBRD can efficientlyintermediate: fixed-spread loans (FSLs) andvariable-spread loans (VSLs). The terms andconditions of the loans IBRD has offered in thepast, such as currency pool loans (CPLs), stillgovern some outstanding loans.

1. Fixed-Spread Loans (FSLs)5

The fixed-spread loan, introduced in 1999,offers borrowers a variable lending rate consist-ing of the six-month LIBOR and a fixed spread,along with embedded options to convert thecurrency and interest rate of the loan. The fixedspread remains constant over the life of the loan.

The FSL has market-based features,including pricing relative to standard marketreferences. It seeks to achieve the following:

■ provide flexibility to customize repay-ment terms in accordance with projectneeds or the country’s asset-liabilitymanagement strategy;

■ permit conversion of currencies orinterest rate terms throughout the lifeof the loan; and

■ offer a transparent basis for borrowersto compare FSL terms with those ofother lenders.

Under the FSL, the borrower selects thecommitment currency, which becomes part ofthe Loan Agreement. Borrowers may chooseto denominate their FSL in one or more cur-rencies, including Euro, Japanese Yen, USDollar, Swiss Franc, British Pound Sterling,and other currencies that IBRD can efficientlyintermediate.6

At the borrower’s request, the commit-ment currency may be converted to anothercurrency as many times as desired during thelife of the loan. For undisbursed amounts, thisis accomplished through a redenomination ofthe loan. For disbursed and outstandingamounts, currency conversions will reflect themarket rate at which the IBRD’s offsetting cur-rency swap is transacted.

FSLs provide borrowers with the ability tocustomize, within existing financial policy andmarket limits, the following financial terms ofthe loans:

■ Currency composition■ Interest rate■ Repayment terms The FSL Agreement also permits borrow-

ers the option to execute any of the followingactions:

5

■ Change the currency of the loan on dis-bursed and undisbursed amounts.

■ Fix the interest rate on disbursedamounts.

■ Unfix or re-fix the interest rate on dis-bursed amounts.

■ Cap or collar the floating interest rateon disbursed amounts.

Either upon loan commitment or at anytime during the life of the loan, the borrowermay direct the IBRD to implement a series ofautomatic interest rate fixings, either by period(at regular time intervals, such as annually orsemiannually) or by amount (upon reaching acertain level of cumulative disbursements).Automatic rate fixings (ARFs) by amount aresubject to a maximum volume of USD 500million and a minimum volume equal to thehigher of USD 3 million equivalent or 10 per-cent of the loan amount. Exceptions may beconsidered on a case-by-case basis. A borrowercan cancel the ARF at any time during the lifeof the loan.

Repayment TermsRepayment terms on IBRD loans are based

on country criteria, particularly per capitaincome and other country creditworthinessindicators.7 IBRD reviews the country classifi-cation annually. If a country is reclassified, thenew repayment terms apply only to new loancommitments. Existing loans are not affected.

FSL repayment terms are governed by twoparameters: (a) average repayment maturity;and (b) final maturity. Subject to these con-straints, an FSL can be structured to provide: (a)bullet loans (with a single maturity date); (b)amortizing loans with an annuity structure; (c)a level repayment of principal (LRP); or (d) cus-tomized repayment of principal. This flexibilityenables borrowers to tailor their repaymentschedules to the needs of a specific project, pro-gram, or debt management strategy.

There are two repayment schedule choicesavailable for an FSL:

■ a repayment schedule fixed at loancommitment (commitment linked)

■ a repayment schedule linked to actualdisbursements (disbursement linked)

Repayment Schedule for Commitment-linked FSLs

Under a commitment-linked FSL, the bor-rower fixes the length of the grace period andthe timing of principal repayments at the timeof loan commitment. The borrower may spec-ify the repayment schedule as either: (a) a levelrepayment of principal (the same amount ofprincipal is due each period); or (b) an annu-ity-type schedule (the sum of principal andinterest due is relatively stable, varying onlywith adjustments in interest rate or changes inloan amounts disbursed and outstanding).

Borrowers may also choose other repay-ment schedules, such as bullet loans or loanswith customized repayments of principal.These loans are subject to a limit, by countrycategory, on average repayment maturity, withan absolute 25-year maximum limit on finalmaturity. The average repayment maturity for


Table 2. Transaction Fees for HedgingProducts (expressed as a percentage of the principal amount involved)

TransactionTransaction Type FeeInterest Rate Conversion

Rate fixings for up to the full maturity of the loan for amounts up to the outstanding loan amount.* No charge

Additional rate fixing/unfixing 1/8%

Interest Rate Caps and Collars 1/8%

Currency Conversion

Undisbursed loan amounts 1/8%

Disbursed loan amounts 1/4%* Borrowers have the opportunity to obtain a fixed interest rate for thefull original loan amount and maturity without a transaction fee. If theIBRD is unable to obtain an interest rate swap for the full loan maturityand has to execute two interest rate swaps to fix the interest rate for thefull loan maturity, neither interest rate fixing will bear a transaction fee.Transaction fees are subject to change by the World Bank at any time.

commitment-linked FSLs is defined as thetime between expected loan approval andscheduled repayments, weighted by the repay-ment amount (see Table 3).

Repayment Schedule for Disbursement-linked FSLs

Under a disbursement-linked FSL, cumu-lative disbursements (the disbursed amount)made during each six-month period arerepayable on a schedule that commences at thebeginning of the interest period following eachdisbursement. The repayment schedule, alongwith the grace period and final maturity, arespecified in the Loan Agreement and are uni-form for all disbursed amounts under thatloan. Limits for a disbursement-linked repay-ment schedule are set based on the maximumsum of the expected average disbursement andthe average repayment maturity for each dis-bursed amount (see Table 4). The expectedaverage disbursement period is the weightedaverage period of time between loan approvaland expected disbursement. The averagerepayment maturity for this type of loan isdefined as the weighted average period of timebetween the date of disbursement and thescheduled repayments, for a disbursedamount, weighted by the repayment amount.

Lending RatesThe lending rate for an FSL consists of a

variable base rate and a fixed spread. The lend-ing rate is reset semiannually, on each interestpayment date, and applies to the interestperiod beginning on that date.

■ The variable base rate is the six-monthLIBOR as of the beginning of each pay-ment period.

■ The spread reflects the sum of the fol-lowing:• IBRD’s projected funding cost margin

relative to USD LIBOR, plus or minusa basis swap adjustment for non-USDFSLs

Financial Products and Terms 7

Table 3. Limits for IBRD Fixed-Spread Loans with Re1payment Maturities Fixed atLoan Commitment (years)

Policy Limits “Standard” Country Terms

Average Country Repayment Repayment

Category* Maturity Final Maturity Grace Period Final Maturity PatternI-II 14.25 25 5 20 Annuity

or 8 20 LRP

III 11.25 25 4 17 Annuity

or 5 17 LRP

IV-V 10.25 25 3 15 Annuity

or 5 15 LRP* For country categories, see OP 3.10, Annexes C and D, at www.worldbank.org (enter “OPs” in the search line).

Table 4. Limits for IBRD Fixed-Spread Loanswith Repayment Schedules Linked toActual Disbursements (years)

Sum of Expected Average Disbursement

Country Period and Average Final Category* Repayment Maturity Maturity

I-II 14.25 25

III 11.25 25

IV-V 10.25 25* For country categories, see OP 3.10, Annex C and D, at www.worldbank.org (enter “OPs” in the search line).

• IBRD’s standard lending spread of0.75%; and

• a market risk premiumThe market risk premium compensates

the IBRD for refinancing risk, given that thelending spread above LIBOR is fixed and thematurity of IBRD’s borrowings is shorter thanthat of its loans to borrowers.

The basis swap adjustment, applicableonly to non-USD FSLs, is the difference in theIBRD’s sub-LIBOR funding cost margin whenthe IBRD swaps LIBOR-based borrowingsfrom one currency to another. For example,swapping USD LIBOR flat funds into a Japan-ese Yen LIBOR basis may result in IBRDhaving to pay JPY LIBOR minus 10 basispoints. This differential arises due mainly tothe difference in credit ratings of the commer-cial banks that serve as the reference banks forLIBOR in the respective currencies. A basisswap adjustment can be either negative orpositive.

2. Deferred Drawdown OptionA deferred drawdown option (DDO)

allows a borrower to postpone drawing downa loan for a defined drawn period after theloan agreement has been declared effective.IBRD-eligible borrowers may defer disburse-ment of a single- or multiple-tranche develop-ment policy loan for up to 3 years, providedthat overall program implementation and themacroeconomic framework remain adequate.The DDO provides borrowers with the flexi-bility to draw down a loan over an extendedperiod of time in case of a financing shortfall.

PrerequisitesDevelopment policy loans with a DDO are

made within the Country Assistance Strategyenvelope. As with all single- or multiple-tranche development policy operations, theyare based on:

■ a satisfactory macroeconomic frame-work, including sustainability ofdomestic and external debt;

■ up-front completion of specific struc-tural reform measures before Boardpresentation; and

■ receipt by IBRD of an acceptable Letterof Development Policy setting out thegovernment’s objective, program ofactions, and policies designed toachieve structural adjustment.

Drawdown Period and ConditionsA loan with a DDO has a drawdown

period of 3 years, beginning at loan signing.During this period, the borrower may elect todraw on the loan when a financing need arises,provided that:

■ the macroeconomic frameworkremains satisfactory, and

■ the borrower continues to adhere to theoverall program set out in the LDP.

A request for extension for up to 3 moreyears may be considered by the Board if theimplementation of the reform program andthe macroeconomic framework remain satis-factory.

Signing and EffectivenessA Loan Agreement providing for a DDO

must be signed within 6 months after Boardapproval; otherwise, the World Bank will with-draw the loan. All specific policy reform condi-tions for a development policy loan with aDDO must be met before Board presentation.No such conditions will be included as effec-tiveness conditions in the Loan Agreement.

Pricing

Contractual commitment charges on theundisbursed balance of a loan with a DDO are1% per annum. When a loan with a DDO isdrawn down, a front-end fee of one percent ischarged, and normal lending rates and otherFSL financial terms, including loan chargewaivers, will apply. A loan with a DDO forwhich the borrower chooses a 3-year extensionof average repayment maturity is subject to a


0.25 percent per annum interest rate premiumabove the FSL lending rate (see Table 5).

3. Variable-Spread Loans (VSLs)The variable-spread loan (formerly the

variable-rate single currency loan) is denomi-nated in the currency selected by the borrower.It has a variable lending rate based on the six-month LIBOR and a spread that varies everysix months, depending on the IBRD’s cost offunding during the preceding period. As with

an FSL, the borrower may choose to denomi-nate the VSL in one or more currencies.

Lending RatesThe VSL lending rate is based on a direct

cost pass-through formula, consisting of theprevailing LIBOR rate plus or minus IBRD’saverage cost relative to LIBOR, plus IBRD’sstandard lending spread of 0.75 percent (exceptin the case of Special Development PolicyLoans, which have a minimum loan spread of


Table 5. Financial Terms of IBRD Development Policy Loans with a Deferred DrawdownOption (DDO)

Financial Terms Normal-Maturity Loans with a DDO Extended Maturity Loans with a DDOCurrency Any currency that the IBRD can efficiently intermediate.

Drawdown Multiple drawdowns on a single tranche up to the full loan amount at any time withinthree years from loan effectiveness. Requests for extension of the drawdown period foran additional period of up to three years may be considered by the Board of ExecutiveDirectors if the implementation of the reform program and the macroeconomic frame-work remain overall satisfactory.

Fixed-spread loan (FSL) disbursement- FSL disbursement-linked schedules linked schedules subject to a final subject to a final maturity of 25 years and maturity of 25 years and a limit on a limit on average repayment maturity

Repayment Terms average repayment maturity plus plus drawdown period of:drawdown period of:

• 14.25 years (country categories I-II); • 17.25 years (country categories I-II);• 11.25 years (country category III); or • 14.25 years (country category III); or• 10.25 years (country categories IV-V). • 13.25 years (country categories IV-V).

Borrowers can tailor grace period, total Borrowers can tailor grace period, total repayment term, and repayment method repayment term, and repayment method to their needs subject to these limits.a,b to their needs subject to these limits.a,b

Lending Base Rate 6-month LIBOR

Lending Rate Spread Same as FSL FSL spread + 0.25%

Front-End Fee 1% of the amount drawn down, payable upon drawdown. FEF may be capitalized orpaid by the borrower from their own proceeds.

