The Inter-American Development Bank today announced it will offer an additional loan pricing mechanism to borrowing country members that will use the London Interbank Offered Rate as the underlying base to determine interest rates on development loans from ordinary capital.
The new product is the most significant change in the IDB’s lending structure since 1996, when the Bank began offering adjustable rate loans from a Single Currency Facility in four different currencies – U.S. dollars, Japanese yen, Swiss francs and Deutsche marks (now euro) – in addition to adjustable rate loans based on a currency pool.
The LIBOR-based lending rate is a response to interest expressed in borrowing member nations of the Bank for a broader and more flexible set of financial products.
Although LIBOR is now comparatively low, it is a more volatile rate than other lending rate structures based on longer-term financing. The IDB will use hedging instruments to mitigate the exposure to potential interest rate spikes associated with a LIBOR product.
The new LIBOR-based pricing option will be generally available for new IDB development loans from ordinary capital and on recently approved but undisbursed loans. LIBOR-based loans will be available in the same four currencies that now compose the IDB’s Single Currency Facility.
Lending rates for the new LIBOR product will be set quarterly, with semiannual payment dates. The new rates will not apply to direct loans to the private sector without government guarantees – these loans will continue to be priced at market rates – and they will not apply to emergency loans, which are for terms of up to five years with rates set at 400 basis above six-month LIBOR in U.S. dollars.