Financial Solutions FAQ
Flexible Financing Facility (FFF)
Lending in LC
- What is lending in LC?
- If a loan is approved in LC, does it mean that the IDB has the obligation to deliver LCF?
- Is there any flexibility in the design of the amortization schedules in LC loans?
- What rate type (i.e., fixed, floating, inflation linked) choices do borrowers have in LC?
- How is pricing determined in LC?
- Does the IDB provide quotes before an actual financing or conversion to LC takes place?
- When does a LCF request become binding to a borrower?
- How is a borrower informed on the final terms and conditions applicable to a LC financing operation?
- Are prepayments allowed in LC?
- How does the IDB treat arrears in LC?
- What is the settlement currency used by the IDB for LC financing?
- Are there transaction fees associated with LCF?
It refers to the option borrowers have to request financing in LC from the IDB through theapproval of loans directly in LC or through conversions of disbursements and/or outstanding loan balances (OLBs) of loans approved in US dollars. Loans in LC can be customized to meet borrower needs, which include the possibility of choosing a desired amortization schedules or a specific interest rate type, subject to market availability.
No, the fact that a loan is approved by the IDB in LC does not oblige the IDB to deliver LCF if such financing is not available in the market at the time of a disbursement request. In this case, a borrower has the option to disburse the desired amount in US dollars and request a conversion to LC at a later time when market conditions allow funding by the IDB in that currency.
Yes. Given the limitations of the LC markets, borrowers have the ability to request shorter loan maturities or different repayment structures (i.e., bullet amortizations, extended grace periods, shorter amortizing loans) at the time of disbursement/conversion to match available LC funding options available to the IDB. The flexibility to modify such repaymentprofiles is limited by the final maturity and Weighted Average Life (WAL) of the original loan approved by the IDB. Please see Flexible Repayments.
It varies depending on the currency and is subject to market availability at the time of the borrower’s request. Given IDB’s matched funding approach, the IDB can only deliver financing in LC with a particular rate type if such rate exists as a market benchmark and the market is liquid enough to enable funding by the IDB in the desired terms requested by the borrower.
The IDB matches LC lending terms with its LC funding terms; thus, pricing is a pass through of the IDB’s borrowing costs in any currency. The lending rate in a LC is the equivalent in LC of the IDB’s Libor-based estimated funding cost in USD at the time of the disbursement/conversion plus the Ordinary Capital (OC) lending spread charged in the same currency. Alternatively, if operationally possible, pricing in LC reflects actual funding costs by the IDB.
Yes. Per borrower request, at the time of each potential disbursement or conversion of disbursement or OLB into LC, the IDB will provide indicative quotes to facilitate borrower decision making process. Indicative quotes are subject to market conditions, are not binding, reflect the desired cash flows and interest rate type requested by a borrower, and have no cost. Communication on indicative quotes between the borrower and the IDB is done informally via e-mail.
Once a borrower submits to the IDB the Disbursement/Conversion Request Letter with specific indications on desired cash flows and interest rate type, such request becomes irrevocable and the IDB proceeds to execute the LC financing requested by the borrower. Per such Letter, the IDB is mandated by the borrower to execute the LC financing within a specified period of time at an interest rate that cannot exceed a ceiling set by the borrower.
Borrowers are informed by the IDB on the final terms and conditions applicable to a LC financing through the Disbursement/Conversion Notification Letter. This Letter is submitted by the IDB to the borrower as soon as the associated match-funded operation is executed by the IDB.
Prepayments in LC are allowed subject to IDB’s ability to redeploy the funds in such currency. Breakage costs or gains associated with IDB’s redeployment of funds are passed on to the borrower. Please see Local Currency Financing.
Arrears remain in LC. Overdue amounts in LC accrue interest at a floating rate in LC determined by the IDB, plus a penalty spread of 100 bps. In exceptional cases, when the penalty spread is not sufficient to cover costs assumed by the IDB, additional charges are assessed consistent with the full cost pass through approach followed by the IDB in LCF. Please see Local Currency Financing.
Thesettlement currency to receive/repay IDB LC financing varies depending on the currency in question. For fully convertible currencies as defined by Euroclear/Clear Stream, the IDB can deliver LC financing with settlement in LC. Alternatively, the IDB delivers LC financing via the off-shore markets with settlement in USD. Settlement currency is determined at the time of market execution of the LC financing operation by the IDB. Please see Local Currency Financing.
Yes. The IDB charges a per annum fee on the outstanding LC amount. This fee is added to the interest rate basis in LC. Please see Transaction Fees (PDF).