Commitment Fee 1% on undisbursed amounts, beginning 60 days after the loan agreement is signed,payable during the drawdown period while DDO is not exercised.

Loan Charge Waivers Eligible, as determined annually by the Executive Directors.

Currency Conversions, Same as for FSLs. Refer to IBRD Financial Products: The Fixed Spread Loan Brochure,Interest Rate Conver- August 1999.sions, Caps, Collars, Pay-ment Dates, Conversion Fees, PrepaymentNote: a. For purposes of administering the repayment term flexibility for DDO loans, a 1.5 year expected average disbursement period will be assumed.b. FSL disbursement-linked schedules currently accommodate only level principal and bullet repayments. Tailored and annuity disbursement-linkedrepayment schedules and tailored prepayment options for FSLs, including DDO loans, will be made available subsequently.

400 basis points over LIBOR). The marginapplied to VSLs is the weighted average semes-ter cost margin relative to LIBOR, averagedacross all currencies. The IBRD cost margin isrecalculated twice a year, and the new rate iseffective every January 15 and July 15.

Repayment TermsVSLs are normally made for 15 to 20

years, including a grace period of 3 to 5 years.VSL principal repayments are based on aprincipal repayment schedule and expressedin the currency in which the loan is denomi-nated. Payments are a function of the com-mitted loan amount, irrespective of thetiming of disbursements.

Borrowers may specify the schedule eitheras level repayment of principal (in which casethe same amounts of principal are due eachperiod) or as an annuity-type schedule (wherethe sum of principal and interest due is rela-tively stable, varying only with adjustments ininterest rates or changes in loan amounts dis-bursed and outstanding). (Annuity appliesonly to countries in categories I and II.)

4. Currency Pool Loans (cpls)Currency pool loans, which were offered

from 1980 to 2001, are multi-currency obliga-tions. While they are committed in US Dollarequivalent, they are not US Dollar obligations.The borrower’s currency obligation reflects thecurrency composition of the World Bank’s cur-rency pool and is the same for all borrowers.

The borrower’s interest obligation is based onthe semester average cost of outstanding IBRDdebt allocated to fund these loans.

The currency composition of each cur-rency pool loan is a share of the World Bank’scurrency pool, and the composition of the cur-rency pool changes on a daily basis. The WorldBank targets the currency composition of thecurrency pool such that at least 90 percent ofthe US Dollar equivalent value of the currencypool is maintained in the fixed currency ratioof USD 1: JPY 125: EURO 1.

The currency amount disbursed is con-verted to US Dollar equivalent, using theapplicable exchange rate (AER; see below) onthe day of disbursement. The US Dollar equiv-alent is then divided by the value of one cur-rency pool unit (see next paragraph) on theday of disbursement to determine the numberof pool units disbursed. This number of poolunits is then added to the number of poolunits outstanding to determine the amountthe borrower must repay.

Applicable Exchange RateThe applicable exchange rate (AER) is

based on exchange rates reported by Reuters at7:00 a.m. New York time. It constitutes a spotrate for settlement two days forward. For exam-ple, the AER applicable to transactions onAugust 15 is the spot rate reported by Reuters at7:00 a.m. on August 13. The rationale for thisapproach rests partly on the two-day settlementperiod in the foreign exchange market. Thetwo-day lag also ensures that the World Bank’sFar East offices have the latest exchange rateswhen they begin conducting business each day.

Pool Unit ValueThe value of a currency pool unit is

derived by dividing the US Dollar equivalentof the currencies in the pool by the totalnumber of pool units outstanding. The poolunit value changes daily in accordance with:(a) movements of the exchange rates for thecurrencies in the pool; and (b) the currency


Table 6. Standard Country Terms for VSLs(years)

Country Grace Final Amortization Category Period Maturity Pattern

I-II 5 20 Annuity

III 4 17 Annuity

5 17 LRP*

IV-V 3 15 Annuity

5 15 LRP* Level repayment of principal.

composition of the pool. The pool unit valuemay be thought of as an exchange rate used toconvert an IBRD currency pool unit into itsequivalent US Dollar value.

Movements in the exchange rates of themajor currencies in the pool relative to the USDollar affect the pool unit value, and thus theUS Dollar equivalent of each currency poolloan. For example, if the US Dollar appreciatesrelative to other currencies in the pool, the USDollar value of the currency pool unitdecreases.

Since the borrower’s obligation is calcu-lated by multiplying the number of pool unitsoutstanding by the pool unit value, changes inthe pool unit value resulting from exchangerate movements affect the US Dollar equiva-lent of the amount to be repaid.

Projection of Principal RepaymentsA repayment schedule is set forth in the

Loan Agreement. In accordance with theschedule, once the grace period has elapsed,IBRD computes the pool units to be recalledon the due date by dividing the scheduledmaturity as per the Loan Agreement by the his-torical value of the withdrawals outstanding,multiplied by the total pool units outstandingon the loan and the current pool unit value.The US Dollar equivalent of the pool unitsrecalled on each due date will change due tothe daily fluctuation of the pool unit value.

For fully disbursed loans, borrowers canproject the pool units to be recalled on eachdue date by dividing the scheduled maturityfor a particular due date by the historical valueof the withdrawal amount outstanding, and

multiplying it by the total pool units outstand-ing. Suppose, for example, the following sce-nario: the scheduled maturity due under aloan is USD 7.5 million semiannually for thenext 10 years; the historical USD Dollar valueof the withdrawal outstanding is USD 140 mil-lion; and the total number of pool units out-standing is 6,900. In this case, the number ofpool units to be recalled on each due datewould be a constant 369.64 (see Table 7).

Lending RateCost Basis and Lending Spread. The

interest rate on currency pool loans passesthrough to borrowers IBRD’s average cost ofoutstanding funding allocated for these loansplus a lending spread. The rate is based on thesemester average cost of outstanding IBRDdebt issued since 1982 (VLR82), excludingdebt allocated to fund IBRD’s liquidity portfo-lio or other loan products offered after 1989(VLR89). This cost basis for IBRD’s borrow-ings in each of the currencies in the pool isrecalculated every six months for the semestersending June 30 and December 31. The cur-rency-specific average costs are then weightedby the U.S. dollar equivalent share of each cur-rency in the currency pool.

IBRD’s contractual lending rate for cur-rency pool loans for which the invitation tonegotiate was issued on or after July 31, 1998,is determined by adding a spread of 0.75% tothis weighted average semester cost. For cur-rency pool loans for which the invitation wasissued before July 31, 1998, IBRD’s lending rateis determined by adding a spread of 0.50%.The lending rate for currency pool loans is


Table 7. Computation of Pool Units to be Repaid

Due Historical Value of Pool Units Date Pool Units to be Repaid Principal Remaining Remaining

1 (7.5m/140m)x6900=369.64 140m-7.5m=132.5m 6900-369.64=6530.36

2 (7.5m/132.5m)x6530.36=369.64 132.5m-7.5m=125m 6530.36-369.64=6160.72

3 (7.5m/125m)x6160.72=369.64 125m-7.5m=117.5m 6160.72-369.64=5791.08

reset every six months and applies to six-month interest periods beginning on or afterJanuary 1 and July 1. Interest accrues on anactual365-366 day basis on daily principal vol-umes disbursed and outstanding. It continuesto accrue on any overdue principal; but IBRDdoes not charge interest on overdue interest.

5. IBRD Hedging Products8

IBRD offers Hedging Products which cantransform the risk characteristics of a bor-rower’s IBRD obligations even though thenegotiated terms of the particular loan agree-ments are fixed. These products provide bor-rowers with improved risk management capa-bility in the context of projects, lendingprograms, and sovereign asset-liability manage-ment. IBRD Hedging Products include interestrate swaps, interest rate caps and collars, cur-rency swaps, and, on a case-by-case basis, com-modity swaps. To use hedging products, bor-rowers must enter with IBRD into a MasterDerivative Agreement (MDA). The agreementprovides the contractual framework betweenthe borrower and IBRD. Table 8 below showsthe Hedging Products available to IBRD loans.

Interest Rate HedgesIBRD borrowers may choose to manage

interest rate risk arising from their fixed-ratesingle currency loans, variable-spread loans,and fixed-spread loans by entering into inter-est rate swaps or interest rate caps and collars.

Interest rate swaps are individually negoti-ated transactions that may be used to trans-

form the interest rate basis of a borrower’sunderlying loan obligation from fixed to float-ing rate or vice versa. The swap specifies theterms of two future cash flow streams, one tobe paid by the borrower (the swap pay leg) andthe other to be received by the borrower (theswap receipt leg), with IBRD as the counter-party. Both streams are denominated in thesame currency. The cash flows paid by onecounterparty reflect a fixed rate of interest,while those of the other counterparty reflect afloating rate of interest. No exchanges of prin-cipal are involved.

Interest rate caps and collars protect users offloating-rate loan products against rising inter-est rates. Interest rate caps are individuallynegotiated transactions which set an upperlimit on the interest a borrower will pay on afloating rate loan, against payment of an up-front premium. Interest rate collars are individ-ually negotiated transactions which set bothupper and lower limits (a collar) on the interesta borrower will pay on a floating rate loan,against payment of an up-front premium.

Currency HedgesCurrency swaps are individually negotiated

transactions that may be used to transform thecurrency denomination of a borrower’s netloan obligation. As counterparties to a cur-rency swap, IBRD and the borrower agree toexchange two sets of cash flows, denominatedin different currencies, at certain dates in thefuture. The cash flows reflect payments ofinterest on these currencies, which may be


Table 8. Applicability of IBRD Hedging Products to IBRD Loans*(available on disbursed and outstanding loan amounts)

Interest Caps and Currency CommodityLoan Type Rate Swaps Collars Swaps Swaps**Fixed-Spread Loans (FSLs) ✓ ✓ ✓

Variable-Spread Loans (VSLs) ✓ ✓ ✓

Fixed-Rate SCLs (FSCLs) ✓ ✓

Currency Pool Loans (CPLs) ✓

Single Currency Pool Loans (SCPs) ✓

* Hedges against CPLs, SCPs and VSLs will be only approximate hedges. ** Offered on a case-by-case basis.

fixed or floating, as well as exchanges of prin-cipal amounts.9

Local Currency Financial Products. TheWorld Bank offers its borrowers financialproducts denominated in their domestic cur-rencies, subject to the availability of liquidswap markets that permit the Bank efficientintermediation of these transactions. Withthese products, borrowers have an option toconvert or swap, depending on the loan prod-uct, disbursed loan amounts into their domes-tic currency. The local currency financial prod-ucts are confined to the local expenditurecomponent of the World Bank’s financing;clients’ requests are considered on a case-by-case basis.

Commodity HedgesCommodity swaps are individually negoti-

ated transactions to exchange two sets of cashflows at specified dates in the future. One set ofcash flows is linked to the market price of acommodity or index, and the other is a pre-agreed fixed cash flow or a cash flow based ona floating or fixed rate of interest. IBRD offersthis product on a case-by-case basis.

Fees for Hedging ProductsFees for IBRD hedging products (see Table

9) are billed at the time the transaction is exe-cuted and are payable within 60 days. IBRD’spolicy regarding eligibility for loan interestwaivers, based on timely debt service, applies totimely payment of fees. IBRD may revise the feeschedule from time to time. In such cases, therevised fees would apply only to hedge requestssubmitted after the new schedule is in effect.10

B. IDA development CreditsThe International Development Associa-

tion is the World Bank’s concessional lendingwindow. IDA extends funds in the form ofcredits, at zero interest rate, to the poorestdeveloping countries. All development creditsare made to or guaranteed by member govern-ments or to the member government of a ter-

ritory of a member (except for developmentcredits which have been made to regionaldevelopment institutions for the benefit ofmembers or territories of members of IDA).Eligibility for IDA development credits isbased on a country’s per capita income and itslack of financial ability to borrow from IBRD.In fiscal year 2005, the upper limit on percapita income for IDA countries was set at amaximum of USD 895 per capita.11 Somecountries, such as India and Indonesia, are eli-gible for IDA development credits due to theirlow per capita incomes, but are also creditwor-thy for some IBRD borrowing. These countriesare known as blend borrowers.

IDA eligibility is a transitional arrange-ment, allowing the poorest countries access tosubstantial resources. As their economiesgrow, the countries graduate from eligibility.

IDA development credits are denominatedin Special Drawing Rights (SDRs). Theamounts disbursed, service and commitmentcharges, and repayments are also calculated inSDRs. Principal payments and charges aremade in the currency (US Dollars, PoundsSterling, or Euros) specified in the CreditAgreement, in an amount equivalent to theSDRs required under the Credit Agreement.

