As of August 1, the Inter-American Development Bank (IDB) closed the largest liability management operation it has ever executed with its clients. The exercise allowed borrowers to take advantage of historically low interest rates in dollars by locking fixed rates.
In total, 41 borrowing shareholders and government guaranteed institutions accepted the offer and converted $26 billion of outstanding debt – more than half of the IDB’s total loan portfolio – to new interest rates and/or dollars.
The total participation rate was 76 percent of the $34.8 billion of loans eligible for this offer. The IDB amended 518 loan contracts in its loan portfolio in order to change the interest rates and currencies, where applicable.
“The Conversion Offer is part of a broader IDB strategy of providing greater access to market-standard financial instruments to its borrowers so they may better manage interest rate and foreign exchange risks associated with their IDB debt,” said Chief Financial Officer Edward Bartholomew. “The IDB is committed to working closely with its member countries and other borrowers to offer financial options to better serve their needs. Those unable to participate in this year’s conversion will have another opportunity in 2010.”
The IDB is the largest multilateral lender for Latin America and the Caribbean. The Conversion Offer is consistent with the strategy of providing greater access to borrowers to financial instruments more commonly used in the market place to respond to asset/liability management objectives.
The offer will increase transparency, making debt management easier for the Bank’s borrowers by allowing them to directly manage the currency and interest rate exposure of their debt. The new interest rates on the loans will fully reflect the IDB’s funding costs and the operation will not affect the Bank’s bottom line.
The offer allows countries and entities with sovereign guaranteed loans to convert "adjustable rate" loans to fixed-rate or debt tied to the three-month dollar London Interbank Offered Rate (Libor), or a combination of both. Adjustable interest rates, introduced by the IDB more than a decade ago, are difficult for clients to forecast and hedge because they reflect the cost of the pool of IDB borrowings. Adjustable rates were used in the IDB’s Currency Pooling System and Single Currency Facility Loans.
By using fixed or Libor-based interest rates on IDB loans, borrowers will be able to better forecast the cost of their debt and take advantage of readily available financial instruments to hedge their currency and interest rate risks. In addition, the offer gives countries the opportunity to combine IDB funding with other market sources, a measure that also helps mitigate certain types of risks.