Lending TermsThere is no interest charged on IDA devel-

opment credits; but a service charge of 0.75percent is levied on the principal amountswithdrawn and outstanding. For fiscal year2006, the Bank’s Board approved a commit-ment charge rate of 0.30 percent on the undis-


Table 9. Transaction Fee Schedule for IBRDHedging Products(percentage of principal amount hedged)

Transaction Type Transaction Fee

Interest rate swap 1/8 %

Interest rate cap and collar 1/8 %

Currency swap 1/4 %

Commodity swap 3/8 %

bursed balance of the credit. The commitmentcharge begins to accrue 60 days after the CreditAgreement is signed. Management reviewsIDA’s financial position on an annual basis andproposes, for the Board’s approval, a specificrate for that year. Borrowers are notified at thebeginning of each fiscal year of the rate appli-cable for that year.

Amortization and Grace PeriodsIDA credits approved by the Board

through June 30, 1987, have a final maturity of50 years. IDA credits approved after that datehave three different final maturities and repay-ment schedules (for the countries' currentmaturities and repayment schedules, seeAnnex D):(a) For IDA-only countries or countries clas-

sified as least developed by the UnitedNations (LLDCs), credits are repayableover 40 years, with principal repayment atthe rate of 2 percent of the credit amountper year from the 11th to the 20th year,and 4 percent per year thereafter. (SeeAnnex D for IDA-only and LLDC classifi-cations.)

(b) For other IDA-eligible countries, creditsare repayable over 35 years, with repay-ments of 2.5 percent of the credit amountper year from the 11th to the 20th year,and 5 percent per year thereafter.

(c) For credits approved after June 30, 2002,for IDA-eligible countries with a GNI percapita, that has been above the operationalcut off for IDA eligibility for more thantwo consecutive years, credits arerepayable over 20 years, with principalrepayment at the rate of 10 percent peryear from the 11th to the 20th year.The first amortization payment on a credit

is due on the semiannual payment date imme-diately following the 10th anniversary of thedate the credit was approved by IDA. For cred-its approved through June 30, 1987, the lastamortization payment is due on the semian-nual payment date immediately preceding the

50th anniversary. For credits approved afterthat date, the last amortization payment is dueon the semiannual payment date immediatelypreceding the 20th, 35th or 40th anniversary,as the case may be.

Modifying TermsFor Development Credit Agreements

approved after June 30, 1987, the terms of out-standing credits extended to a particular bor-rower are modified if both the following con-ditions are met:(a) the annual per capita GNI of the borrower

has remained above the historical ceiling12

for five consecutive years, and(b) the borrower has achieved creditworthi-

ness for IBRD borrowing.For Development Credit Agreements for

which invitations to negotiate were issued onor after August 1, 1996, subject to the Board'sreview and approval, the terms of outstandingcredits extended to a particular borrower aremodified if both the following conditions aremet:(a) the annual per capita GNI of the borrower

has remained above the operational percapita income cutoff13 for three consecu-tive years, and

(b) the borrower has achieved creditworthi-ness for IBRD borrowing.When the above conditions for adjusting

terms have been met, IDA may, subject to theBoard's review and approval, require the bor-rower to repay twice the amount of each prin-cipal installment not yet due, until the credit isfully repaid. Alternatively, the borrower mayrequest that IDA substitute an interest chargefor some or all of the higher principal repay-ments, provided the new terms have a grantelement equivalent to that resulting from dou-bling of the principal payments alone. If a bor-rower's economic condition deteriorates sig-nificantly after terms have been adjusted, IDAmay, if the borrower requests, revert to theoriginal repayment schedule.


C. World Bank Guarantees14

The World Bank offers three basic types ofguarantees: partial risk guarantees (IBRD andIDA); partial credit guarantees (IBRD); andpolicy-based guarantees (IBRD). Govern-ments, government-owned entities, and priva-tized or private sector entities are all eligible toreceive credit enhancement under the WorldBank’s guarantee. In countries where the WorldBank limits the availability of IBRD loans,however, these limits also apply to guarantees.

1. IBRD GuaranteesIBRD guarantees are available only to

IBRD-eligible countries, with the exception ofcertain foreign exchange earnings projects forwhich an IBRD guarantee is provided in anIDA country.

Instrument Type and Project EligibilityPartial risk guarantees cover private

lenders against the risk of a public entity fail-ing to perform its obligations with respect to aprivate project. The guarantees ensure pay-ment in the case of default resulting from thenonperformance of contractual obligationsundertaken by governments or their agenciesin private sector projects. These sovereigncontractual obligations vary depending onproject, sector, and country circumstances.The obligations are determined as part ofnegotiations for the guarantee.

Partial credit guarantees cover privatelenders against all risks during a specific periodof the financing term of debt for a public invest-ment. Such guarantees allow public sectorprojects to extend maturities and lower spreads.Partial credit guarantees cover all events of non-payment for a designated part of a financingarrangement. These guarantees are generallyused to encourage extension of maturity, bycovering the latter years of a loan’s maturity.

Policy-based guarantees extend the WorldBank’s partial credit guarantee instrumentbeyond investment projects to sovereign bor-rowings from private foreign creditors in sup-

port of agreed structural, institutional, andsocial policies and reforms. Policy-basedguarantees are intended to play a catalytic rolein helping World Bank borrowers with strongeconomic and social programs to improvetheir access to private foreign financing. Theguarantee can either be self-standing or part ofa larger package of IBRD financial support.15

Enclave guarantee is a partial-risk guaran-tee structured for export oriented foreignexchange generating commercial projects inIDA-only countries. IBRD considers providinga non-accelerable guarantee for such projects,provided that adequate arrangements are inplace to ensure that the host government willbe able to meet its obligations with respect tothe guarantee. The enclave guarantee usuallycovers direct sovereign risks such as expropri-ation, changes in law, war, and civil strife. TheWorld Bank generally will not guarantee anypayment obligations (such as those of anoutput purchaser), nor will it guarantee trans-fer risk. In all cases, the scope of risk coverageunder the guarantee is the minimum requiredto mobilize financing for a given project.

2. IDA GuaranteesIn many IDA-only countries, macroeco-

nomic reforms have led to an improved busi-ness environment suitable for increased pri-vate sector participation, especially in sectorsundergoing significant reforms.

Instrument Type and Project EligibilityPartial-risk guarantees in IDA countries

are intended to ease the transition of countriesthat are clearly on the path of reform. Theguarantee is offered to private lenders againstcountry risks that are beyond the control ofinvestors and where official agencies and theprivate market offer insufficient insurancecoverage. The guarantee can cover up to 100percent of the principal and interest of a pri-vate debt tranche for defaults arising fromspecified sovereign risks, including govern-ment breach of contract, foreign currency con-


vertibility risk, expropriation, and changes inlaw. This guarantee is available in selectedcases in IDA-only countries where an IBRDenclave guarantee is not applicable.

3. Fees and Pricing on World BankGuarantees

The Bank charges a standby fee, a guaran-tee fee, and a front-end fee to provide a guaran-tee. In addition, the Bank may also charge aninitiation fee, and processing fee for a privatesector project. Charges are based on the con-cept of loan equivalency and may differ fromone guarantee structure to the other. Table 10shows the different types of fees charged by theBank for both IBRD and IDA guarantees.

D. IDA GrantsPursuant to Article V, Section 2(a)(ii) of

the IDA Articles of Agreement, only funds thatare provided with specific grant authorization

may be used to finance IDA grants. Starting inIDA11, the Board of Governors authorizedIDA to provide grants in the context of theHIPC Debt Initiative, and in IDA12 thisauthority was expanded to include grantsunder exceptional circumstances to post-con-flict countries under a framework approved bythe Executive Directors. In IDA13, the Boardof Governors approved a substantiallyexpanded use of IDA grants, in the range of 18to 21 percent of overall IDA resources for thereplenishment. In February 2005, discussionsconcluded for IDA14 with IDA donors agree-ing to provide the largest increase of IDA’sresources in over two decades. The estimatedshare of IDA14 resources that will be providedon grant terms is approximately 30% as com-pared to 18-21% in IDA13.16

These grants are allocated for specifiedcategories such as HIV/AIDS, natural disas-ters, and IDA-only countries that are very


Table 10. Fees on World Bank Guarantees

Type of Guarantee Up-Front Fees Recurring FeesInitiation Processing Front-end Guarantee Standby Fee Fee Fee Fee Fee

IBRD Partial Risk 0.15% of total up to 0.50% of 0.50% on 1% on 0.25% on Guarantee guaranteed debt total guaranteed maximum disbursed and committed but

or a minimum of debt guaranteed outstanding undisbursed USD 100,000 principal balance exposure to the

BankIBRD Credit None None 0.50% on 0.75% on 0.25% on Guarantee maximum disbursed and committed but

guaranteed outstanding undisbursed principal balance exposure to the

BankIBRD Enclave 0.15% of total up to 0.50% of 0.50% on up to 3% on 1% on Guarantee guaranteed debt total guaranteed maximum disbursed and committed but

or a minimum debt guaranteed outstanding undisbursed of USD 100,000 principal balance exposure to the

BankIDA Partial Risk 0.15% of total up to 0.50% of None 0.75% on 0.35% on Guarantee guaranteed debt total guaranteed disbursed and committed but

or a minimum debt outstanding undisbursed of USD 100,000 balance exposure to the

BankDisclaimer: The pricing and fees components shown are indicative only and derive from World Bank guarantees pricing policies as ofDecember 2004.*Paid on an annual basis.

poor, vulnerable to increased debt, or attempt-ing to recover following armed conflict. Fundsreceived from IBRD as net income transfershave also included explicit authority that suchfunding can be used for grants, beginning withthe transfer out of IBRD’s FY97 net income.

Allocation of FundsThe amount of grants available for each

IDA country is a function of the country’s per-formance-based IDA allocation, its eligibilityfor grants, and IDA’s overall available grantenvelope. IDA and its borrowing membersagree which projects are to be financed fully bygrants and which will be a blend of credit andgrant, based on a country’s circumstances, pri-orities and preferences, the size and nature ofprojects, and share of grants in the IDA alloca-tion for that country. Under the IDA 14 guide-lines, the performance-based allocation system

will operate in conjunction with a new IDAgrant allocation system, which sets the terms(i.e. credit or grant) on which IDA resourceswill be provided. The risk of debt distress is theprimary grant eligibility criterion in the newsystem, and the share of grants in total IDAfinancing will emerge from a country-by-country analysis of the risk of debt distress.

Grant EligibilityGrant eligibility under IDA 14 will be lim-

ited to IDA-only countries and will be basedon ratings of countries’ risk of debt distress.Debt distress risk will initially be estimatedfrom current data on key external debt ratios.Existing Debt Sustainability Analyses (DSAs)may be used to supplement this rating mecha-nism. Over time, debt distress risk estimateswill be based only on DSAs.


Chapter IV

Overdue and Sanction Policy

When a borrower fails to service its loans,credits, or Project Preparation Facility (PPF)advances on the due dates, the World Bank hasthe option of suspending disbursementsimmediately on all loans and credits to theborrower. The World Bank’s current practice isto follow a graduated approach, usingreminders, incentives, and sanctions.Reminders are sent to defaulting borrowers onthe 5th, 15th, 30th, and 35th day after the duedate. On the next business day after the 45thday, a warning of suspension notice is sent tothe member country and all borrowerstherein, informing them that the suspension ofdisbursements will take effect on day 60.

As an incentive for timely payment, a por-tion of interest payments on IBRD loans maybe waived (see Chapter V). Progressive sanc-tions are imposed by withholding Board pre-sentations of new loans and guarantees, delay-ing signature of previously approved loans andguarantee agreements, and suspending dis-bursements. When a second consecutive serv-ice payment is missed on any loan to or guar-anteed by a member, all loans to or guaranteedby the member are placed in non-accrualstatus.

A. Reminders and SanctionsWhen payment is:

5 or 15 days overdue:ACTCF notifies the borrower that if the

amount is still overdue more than 30 days afterthe due date, the following actions apply: theborrower may lose eligibility for any applicableinterest waiver; no new loans will be presentedto the Board for approval; and no agreementsrelated to previously approved loans will besigned.

30 days overdue:The Country Department notifies the

defaulting borrower that no new loans will bepresented to the Board for approval, and noagreements related to previously approvedloans will be signed.

The Country Department informs thecountry, if it is the guarantor and not the bor-rower in default, that if the payment becomes45 days overdue, no new loans to or guaran-teed by the country will be presented to theBoard for approval, and no agreements relatedto previously approved loans to or guaranteedby the country will be signed. Both the coun-try and the borrower are also notified that awarning may be issued that disbursementsmay be suspended on the 60th day overdue onall loans or credits to both the borrower andthe country. This warning is issued on the 45thday after the due date.

19

35 days overdue:ACTCF informs the borrower that it has

lost its eligibility for any partial waiver ofIBRD interest.

45 days overdue:The Country Department informs the

borrower and country that no new loans to orguaranteed by the country will be presented tothe Board for approval, and no agreementsrelated to previously approved loans to orguaranteed by the country will be signed. Boththe country and the borrower are notified thatdisbursements will be suspended on all loansto or guaranteed by the country on the 60thday after the due date, unless all outstandingpayments are made, including those comingdue by that date.17


project co-financiers and the relevant regionaldevelopment banks of the pending suspension.


borrowers and country by telex that a suspen-sion of disbursements is in effect and also noti-fies the Board. This telex may, at the discretionof the World Bank, specify items that areexempted from the suspension.

6 months overdue:When service payments on a loan or

development credit becomes six months over-due (more specifically, on the date the secondconsecutive service payment is missed), theregional Vice President sends a notice to themember. A formal notice is also sent to theBoard within two days of that date, and a newsrelease is distributed. Information on thoseborrowers with loans for which payent is morethan six months overdue is included in theWorld Bank’s financial statements.


Chapter V

Partial Waiver of Loan Charges Policy

In conjunction with the annual review ofIBRD’s net income, the World Bank may waivea portion of the loan charges applicable in afiscal year. A waiver of charges applies to allIBRD loans except Special Development PolicyLoans (SDPLs). There are three main types ofwaivers: (a) commitment charges waiver; (b)interest charges waiver; and (c) front-end feewaiver. Borrowers are notified at the beginningof each fiscal year of the waiver rate applicablefor that year. The partial waivers apply to allpayment due dates that commence within thefiscal year for which the waivers are approved.

In the event that a waiver is not approvedfor a given fiscal year, the specific charge forthat fiscal year will revert to the contractualrate in the Loan Agreement. The waivers forcommitment and interest charges areexpressed and accrued on an actual 365 or366-day convention. The amount waived isreflected in the billing statement of the loan.

Commitment Charge WaiverThe Bank’s Board of Executive Directors

approved an unconditional one-year waiver of50 basis points of the contractual commitmentcharges for all payment periods commencingin FY05 for all borrowers. All loans (except forSDPLs) are eligible for the commitmentcharge waiver, regardless of payment perform-

ance. The commitment charges rate is reflectedin the billing statements net of the waiver.

Interest Charge WaiverFor FY05, The Bank’s Board of Executive

Directors approved for eligible borrowers awaiver of 25 and 5 basis points of interestcharges, respectively, on new loans and oldloans.18

Eligibility for the partial waiver of interestis limited to borrowers who have made fullpayments of principal and charges on all theirloans within 30 calendar days of the due datesduring the preceding six months. All IBRDloans are eligible for the partial waiver of inter-est except for SDPLs. The partial waiver ofinterest policy does not apply to charges onProject Preparation Facility (PPF) advances.Based on eligibility status, the waiver is deter-mined on the billing date, approximately twomonths before the due date. The waiveramount is reflected in the billing statementand is not recomputed on the due date.

If a payment under any loan to a borroweris not received by IBRD within 30 calendardays of the due date, then all loans to that bor-rower will be ineligible for the waiver of inter-est charges until a new qualifying period of sixmonths of full and timely payment is estab-lished. If a loan made to or guaranteed by a

21

member country becomes more than sixmonths overdue, on the date the second con-secutive service payment is missed, the loans ofall borrowers in that country will be ineligiblefor the partial waiver of interest charges, irre-spective of their individual eligibility status,until all amounts overdue under all loans havebeen paid. Figure 1 illustrates how the waivereligibility is affected when a debt service pay-ment is not received within 30 calendar days ofthe due date.

Borrower ClassificationFor purposes of the waiver policy, all loans

to a country are classified by borrower (eithercountry or entity within a country, such as autility or specific ministry), and are identifiedas either:

■ IBRD loans—loans made directly to themember country; in such cases, a gov-

ernment agency represents the bor-rower; or

■ IBRD Guaranteed loans—loans grantedto entities that are guaranteed by amember country; in such cases, theentity is the borrower.

At the end of each fiscal year, the borroweris provided with a list of loans for which it isresponsible, and a report showing loan chargewaiver amounts earned and/or lost during thefiscal year for each loan.

Front-End Fee WaiverOn August 3, 2004, The Bank’s Board of

Executive Directors approved a 50 basis pointswaiver of the front-end fee (100 basis points)for all IBRD loans (other than SDPLs) pre-sented to the Board in FY05, with retroactiveeffect to all loans presented to the Board on orafter March 1, 2004.


Partial Waiver of Loan Charges Policy 23

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Chapter VI

Prepayment Policy

Borrowers have the right to prepay inadvance of maturity, as of a date acceptable tothe World Bank: (a) all of the outstandingprincipal of the loan; or (b) all of the principalamount of any one or more maturities of theloan. The prepayment premium charged willdepend on the specific type of loan.19

The borrower should notify the WorldBank at least 45 days in advance of its inten-tion to repay any amount in advance of matu-rity.20 The advance notice is necessary so thatthe World Bank can provide the borrower witha detailed estimate of the prepayment amount.

A. IBRD Loans

Prepayment Policy for Fixed-Spread Loans (FSLs)

Partial prepayments of FSLs will beapplied in the manner specified by the bor-rower—or, in the absence of any specificationby the borrower, in the following manner: (a)if the Loan Agreement provides for separateamortization of specified disbursed amountsof the principal, as is the case for disburse-ment-linked FSLs, such prepayment shall beapplied in the inverse order of said disbursedamounts, based on withdrawal date (the last-withdrawn disbursed amount is repaid first)and then on maturity date (within each

tranche, the amount to be prepaid is applied ininverse order of maturity, starting with thelatest maturity date); and (b) in all other cases(i.e., for commitment-linked FSLs), such pre-payment shall be applied in the inverse orderof maturity of the loan, with the latest matu-rity repaid first.

The premium payable upon prepayment ofany amount of the loan will be an amount rea-sonably determined by the World Bank to rep-resent the cost to the World Bank of redeploy-ing the amount to be repaid, from the date ofprepayment to the maturity date of suchamount. The prepayment premium charged isbased on the difference between the fixedspread payable on the prepaid loan and thefixed spread in effect for FSLs in the relevantcurrency at the date of prepayment.

If a currency conversion has been effectedand the conversion period has not terminatedat the time of the prepayment: (a) the bor-rower shall pay a transaction fee with respect toearly termination of the conversion option atthe rate in effect at the time the World Bankreceives the borrower’s notice to prepay; and(b) the borrower or the World Bank, as thecase may be, shall pay an unwinding amount,if any, with respect to the early termination ofthe conversion. The transaction fee and

24

unwinding amount are payable within 60 daysafter the date of the prepayment.

If IBRD in unable to fund itself in a partic-ular currency, it may provide the borrower witha substitute currency. No prepayment pre-mium is charged on an FSL if the loan is pre-paid while a substitute currency is outstanding.

Prepayment Policy for Variable-Spread Loans

IBRD charges a prepayment premiumbased on the cost of redeploying the amount tobe prepaid from the date of prepayment to thematurity date. The amount of the prepaymentpremium is based on the difference betweenthe contractual lending spread of the prepaidloan and the contractual lending spread ineffect for VSLs in the currency of the prepaidloan at the date of prepayment. Prepaidamounts are applied to the latest amortizationpayments due under the loan.

Prepayment Policy for Fixed RateSingle Currency Loans (FSCLs)

IBRD charges a prepayment premiumbased on the cost of redeploying the fullamount of the loan to be prepaid from the dateof prepayment to the original maturity date.Under an FSCL, IBRD enters into rate-fixingswap transactions to provide the borrowerwith a fixed rate. At the end of each disburse-ment period, through a rate-fixing swap trans-action, IBRD fixes the rate for the amount ofthe loan disbursed during that period. Thus anFSCL consists of multiple tranches, each withits own fixed rate. Upon a prepayment IBRDunwinds the rate fixing swap transaction(s)entered into in connection with the amount ofthe loan to be prepaid. The degree of off-mar-ketness of each such rate-fixing swap is used todetermine the redeployment cost of the fullamount of the loan to be prepaid. If IBRDenters into more than one rate-fixing swaptransaction in connection with the loanamount to be prepaid, IBRD nets out any gainsand losses resulting from the unwinding of

each swap transaction. The borrower paysIBRD the net amount, so calculated, as theprepayment premium—provided, however,that if such netting results in a negativeamount (i.e., in an amount due to the bor-rower), such amount is deemed to be zero.

Prepaid amounts are applied in the inverseorder of the disbursed amounts under the loan,with the disbursed amount withdrawn lastbeing prepaid first, and with the latest maturityof such disbursed amount being prepaid first.Within each tranche, the amount to be prepaidis applied in inverse order of maturity.

Prepayment Policy for CurrencyPool Loans (CPLs)

The premium charged to borrowers forprepayment of a currency pool loan is the lowerof: (a) the computed contractual premium (theratio of the premium that would be charged, asper the Loan Agreement, over the current valueof the loan); or (b) the premium over the carry-ing value,21 based on the carrying values andestimated values in the World Bank’s auditedfinancial statements from June of each year.

The premium rate is calculated by multi-plying the current interest rate on the loan bythe appropriate factor specified in the Pre-mium on Prepayment schedule of the LoanAgreement. The premium rate so calculated isthen applied to the appropriate maturity toarrive at the prepayment premium for thatmaturity. Premiums computed for all maturi-ties being prepaid on the loan are addedtogether to derive the prepayment premium forthe loan. The prepayment premium on a loanis waived in its entirety if the estimated value ofall loans in a particular category (fixed or vari-able) is less than or equal to the carrying value.

Upon receipt of the borrower’s request forprepayment, the World Bank will providedetailed estimated prepayment amounts,including computation of the prepaymentpremium. The estimate, based on theintended date of the prepayment, includes amargin of 2 to 3 percent to cover any foreign

Prepayment Policy 25

exchange rate fluctuations. Any resulting dif-ferences between the estimate and the finalamounts are settled after the prepayment date.Because the pool unit value for currency poolloans is determined retroactively, after theWorld Bank closes its accounting cycle (on the14th and the last day of the month), the WorldBank will inform the borrower of the finalamounts approximately two weeks after theapplicable accounting closing. However, thevalue of the pool unit on the prepayment datewill prevail for application of the funds.

To maintain the pool currency composi-tion (USD 1: JPY 125: EUR 1), the prepaymentof pool loans must be made in those curren-cies. The proportion on each currency is sub-ject to the prevailing applicable exchange rate(AER) of the JPY and EUR at the effective dateof the prepayment.

Prepayment of Pre-pool LoansAll pre-pool loans (made before 1980) are

fixed-rate loans. For pre-pool loans with aninterest rate lower than 7 percent, the prepay-ment premium will be waived on a case-by-case basis.

B. IDA Development Credits

Prepayment of IDA DevelopmentCredits

As per the General Conditions applicableto IDA development credits, Section 3.04(b)the Borrower has the right to repay in advanceof maturity all or any part of the principalamount of one or more maturities of theCredit specified by the Borrower. Currently,there are no prepayment premium charges onprepayment of IDA credits.


Chapter VII

Billing Procedures

Each IBRD loan and IDA credit is billed twiceyearly, on the dates specified in the Loan orCredit Agreement. The billing statements areprepared as of two months before the semian-nual payment due date. IBRD and IDA billsreflect four months of actual accrued chargesand two months of estimated charges.

Billing IBRD LoansCharges are estimated for the two-month

period based on the balances and exchange ratevalues available at the billing cutoff date. Exceptfor the waiver amount, the borrower’s obliga-tion is recomputed on the payment due date.The difference between the billed amount andthe amount the borrower is legally obligated topay, as calculated on the due date, is carried for-ward to the next billing date on a non-interest-bearing basis as a Deferred balance.

Differences may arise due to transactionsposted between the date the billing is pre-pared (two months in advance) and the pay-ment due date (see Figure 2). For currencypool loans, the main reasons for these vari-ances are exchange rate fluctuations andchanges in the currency pool composition. Ifthe “Deferred” amounts are not settled asrequested at the time of the next billing, thedeferred principal component will be subjectto additional charges.

If the due date obligation is less than theamount billed, the resulting excess is carriedforward as a credit for application on the nextbill and payment due date.

Billing IDA Development CreditsIDA credit commitments from repayment

years 1 through 5 are expressed in UnitedStates Dollars, and from repayment year 6onward in SDRs. At the time of negotiations,the borrower selects the currency in which thedebt service will be billed. Currently, all IDAdevelopment credits are billed in United StatesDollars, Pounds Sterling, or Euros. The bor-rower may change the currency of repaymentby giving appropriate advance notice to IDA.However, any shortage of remittance due toexchange rate conversion is treated as overdue.

Upon receipt, the borrower’s payment istranslated at the exchange rate on the valuedate of receipt into the currency of commit-ment (either USD or SDR). Shortfalls or sur-pluses, which may arise due to exchange ratechanges or to transactions on individual cred-its between the billing date and due date, arecarried forward on the borrower’s account forsettlement or application on the next paymentdue date. Overdue principal amounts continueto accrue a service charge of 0.75 percent untilsettled.

27

Payment Due Date and BankingDays

Debt service payments are requested onthe 1st and the 15th of the month, except if thepayment due date falls on a bank holiday. Thepayment or settlement is then requested forthe next banking day.

Cancellation of UndisbursedAmounts

The borrower has the right to cancel anyamount of the loan not yet withdrawn, exceptfor amounts for which the World Bank hasentered into a special commitment. The WorldBank may cancel an amount of the loan forreasons related to continuing suspension ofdisbursements, savings in project costs, mis-procurement, expiration of closing date, orcancellation of the guarantee by the guarantor.In any of these cases, the World Bank maycancel by notifying the borrower of suchaction.

Once an amount of the loan has been can-celed by either the borrower or the WorldBank, the withdrawal and amortization sched-ules are revised to reflect the cancellation. Thecanceled amount is applied to the amortiza-tion schedule on a pro-rata basis. Cancella-tions processed after the billing cutoff date willbe reflected in the subsequent billing period.

Capitalization of ChargesSome Loan Agreements provide for the

capitalization of loan charges (interest andcommitment fees), which allows the Bank towithdraw from the Interest category of theloan proceeds the funds required to settle theloan charges on each of the semiannual pay-ment dates. The amounts withdrawn are lim-ited to the agreed US dollar value and to thedate to which this category may be used.

Billing PackageFor IBRD loans, the billing package

includes the following statements:

■ Payment Instructions■ Summary Statement of Amounts Due■ Statement of Currency Purchase Calcu-

lations (if applicable)■ Statement of Interest■ Statement of Interest on Overdue Prin-

cipal (if applicable)■ Statement of Commitment Charges■ Computation of Deferred Amounts

Due■ Statement of Debt Service Amounts

Received and Applied■ Statement of Principal ActivityFor IDA credits, the billing package

includes:■ Payment Instructions■ Summary Statement of Amounts Due■ Statement of Service Charges■ Statement of Service Charges on Over-

due Principal (if applicable)■ Computation of Carried Forward

Amounts Due■ Statement of Debt Service Amounts

Received and Applied■ Statement of Principal Activity

Payment Applications IBRD debt service receipts are applied in

the following order: overdue amounts,deferred amounts, and current receivables.Within these categories, the order of applica-tion is as follows: interest on overdue princi-pal, commitment fees, interest, transactionfees, and principal. Interest accrues on theunpaid principal at the current rate applicableto the loan.

IDA debt service receipts are applied in thefollowing order: overdue amounts, balancescarried forward, and current receivables.Within these categories, the order of applica-tion is as follows: principal, service charges onoverdue principal, commitment fees, and serv-ice charges.


Billing Procedures 29

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Currency Purchase Agreement (nolonger available)

IBRD borrowers who entered into a cur-rency purchase agreement (CPA) with theWorld Bank can settle their debt service obli-gations in a single agreed-upon currencyrather than in the designated currencies thatare due. For loans under a CPA, the billingnotices specify the amount of agreed-uponcurrency to be paid, including a small margin(2 to 5 percent) to cover possible exchange rate

fluctuations. Upon receiving payment, IBRD,acting as an agent for the borrower, purchasesthe currencies required to settle the debt obli-gation. Irrespective of the date of the conver-sion (but not before the due date), the bor-rower’s account is credited on the date theWorld Bank receives the payment from theborrower. Excess payments are handled inaccordance with the borrower’s instructions.Shortfalls are carried forward to the next pay-ment date.

Chapter VIII

Frequently Asked Questions

A. Project Preparation Facility

What happens if a loan is not madefor a project after the borrower hasused a PPF advance for thatproject?

If the PPF is not refinanced, ACTCF willbill the borrower. If the amount of the PPF isUSD 50,000 or less, the borrower is required tomake a lump sum payment within 60 days forthe amounts due during the project prepara-tion period. If the amount of the PPF exceedsUSD 50,000, the borrower is required to repaythe advance (plus accrued interest or servicecharges) in ten semi-annual installments overthe next five years.

B. Local Currency FinancialProducts

Why must the FSL be denominatedin a major currency and thenconverted into local currency? Whynot denominate the FSL in localcurrency from the start?

The World Bank will not commit an FSLin a borrower’s currency because it may notalways be able to access the local currency mar-kets when borrowers wish to have disburse-ments or at terms that are acceptable to them.

Pre-funding loan commitments in local cur-rency and holding the liquidity until disburse-ments are made might be a way to addresssuch funding risk. However, holding liquidityin local currency is likely to result in a negativecarrying cost for the World Bank, given thevolatility and illiquidity of emerging financialmarkets and the limited number of instru-ments with acceptable credit rating in whichthe World Bank can invest. Pricing the fundingand liquidity risks into the loan charges for anFSL in local currency would make these prod-ucts uncompetitive. Therefore, the World Bankhas opted to provide local currency financingthrough the use of currency swaps from amajor currency into a borrower’s local cur-rency.

Why can’t the entire loan beconverted into local currency?

The Articles of the Agreement permit theWorld Bank to provide local currency financ-ing only under exceptional circumstances.Since these circumstances are basically thesame as those under which the World Bank isauthorized to finance local expenditures withforeign exchange, the amount of the loan thatcan be converted into local currency is limitedto that part of the loan that is used to financelocal expenditures. For purposes of determin-ing eligibility for local currency financing, the

31

local expenditure content is measured at thecountry’s IBRD portfolio level.

Can undisbursed amounts of an FSLbe converted into local currency?

The conversion of a fixed-spread loan intolocal currency is limited to disbursed loan bal-ances, so that the World Bank can intermediatethe currency swap transactions on the basis ofknown projected cash flows. Convertingundisbursed amounts of an FSL into local cur-rency is equivalent to having FSL commit-ments in local currency, which would exposethe World Bank to financing and liquidityrisks.

What local currencies are available?As of March 2005, an indicative list of

emerging market currencies in which theWorld Bank might be able to undertake cur-rency swap transactions includes, per geo-graphical region: (i) Latin America: BrazilianReal, Mexican Peso, Chilean Peso, and Colom-bian Peso; (ii) Eastern Europe: Polish Zloty,Czech Kroner, Hungarian Forint, and SlovakKoruna; (iii) Africa: South African Rand; and(iv) East Asia: Indian Rupee, IndonesianRupee, Malaysian Ringgit, Philippine Peso,South Korean Won and Thai Baht. However,the availability of these currencies and theterms and conditions that the World Bank canobtain at a given point in time, depend on swapmarket conditions at the time of execution ofthe proposed transactions. Since conditions inemerging financial markets can change rapidly,the World Bank will determine, upon a bor-rower’s request, whether conditions wouldallow financing in a specific currency.

How can a borrower request aconversion or hedge into localcurrency?

For FSL conversions, the borrower sub-mits a Conversion Request to ACTCF, usingthe form provided in the FSL conversionguidelines. The guidelines also include proce-

dural details for the conversion.22 The WorldBank then investigates the availability of swapsin the requested local currency, and informsthe borrower.

In the case of a free-standing hedge, theborrower must first enter with IBRD into aMaster Derivatives Agreement and also pro-vide the signatures of officers authorized torequest IBRD hedge transactions. After thederivatives agreement is in place, the borrowermay submit to ACTCF a request for a hedgeinto local currency.23

C. Fixed-Spread Loans

If the borrower selects automaticrate fixing, is a fee charged at everyrate fixing?

No. If the Loan Agreement calls for auto-matic rate fixing, then rates are fixed at nocharge at the end of each interest period. Auto-matic rate fixing can be requested at any timeduring the disbursement period.

If the borrower has three tranchesand decides to fix all three at onetime, is a fee charged for eachtranche?

No. There is no transaction fee for the fullamount of the loan for the entire maturity ifthis is the first rate fixing. Subsequent rate fix-ings will bear a transaction fee.

Can repayment terms be amended?No. The World Bank does not amend

repayment terms once a Loan Agreement hasbeen signed.

What is the fixed spread applicableto a new FSL?

IBRD’s fixed spread with respect to the ini-tial loan currency will be that in effect at 12:01a.m. Washington, D.C. time, one calendar dayprior to the signing date of the Loan Agree-ment. The spread remains in effect during thelife of the loan.


Where can I find FSL lending ratesand spreads?

At the website http://www.worldbank.org/fps/.

D. Currency Pool Loans

Where can I find historical lendingrates for Currency Pool Loans?

At the website http://www.worldbank.org/fps/.

How is the prepayment premium calculated for a currency pool loan?

This question can best be answered by anillustration. Let us assume that a Category IIIcountry wants to fully prepay the outstandingbalance of USD 10 million under a variable-rate pool loan that has installments of USD 1million per semester. Further, let us assume thefollowing at the time the prepayment requestwas received by the World Bank:

In the example below, the borrower will becharged the computed contractual premiumof 1.47%, as it is less than the premium overthe carrying value of 4.30%.

Note that the carrying value of an IBRDloan is synonymous with the book value of theloan and is expressed in USD equivalent terms.IBRD loans do not have a secondary market;thus the estimated values of IBRD loans pub-lished in the World Bank’s financial statementsare used as a proxy for their theoreticalmarked-to-market values.

What is the difference betweenwithdrawal outstanding andprincipal outstanding?

Withdrawal outstanding represents theUS Dollar equivalent of total disbursementsoutstanding, calculated at the historicalexchange rate. Principal outstanding is thecurrent US Dollar equivalent, includingexchange adjustments, of the outstandingdebt due IBRD.

Frequently Asked Questions 33

Basic Loan Information:Current value of the loan USD 11 million (USD 10 million plus

USD 1 million due)

Interest rate on the loan 6.5%

Calculation of the Contractual Premium:Premium factor for maturities < 3 years 0.18

Premium rate for maturities < 3 years 1.17% (6.5% x .18)

Premium amount for maturities < 3 years USD 70,200 (6 million x 1.17%)

Premium factor for maturities between 3-6 yrs 0.35

Premium rate for maturities between 3-6 years 2.275% (6.5% x .35)

Premium amount for maturities between 3-6 yrs USD 91,000 (USD 4 million x 2.275%)

Total premium per loan agreement USD 161,200 (USD 70,200 + USD 91,000)

Comparison of the Contractual Premium versus the Ratio of the EstimatedValue/Carrying Value:

Computed contractual premium ratio 1.47% (USD 161,200 / USD 11 million)

Estimated value of all variable-rate pool loans USD 34,628 million

Carrying value of all variable-rate pool loans USD 33,200 million

Premium over carrying value 4.30% (USD 34,628 million–USD 33,200 million / USD 33,200 million)

E. Guarantees

Where can I find information ondifferent types of guaranteesoffered by the World Bank?

More information on the World Bank’spartial risk, partial credit, and policy-basedguarantees can be found at www.worldbank.org/guarantees.

F. Graduation

What is a graduating country?A graduating country is one in which

lending is being phased out, either under or inanticipation of an agreed graduation program.Countries normally graduate from WorldBank lending when they have developed accessto financing from other sources, in sufficientvolume and on reasonable terms. The percapita income of a country is used as the basisfor the graduation purpose.

G. Billing

When is the billing statementproduced and sent to theborrower?

The billing statement is produced twomonths prior to the semiannual due date spec-ified in the Loan Agreement and is sent to theborrower approximately seven weeks beforethe due date.

What happens if a due date falls ona weekend or a non-banking day?

The borrower will be requested to makepayment to the specified depository bank onthe next business day.

H. Fees

When does the commitment feestart to accrue?

Commitment fees begin to accrue 60 daysafter the Loan Agreement is signed. Once the

loan becomes effective, the commitment fee isbilled on the undisbursed amount, on theinterest payment date following the date ofeffectiveness. If the loan does not becomeeffective, the World Bank will not bill the bor-rower for accrued commitment fees.

The contractual commitment charge forIBRD loans is 0.75 percent per annum(excluding any commitment charge waivers).For FSLs, an additional 0.10 percent is chargedduring the first four years of the loan’s life.

Why is the FSL commitment feehigher for the first four years of theFSL’s life?

FSLs carry a commitment charge risk pre-mium of 0.10 percent on undisbursed loanamounts during the first four years of theloan’s life. This is in addition to IBRD’s 0.75percent standard commitment fee. The com-mitment charge risk premium compensatesIBRD for funding risk, given that the loan mayhave been committed but not yet funded.

How is the front-end feecalculated?

The borrower shall pay to the Bank afront-end fee in an amount equal to one per-cent (1%) of the amount of the loan, subject toany waiver of a portion of such fee.

Is the front-end fee adjusted in theevent the loan amount is reducedor canceled for any reason?

If a loan is partially or fully canceled on orafter effectiveness, no adjustment to the front-end fee is made. This applies equally to loansdisbursed in tranches; if a tranche is canceledafter effectiveness, no portion of the front-endfee is refunded to the borrower.24

What happens when anundisbursed amount is notcanceled?

The borrower continues to pay commit-ment charges on the amounts undisbursed


until the World Bank is notified in writing tocancel any amount of the loan not yet with-drawn. If at cancellation time the commitmentfee on the canceled amount has already beenbilled, the billing statement for the next duedate will be adjusted to reflect the cancellationof the undisbursed amount and the reductionin the commitment fee.

Does IBRD amend the amortizationschedule after a loan has beenapproved?25

The World Bank generally does not amendexisting repayment terms for any loan, exceptwhen: (a) disbursement has been delayed; or(b) extraordinary circumstances exist in coun-try or project, in which instance amendmentsare approved on a case-by-case basis.

What happens to a refund receivedby the World Bank under a closedloan or credit account?

In most cases, the World Bank appliesrefunds relating to closed loan or creditaccounts to the borrower’s future debt service.In determining whether to apply a refund tothis debt service, the World Bank takes severalfactors into account. These include:

■ Amount of the refund. Any refundreceived by the World Bank that is equalto or less than one percent of the totalamount disbursed may be applied tothe next debt service on the same loanor credit under which the original dis-bursement was made.

■ Amount due to the World Bank at thenext due date. If the refund amountreceived by the World Bank for a loanor credit is less than the amount due onthe next debt service payment date,then the refund may be applied to thenext debt service due under that loan orcredit.

■ Time lag between the value date of therefund and the next due date. Anyrefund amount received by the World

Bank three months or more before thenext debt service due date may beapplied to the next debt service dueunder that loan or credit.

If the borrower requests that refunds behandled in a different manner, the requestmust be approved by the Director of the LoanDepartment.

Does the World Bank charge interest on overdue loan charges?

No. However, the World Bank chargesinterest on overdue principal amounts, basedon the prevailing lending rate.

How does a borrower becomeeligible for a partial waiver ofinterest charges?

A partial interest waiver is extended onlyto borrowers from whom the IBRD hasreceived full and timely payments for a con-tinuous period of six months. Full paymentmeans that the borrower has paid all amountsbilled. Timely payment in this context meansno more than 30 calendar days after the duedate. If a borrower fails to make a timely pay-ment on any of its loans, all loans to that bor-rower will be ineligible for a waiver until anew qualifying period of six continuousmonths of full and timely payments is estab-lished. Special Development Policy Loans(formerly known as Special Structural Adjust-ment Loans) are not eligible for waivers ofinterest.

Are new borrowers eligible for apartial waiver of interest charges?

A new borrower is automatically eligiblefor a partial waiver of interest charges, subjectto the conditions above.

Frequently Asked Questions 35

What happens when a payment isoverdue for more than 30 days and60 days?

As soon as a payment is more than 30 daysoverdue, no new loans and credits for thatcountry will be presented to the Board forapproval, and any previously approved loansand credits will not be signed. In addition,IBRD borrowers may lose eligibility for thepartial waiver of interest charges on theirloans. For both IBRD and IDA borrowers,when a payment is outstanding for 60 days ormore, disbursements to all borrowers in thatcountry are suspended.

What happens when a paymentbecomes six months overdue?

On the date of the second consecutiveservice payment is missed (known also as the“trigger date”), the regional Vice Presidentsends a notice to the member. A formal noticeis also sent to the Board within two days of thatdate, and a news release is distributed. Infor-mation on those borrowers with loans for

which payment is more than six months over-due is included in the World Bank's financialstatements.

In which currency are the bills paid?Bills are paid in different currencies,

according to the product:

IDA credits—in the currency of commit-ment.

IBRD LoansCurrency pool loan—in Euros, JPY, or

USD, as determined by the Treasury Depart-ment.

Single currency pool loan (SCP)—inEuros, JPY, or USD, depending on the currencychosen at the time of conversion.

Variable-spread loan and fixed-ratesingle currency loan—in the currency ofcommitment.

Fixed-spread loan—in the currency ofcommitment.


Attachment A.

Currency Choice Conversion ofCurrency Pool Loans

For new loans, IBRD offers only the fixed-spread loan (FSL) and variable-spread loan(VSL) financial terms set out in OP 3.10. Thisannex presents the terms and conditions of pastIBRD loan offerings, which still govern someoutstanding loans.

Based on a decision of its Executive Direc-tors in June 1996, the World Bank adopted apolicy under which it offered choice of cur-rency for all IBRD currency pool loans (CPLs)for which the invitation to negotiate wasissued before September 1, 1996. The offer wasin effect from that date, September 1, 1996,through June 1, 1998. The offer reflected andresponded to borrower demand for broadercurrency choice for IBRD loans. The policy onthe conversion of CPLs to SCLs and SCPsappears as follows in Annex A, paras. 19—26,of the World Bank’s Operational Manual,OP3.10 (with this excerpt appearing under thetitle, “Offer of Currency Choice for existingCPLs as of September 1996”):

19. Between September 1, 1996, and June1, 1998, IBRD offered borrowers the option toamend the terms of their existing CPL(VLR89, VLR82, or fixed-rate) Loan Agree-ments to change their currency obligation.Borrowers could request the following:

(a) conversion of undisbursed loanamounts to single currency loan terms (VSL orFSCL); or

(b) conversion of disbursed loan balancesand undisbursed loan amounts (not convertedto single currency loan terms) to one of foursingle currency pools (SCPs); or

(c) a combination of (a) and (b).

Conversion of Undisbursed Loan Amounts toSingle Currency Loan (SCL) Terms

20. Borrowers could convert undisbursedbalances into any currency or currencies ofsufficient borrower demand that the IBRDcould efficiently intermediate. They could alsochoose between VSL or FSCL terms.

21. LIBOR-based SCL Terms (presentlyknown as VSL terms). The lending rate for loanamounts converted to VSL terms is deter-mined in the same manner as for new VSLsless any applicable waivers (see OP 3.10, paras.25-26).

22. Undisbursed loan amounts convertedto VSL terms retained the same remainingmaturity as the original currency pool loanhad before its terms were amended. The amor-tization schedule was adjusted using a pro ratashare of the amortization schedule of the orig-

37

inal loan, such share being the ratio of con-verted amounts to the sum of converted andunconverted balances.

23. Fixed-Rate SCL (FSCL) Terms. Thelending rate for loan amounts converted tofixed-rate SCL (FSCL) terms is determined inthe same manner as for existing FSCLs less anyapplicable waivers.

24. Loans converted to FSCL terms havematurities, grace periods, and amortizationschedules set in the same manner as for newlycontracted FSCLs, and in no case do theyexceed the final maturity of the original cur-rency pool loan.

Conversion of Disbursed and Undisbursed LoanAmounts to Single Currency Pool (SCP) Terms

25. Currencies. Loans that were converted tosingle currency pool (SCP) terms were to bemulticurrency obligations initially and wouldcontinue to be expressed in U.S. dollar equiva-lents. SCPs were offered in four designated cur-rencies: Deutsche mark, Japanese yen, Swissfranc, and U.S. dollar. Deutsche mark SCPs werere-denominated to euro on December 31, 2001.

26. Since January 1, 1999, IBRD hasestablished a currency composition for eachSCP that is 100% in the borrower’s desig-nated currency.


Attachment B.

Prepayment of IBRD Loans

This attachment describes the general termsapplicable to prepayment for the followingtypes of IBRD loans: fixed-spread loans(FSLs); variable-spread loans (VSLs); fixedrate single currency loans (FSCLs); and, collec-tively, the category of pre-pool loans, currencypool loans (CPLs), and single currency poolloans (SCPs).

1. Fixed Spread Loans (FSLs)IBRD may charge the borrower a prepay-

ment premium to cover the cost to IBRD ofredeploying prepaid funds.i The premium is cal-culated as described in para. (a) below for anyportion of an FSL that has not been convertedand as described in para. (b) below for any por-tion of an FSL that has not been converted.

(a) Prepayment of unconvertedportions of FSLs

IBRD charges the borrower a prepaymentpremium equal to the discounted presentvalue of the differential between the fixedspread payable on the prepaid loan and thefixed spread in effect for FSLs in the relevantloan currency at the date of prepayment.

(b) Prepayment of convertedportions of FSLs

If all or any portion of an FSL has beenconverted, the prepayment premium will be

calculated as the sum of the following compo-nents:

(i) a prepayment premium on account ofthe underlying floating rate FSL, as outlined inpara. (a);

(ii) an “Unwinding Amount”ii in connec-tion with the early termination of any conver-sion. The “Unwinding Amount” is the mark-to-market value of any swap effected for therelevant conversioniii and can result in either acost to the borrower (i.e., an additionalamount payable by the borrower to the Bank)or a gain by the borrower (subtracted from theamount to be prepaid or paid by the bor-rower).iv

(iii) an equivalent percentage surcharge onany equity-funded portion of the loan to beprepaid;

(iv) a transaction fee, applied to theamount of the principal being prepaid (see theBCFBD website for transaction fee informa-tion: http://www.worldbank.org/fps).

2. Variable Spread Loans (VSLs)The total spread on a VSL consists of a con-

tractual lending spreadv and a variable costmargin (adjusted every six months based on theweighted average cost margin of the debt allo-cated to VSLs). The prepayment premium isbased on IBRD’s redeployment cost of the pre-paid funds, derived from the difference betweenthe contractual lending spread of the prepaid

39

loan and the contractual lending spread ineffect for VSLs in the currency of the prepaidloan at the date of prepayment.vi The net pres-ent value of the cashflows is computed by takinginto account current market rates and the totalspread in effect for VSLs at the date of prepay-ment. Prepaid amounts are applied first to thelatest maturities due on the loan.

3. Fixed Rate Single Currency Loans(FSCLs)

IBRD charges a prepayment premiumbased on the cost of redeploying the fullamount of the loan to be prepaid from the dateof prepayment to the original maturity date.Under an FSCL, IBRD enters into rate-fixingswap transactions to provide the borrowerwith a fixed rate. IBRD fixes the rate for theamount of the loan disbursed during a periodthrough an end-of-period rate-fixing swaptransaction. Thus an FSCL consists of multipletranches, each with its own fixed rate. Upon aprepayment, IBRD unwinds the rate-fixingswap transaction(s) it executed in connectionwith the prepayment.vii The degree of off-mar-ketness of each such rate-fixing swap is used todetermine the redeployment cost of the fullamount of the loan to be prepaid. If IBRDenters into more than one rate-fixing swaptransaction in connection with the prepay-ment, IBRD nets out any gains and lossesresulting from the unwinding of such swaptransactions. The borrower pays IBRD the netamount, so calculated, as the prepayment pre-mium—provided, however, that if such net-ting results in a negative amount (i.e., in anamount due to the borrower), such amount isdeemed to be zero. Prepaid amounts areapplied in the inverse order of the disbursedamounts under the loan, with the disbursedamount withdrawn last being prepaid first,and with the latest maturity of such disbursedamount being prepaid first. Within eachtranche, the amount to be prepaid is applied ininverse order of maturity.

4. Pre-Pool Loans, Currency PoolLoans (CPLs), and Single CurrencyPool Loans (SCPs)

Assessment of the prepayment premiumwaiver on pre-pool loans, CPLs, and SCPs isbased on the following procedure:

(a) The latest available carrying values andestimated values for loans in various cate-gories, as reported semiannually in IBRD’saudited financial statements, serve as the basisfor assessing whether a waiver of the contrac-tual prepayment premium can be granted.viii

(b) The prepayment premium on the loanis waived in its entirety if the estimated valueof all loans in a particular category is less thanor equal to the carrying value. However, thepremium is applied if the estimated value isgreater than the carrying value—with the pro-viso that it will equal the smaller of the com-puted contractual premium on the loan andthe premium over the carrying value, as deter-mined by the estimated value. If interest rateswere to rise, the off-marketness of the lendingrates would narrow, and the contractual pre-payment premium on these loans could exceedthe premium of the estimated value over thecarrying value. In that case, the borrowerwould pay the latter as the premium, thusreceiving a partial prepayment premiumwaiver.

(c) For pre-pool loans with interest rateslower than 7%, prepayment premium waiversmay be granted on a loan-by-loan basis. (Allpre-pool loans are fixed-rate loans).

(d) For financial intermediary loans withflexible amortization schedules, IBRD waivesthe premium if the financial intermediariesmake the prepayments after receiving the pre-payments from the sub-borrowers.

(e) Prepayment premium schedules forpre-pool loans, CPLs, and SCPs are included inthe Loan Agreements for those loans. Premiaare calculated in accordance with these sched-ules, as illustrated below.


(f) For pre-pool loans, CPLs, and SCPswith a fixed rate, the total prepayment pre-mium equals the sum of the premia for eachmaturity being prepaid; such premia, in turn,are calculated as the product of the maturityamount and the premium rate for that matu-rity, as stated in the Loan Agreement.

(g) For CPLs and SCPs with a variablerate, the premium rate for each of maturitybeing prepaid is calculated by multiplying thecurrent interest rate on the loan with theappropriate factor from the “Premiums onPrepayment” schedule in the Loan Agreement.The premium rate so computed is then appliedto the appropriate maturity to derive the pre-payment premium for that maturity. Premiacomputed for all maturities being prepaid areadded together to derive the total prepaymentpremium for the loan.

(h) As an illustration, assume a CategoryIII country prepays any variable-rate pool loanwith four remaining maturities. Each maturityis $1 million and the total prepayment is US$4million. Assume further that the current inter-est rate on the loan is 6.5% and the factor fromthe “Premiums on Prepayment” schedule inthe Loan Agreement is 0.18. The premium ratefor the maturities being prepaid is (.065*.18) =.0117, or 1.17%. Multiplying $4 million by thepremium rate of 1.17% produces the total pre-mium for the loan of $46,800.

Annex B Notesi. A loan to a borrower may be funded by IBRD

through a combination of debt and equity. The cal-culation of redeployment cost covers both por-tions, debt and equity. If IBRD executes a markettransaction or applies a screen rate in order to effecta conversion, it does so only with respect to thedebt-funded portion of the loan. Thus, for portionsof FSLs that have been converted, any calculation ofredeployment cost has to be adjusted so as toinclude the redeployment cost of the equity-fundedportion. This is detailed in component (ii) of para.1 (b).

ii. “Unwinding Amount” is defined in the Gen-eral Conditions Applicable to Loan and Guarantee

Agreements for Fixed Spread Loans, dated Septem-ber 1, 1999, Article 2.01 (46).

iii. The Bank may have effected the relevantconversion by entering into a hedge transactionwith a market counterparty or by applying a screenrate (in the circumstances described in the Conver-sion Guidelines). In both cases an UnwindingAmount may be payable by either the Bank or theborrower, as the Bank would have taken a positionin order to effect the conversion that would have tobe reversed because of a loan prepayment.

iv. The Bank will effect a market transaction oruse a screen rate calculation, either on the prepay-ment date or shortly thereafter; it generally takestwo business days to settle a swap.

v. As approved by the Board of ExecutiveDirectors from time to time.

vi. Article III, Section 3.04 (c) of the GeneralConditions applicable to VSLs provides that thepremium payable on prepayment of any maturityshall be an amount reasonably determined by theBank to represent any cost to the Bank of redeploy-ing the amount to be prepaid from the date of pre-payment to the maturity date. Although the spreadon the VSL includes a variable margin adjustedevery six months on the basis of the weighted aver-age cost margin of the debt allocated to VSLs,under current practices, the calculation of the rede-ployment cost derived from the difference in thevariable margins would result in a de minimisamount being payable to the Bank (equal to the dif-ference in spreads for the period from the date ofprepayment until the next interest payment date).As this amount is not likely to be significant, undercurrent practices, the difference in the VSL’s vari-able margin is not included in the calculation of theprepayment premium.

vii. The Bank effects a market transaction oruses a screen rate calculation on the prepaymentdate or shortly thereafter; it generally takes twobusiness days to settle a swap.

viii. “Carrying value” and “estimated value” areterms used in IBRD’s financial statements. The“carrying value” of an IBRD loan is synonymouswith the book value of the loan and is expressed inUSD equivalent terms. It can be defined as the his-torical value of currencies in USD equivalents out-standing on the loan, plus the translation adjust-ment on the loan. IBRD loans do not have asecondary market. “Estimated values” of IBRDloans published in IBRD’s financial statements areused as a proxy for the market-to-market value ofIBRD loans.

Attachments 41


APPLICATION FORM FOR PREPAYMENT OF IBRD LOANS

Country/Borrower :

Date of Request:

Proposed Prepayment Date (must be at

least 45 days after Date of Request)1 :

Loan Details :

Loan Type (Please mark)For Partial Prepayments, please indicate the

following:Loan No.

CPL SCPL VSL FSL FSCL NPL

Indicate either

Full or Partial

Prepayment Currency Amount %

(Use additional sheets, if required)

Notes:

1. CPL: Currency Pool Loans

SCPL: Single Currency Pool Loans

VSL: Variable-Spread Loans

FSL: Fixed-Spread Loans

FSCL: Fixed Rate Single Currency Loan

NPL: Pre-Pool Loans

2. For CPL only:

Prepayment of CPLs are accepted only between the first of the month and two business days before the 15th

of the month.

In selecting a prepayment date, borrowers should keep in mind that we can only calculate the final amounts due on CPLs

seven business days after the closing of our mid-month accounting cycle (14th

of the month), when the pool unit values are

determined. Thus a prepayment date closer to the beginning of the month will result in a longer waiting period before the final

amounts are known, with subsequent impact in the settlement of excess/shortfall prepayments.

3. No currency conversion facilities are currently being offered on prepayments. All prepayments are payable in the currency of

the loan. CPLs are payable in any of the outstanding currencies in the pool (or a combination thereof) in any proportion, as

determined by the IBRD.

Attachments 43

For Partial Prepayment of FSLs, specify Maturities to be prepaid * :

FSL Loan No. Maturity Date Maturity Amount Maturity Amount to be Prepaid

(Use additional sheets, if required)

* For FSLs, the borrower may specify which loan maturities are to be prepaid. If the borrower does not so specify, any such prepayment will be applied

as follows: (a) if the Loan Agreement provides for the separate amortization of Disbursed Amounts, the prepayment is applied in the inverse order of

such Disbursed Amounts, with the Disbursed Amount that had been withdrawn last being prepaid first and with the latest maturity of such Disbursed

Amount being prepaid first; and (b) in all other cases, the prepayment is applied in the inverse order of maturity of the loan, with the latest maturity

being repaid first.

Reason for prepayment:

Contact Information for Prepayment Confirmation:

Name: __________________________________ Telephone: ____________________

Title: __________________________________ Facsimile: ____________________

Address 1: __________________________________ Email: ____________________

Address 2: __________________________________

Signature: __________________________________

Other Contact Person: __________________________________ Telephone: ____________________

Facsimile: ____________________

Email: ____________________

∞ The Authorized Representative is the person currently designated as representative of the borrower, or by a person duly authorized to act on his/her behalf, as

per the legal agreement of the loan.

∞ This form should be sent to The IBRD under a cover letter of the borrower proposing the prepayment. Please mention any additional contact details (including

E-mail address, Fax, and Telephone Numbers) that will facilitate the prepayment process.

This completed form and any related correspondence should be addressed to:

Attn: Mr. Antonio Dávila-Bonazzi / Mr. Amit Mehra Telephone:+1 (202) 458-8330

Loan Services Group (ACTCF) Facsímile: +1 (202) 522-3428

The World Bank E Mail: [email protected]

1818 H Street, NW

Washington DC 30433

USA

Disclaimers:

(a) This form is not a recommendation for prepayment by the World Bank.

(b) Information available regarding correspondence address, types of loans, and currencies of recall is subject to change

(c) Submission of this form implies an independent decision for prepayment made by the borrower.

(d) Submission of this form to the World Bank is not to be construed as acceptance of the prepayment proposal by the World Bank.

Notes

1. Additional information on The World BankLending Instruments is available at www.world-bank.org (click on Projects & Operations and selectFinancing Instruments).

2. See OP/BP 8.60, Development Policy Lend-ing, at www.worldbank.org (click on Projects &Operations, select Policies & Procedures, Opera-tions Manual of WB Policies/Volume I/Strategies &Products, Business Products and Instruments).

3. Additional information on The World BankLending Instruments is available at www.world-bank.org (enter “Lending Instruments” in thesearch line and select Projects–Investment & Devel-opment Policy Lending).

4. See OP 3.10, Financial Terms and Conditionsof IBRD Loans, IBRD Hedging Products, and IDACredits, at www.worldbank.org (click on Projects &Operations, select Policies & Procedures, Opera-tions Manual of WB Policies/Volume I/Strategies &Products, Business Products and Instruments).

5. For additional information, please refer toThe Fixed-Spread Loan (April 2003) and MajorTerms and Conditions of IBRD Loans (February2001). Both brochures are available from the Bank-ing and Debt Management Group or atwww.worldbank.org/fps.

6. In the unlikely event that IBRD is unable tofund itself in a particular currency, it may providethe borrower with a substitute currency.

7. For more information, see OP 3.10, AnnexD, available at www.worldbank.org (click on Pro-jects & Operations, select Policies & Procedures,Operations Manual of WB Policies/Volume I/Strategies & Products, Business Products andInstruments).

8. For additional information, please refer tothe brochure, IBRD Hedging Products: An Introduc-tion (May 2001), available from the World Bank’sBanking and Debt Management Department, or atwww.worldbank.org/fps.

9. Currency swaps on CPLs and SCPs reflectexchanges only of principal.

10. Current and revised fee schedules are avail-able at www.worldbank.org/fps.

11. See OP 3.10, Annex D, IBRD/IDA Coun-tries: Per Capita Incomes, Lending Eligibility, andRepayment Terms, at www.worldbank.org (click onProjects & Operations, select Policies & Procedures,Operations Manual of WB Policies/Volume I/Strategies & Products, Business Products andInstruments).

12. See the front notes to Annex D to OP 3.10for the current equivalent of the historical percapita income ceiling figure

13. See the front notes and footnote 2 to AnnexD to OP 3.10 for the current equivalent of the oper-ational cutoff figure and exceptions to the cutoff.

14. For additional information, please see the Guarantees website at www.worldbank.org/guarantees (click on Projects & Operations andselect Financing Instruments).

15. Such guarantees usually cover a portion ofdebt service on a borrowing (loans or bonds) by aneligible member country from private foreign cred-itors, in support of agreed structural, institutional,and social policies and reforms. The guarantee canbe self-standing or part of a larger package of IBRDfinancial support.

16. For additional information on IDA grants,please refer to IDA website at http://www.worldbank.org/

45

17. This notice may be delayed in certain situ-ations, as described in OP 13.40, available atwww.worldbank.org (click on Projects & Opera-tions, select Policies & Procedures, OperationsManual of WB Policies/Volume II/Project Require-ments, Contractual).

18. “New loans” are defined here as those loansfor which the invitation to negotiate was issuedprior to July 31, 1998, and “old loans” as those loansfor which the invitation to negotiate was issued onor after July 31, 1998.

19. See OP 3.10, Annex B, Prepayment of IBRDLoans, at www.worldbank.org (click on Projects &Operations, select Policies & Procedures, Opera-tions Manual of WB Policies/Volume II/ProjectRequirements, Contractual).

20. See Attachment, Application Form for Pre-payment of IBRD loans.

21. The carrying value of a loan represents itsbook value and is expressed in US Dollar equivalent.

22. The Guidelines for Conversion of LoanTerms for Fixed-Spread Loan are available the Bank-ing and Debt Management Group (BCFBD) or atwww.worldbank.org/fps.

23. Model hedge request forms are availablefrom ACTCF or at www.worldbank.org/fps.

24. See OP 3.10, para. 8, Front-end Fee, atwww.worldbank.org (click on Projects & Opera-tions, select Policies & Procedures, OperationsManual of WB Policies/Volume II/Project Require-ments, Contractors).

25. See OP 3.10, para. 19, Financial Terms andConditions of IBRD Loans, IBRD Hedging Products,and IDA Credits, and BP 3.10, para. 10, Changes toApproved Repayment Terms of IBRD Loans, atwww.worldbank.org (click on Projects & Opera-tions, select Policies & Procedures, OperationsManual of WB Policies/Volume II/Project Require-ments, Contractors).


Glossary

AAcceleration Clause—A provision in a loan

agreement requiring that under default,any remaining interest and principalimmediately become due.

Accrual Accounting—Accounting methodthat recognizes transactions and otherevents when they occur (i.e., not necessar-ily when cash or its equivalent is issued orpaid). The events are recorded in theaccounting periods when they occur andalso reported in the financial statements ofthose periods.

Annuity Amortization—A method of princi-pal amortization wherein the principal isrepaid in installments over time. The prin-cipal amount due on each repayment dateis based on the sum of the principal andinterest of each installment, using a dis-count rate determined at the time of theloan negotiation. This assumes there is norate change over the life of the loan. Actualrepayment obligations depend on dis-bursed amounts, and interest rates maychange over time.

Applicable Exchange Rate (AER)—IBRD’sfinancial transactions are valued usingapplicable exchange rates. The AER isbased on exchange rates reported byReuters at 7:00 am. New York time. Under

the currency pool system, it is essentialthat currency risks be shared equitablyamong all currency pool borrowers andthat a single AER for each currency beused for the valuation of all transactionson a particular date.

Automatic Rate Fixing (ARF) Arrange-ment—An arrangement wherein theinterest rate of a fixed-spread loan (FSL) isfixed automatically, according to a pre-specified schedule, either at regular peri-ods or once a predetermined volume ofdisbursements is reached.

Average Life—The average length of time anamount on loan remains outstanding. Ittakes into account the timing of both dis-bursements and principal repayments.Average life is a measure of the periodduring which the borrower has use of theloan proceeds, and is calculated as the sumof the annual loan balances divided by theface value of the loan.

BBase Rate—An interest rate used as an index

to price loans or deposits. Quoted interestrates are typically set at mark-up, such as0.25% or 1%, over the base rate—so thatthey change when the base rate changes.The base rate for fixed-spread loans andvariable-spread loans is the six-month

47

LIBOR. For currency pool loans, the baserate is IBRD’s semester weighted averagecost of the outstanding debt funding theseloans. Since a vast majority of the fundingis medium to long-term fixed-rate debt,the lending rate for currency pool loansrepresents a moving average of IBRD’s his-torical funding costs.

Blend Country—Country eligible to receivefinancing from both IBRD and IDA.

CCarrying Value—The carrying value of an

IBRD loan is synonymous with the bookvalue of the loan and is expressed in USDequivalent terms.

Charges Category—An amount specified inthe Loan Agreement for capitalization ofcharges during the implementation periodof the project.

Closing Date—The date specified in a LoanAgreement after which IBRD may, bynotice to the borrower and the Guarantor,terminate the rights of the borrower tomake withdrawals from the loan or creditaccount.

Co-Financing—An arrangement under whichfunds from the World Bank are associatedwith funds provided by other sources out-side the borrowing country in the financ-ing of a particular project.

Commitment—An obligation by the WorldBank, effective upon signing of the LoanAgreement, to make a specific amount offunds available for the purpose of the loan,subject to the borrower’s fulfillment of anyconditions specified in the project docu-ments.

Commitment Currency—Currency in whicha borrower’s loan or credit is denomi-nated. This is also the currency of obliga-tion of the borrower.

Commitment-Linked Repayment Schedule—Loan grace period and repaymentmaturities, as fixed at loan commitment.

Conversion—A modification of the terms ofall or any portion of the loan, as requestedby the borrower and accepted by theWorld Bank. As provided in the LoanAgreement, the conversion may include:(a) an interest rate conversion; (b) a cur-rency conversion; or (c) establishment ofan interest rate cap or interest rate collaron the variable rate.

Conversion Date—The interest payment dateon which the conversion enters intoeffect—or, in the case of a currency con-version of an unwinding amount of theloan, such other date as the World Bankshall determine.

Conversion Period—The period from andincluding the conversion date, to andincluding the last day of the interest periodon which said conversion terminates by itsterms—provided that, solely for the pur-pose of enabling the final payment ofinterest and principal in the approved cur-rency, such period shall end on the interestpayment date immediately following thelast day of the final applicable interestperiod.

Currency Pool Loan—A multi-currency loancommitted in US Dollar equivalent. How-ever, a currency pool loan is not a USDollar obligation.

DDebt Service—All payments made against a

loan or credit—i.e., principal repaymentsplus interest or service charges and othercharges.

Disbursed and Outstanding Balance—Theamount that has been disbursed from aloan or credit commitment that has notyet been repaid.

Disbursement Currency—Currency in whichthe World Bank effects payment to a bor-rower or to a borrower’s supplier of goodsand services.

Disbursement-Linked Repayment Schedule—Repayment schedule linked to actual


disbursements, under a fixed-spread loan.Cumulative disbursements during eachsix-month period (a “disbursed amount”)are repayable on a schedule that com-mences from the beginning of the interestperiod following disbursement. Graceperiod, final maturity, and repayment pat-tern are specified in the Loan Agreementand are the same for all disbursed amountsunder that loan.

EEffective Date—The date on which a Loan

Agreement, Credit Agreement, and Guar-antee Agreement, if any, enter into effect.

Estimated Value—In the absence of a second-ary market for IBRD loans, the value of anIBRD loan as published in the WorldBank’s financial statements and used as aproxy for the theoretical marked-to-market value of the loan.

Execution Date—With respect to a conver-sion, the date by which the World Bankshall have undertaken all actions necessaryto effect the conversion, as reasonablydetermined by the World Bank.

Expected Average Disbursement Period—The weighted average period of timebetween loan approval and expected dis-bursement.

FFixed Spread—For a fixed-spread loan, a

spread that reflects: (a) IBRD’s projectedcost margin relative to US Dollar LIBOR;(b) a basis swap adjustment in the case ofa non-US Dollar loan; (c) a market riskpremium; and (d) IBRD’s standard lend-ing spread. With respect to the initial loancurrency, the spread will be that in effect at12:01 a.m., Washington, D.C. time, onecalendar day prior to the date of the LoanAgreement, and will remain in effectthroughout the life of the loan.

Floating Rate—A rate that changes at regularintervals, depending on the base rate (e.g.,6-month LIBOR). The instrument is re-priced whenever the base rate changeswithin a predetermined rest period.

GGrace Period—The period between the com-

mitment date of a loan or credit and thescheduled date of the first principal repay-ment.

IInterest Rate Risk—Risk or uncertainty asso-

ciated with the expected return from afinancial instrument, attributable tochanges in interest rates over time.

Interest Payment Date—The date specified inthe loan agreement for the payment ofinterest.

JJoint Financing—Co-financing operation for

which: (a) a common list of goods and serv-ices exists; and (b) disbursements for all orcertain items are shared in agreed propor-tions by the World Bank and the co-lender.

LLending Instrument—Loan for a specific pur-

pose—in the case of the World Bank,either a development policy loan or aninvestment operation.

Lending Product—A financial product whichdefines particular currency and repaymentterms—e.g., fixed spread or variable rate.

Level Repayment of Principal—A method ofprincipal amortization on a loan whereinthe principal is repaid in equal install-ments over time.

London Inter-bank Offered Rate (LIBOR)—Interest rate at which banks lend to eachother in the inter-bank market in London.Floating rate instruments often use LIBORas the interest rate index.

Glossary 49

MMaster Derivative Agreement—This agree-

ment provides the contractual frameworkbetween the borrower and IBRD for hedgetransactions, including the requirement todocument each transaction with a confir-mation. Master derivative agreements havecross-remedy provisions with IBRD LoanAgreements and vice versa; default underthe derivative agreement is treated in thesame manner as default under the LoanAgreement.

NNon-Accrual Status—For accounting pur-

poses, the Bank treats as uncollectible theentire remaining balance, both principaland interest, of all loans made to or guar-anteed by a member country that the Bankhas placed in non-accrual status.

OOn-Lending—Occurs when World Bank

funds are channeled through the govern-ment or a local financial intermediary topublic and private entities in the form ofsub-loans. Whenever the government isthe direct borrower, it enters into a sub-sidiary loan agreement with any sub-bor-rower.

PPro Rata—Basis for allocating an amount pro-

portionately to items involved. In the caseof a canceled loan amount, that amountmay be proportionately distributed to theremaining maturities.

RRetroactive Financing—World Bank dis-

bursements against eligible expendituresmade by borrowers within specified peri-ods prior to signing a Loan Agreement.

SSuspension of Disbursement—Remedial

action taken by the World Bank to haltfurther loan proceeds from being drawndown by a borrower. Suspension of dis-bursement occurs when the borrower is inbreach of loan conditions.

TTerminal Date for Effectiveness—A date

specified in the Loan Agreement indicat-ing the latest date a loan or credit may bemade effective.

Terminal Date for Charges—A date specifiedin the Loan Agreement, after which, unlessthat date is extended, the amount availablefor capitalization of charges can no longerbe used.

Trigger Date—The date on which the loanportfolio of a particular member will beplaced in non-accrual status. The triggerdate is the date of the second consecutivemissed payment on any loan, credit, orproject preparation advance, or the dateon which the final amortization paymentbecomes overdue by more that six months.

UUnwinding Amount—Amount to be paid by

the borrower in the case of prepayment ofa loan.


Bibliographyand other useful information

World Bank Debt Servicing Handbook for Bor-rowers (March 2005), available from theAccounting Department’s Loan ServicesGroup.

Disbursement Handbook (July 1998), availablefrom the Loan Department.

Guidelines for Using IBRD Hedging Products(February 2001), available from the Bank-ing and Debt Management Department orat www.worldbank.org/fps

The Fixed-Spread Loan (April 2003), availablefrom the Banking and Debt ManagementDepartment or at www.worldbank.org/fps.

IBRD Hedging Products: An introduction (May2001), available from the Banking andDebt Management Department or atwww.worldbank.org/fps.

Major Terms and Conditions of IBRD Loans(February 2001), available from the Bank-ing and Debt Management Department orat www.worldbank.org/fps.

Partial Waiver of Loan Charges (November1995), available from the Loan ServicesGroup.

Pool Unit Approach to Currency Pool Loans(June 1995), available from the Loan Ser-vices Group.

World Bank Guarantees brochure (January2002), available from the Project Financeand Guarantees Group or at www.world-bank.org/guarantees.

Compendium of IDA Financial Policies (June2004), available from the World Bank’sResource Mobilization Department(FRM).

World Bank Lending Instruments: Resources forDevelopment Impact (July 2001), availableat www.worldbank.org/pdf/Lending_Instr_Eng.pdf (IBRD only).

The World Bank’s Currency Pool (October1988), available from the Loan ServicesGroup.

Specific information on loans andcredits that borrowers can requestdirectly from the Loan Client andFinancial Services Group:Audit Confirmation StatementCopies of Billing StatementsEstimated Debt Service ReportNet Disbursements and Charges ReportStatement of Loans and Credits Statement of Pool UnitsInterest Waiver Earned and Lost by Borrower

Loan Information Available throughthe Client Connection Website

Loan information is available to borrowersthrough the Client Connection website athttps://clientconnection.worldbank.org/ . TheClient Connection allows borrowers to accessinformation on their loans, credits, grants, and

51

trust funds through a secure, password-pro-tected website. This information includes,among others, billing statements, estimateddebt service payments, statements of IBRDloans and statements of IDA credits, pool unitvalue, exchange rate, and current loan specificaccount details. The Client Connection also

features disbursements and procurementinformation as well as a wealth of country-spe-cific data.

If you are interested in gaining access toClient Connection, please send an e-mail [email protected]


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