Background Note: Catastrophe Risk Deferred Drawdown Option (DDO), or CAT DDO

Contacts:
In Washington: Alexander Ferguson (202) 458 4953
aferguson@worldbank.org

Background note

Catastrophe Risk Deferred Drawdown Option (DDO), or CAT DDO:

The CAT DDO is a new financial product offered to middle-income country governments by the International Bank for Reconstruction and Development (IBRD), part of the World Bank Group.

Its purpose is to make financing immediately available after a natural disaster, like an earthquake or hurricane. It is intended to fill the gap while other sources of funding, such as emergency relief aid, are being mobilized. Countries can access funds from the facility if they declare a state of emergency as a result of a natural disaster.. Countries that sign up for the CAT DDO must have an adequate hazard risk management program in place that is monitored by the World Bank. The maximum amount available will be limited to U.S. $500 million or 0.25% of a country’s gross domestic product, whichever is smaller.  Loan pricing is in line with standard IBRD terms, which include a 0.25 percentage point front-end fee. .The funds may be drawn down over a three-year period, which may be renewed up to four times for a total of 15 years..   

Enhancement of the Deferred Drawdown Option (DDO):

The DDO is an IBRD product that allows countries to defer disbursements for up to three years and, upon renewal, for another three years.  Similar to a line of credit, the product is designed for countries that have no immediate need for funds but that might suddenly need them if unforeseen events occurred, which made it difficult for them to access the capital markets.

The DDO is being enhanced to address certain issues that created a disincentive to using this option.  Introduced in 2001, only two countries have used the DDO because borrowers were uncertain whether funds would be available when they asked for them. The reason was that disbursements were conditional on reviews to be carried out at the time of the drawdown of funds. In addition, the DDO was more expensive than regular IBRD loans; it charged a higher commitment fee and had a surcharge for a longer maturity.

. The enhancements ensure that borrowers will now have more certainty because the Bank will continuously monitor a borrower’s economy in order to allow disbursement upon request. The funds may be drawn down at any time unless the Bank gives prior notification to the borrower that one or more of the drawdown conditions are not met. The second change aligns the pricing of the DDO with standard IBRD terms, thus eliminating the commitment fee and surcharge for the longer maturity.

Maturity extension

The Colombia loan is the first under a new policy approved for IBRD on February 12 by the Board of Executive Directors. The maximum maturity limit for new IBRD loans and guarantees was extended to 30 years for all borrowers, regardless of country per capita income. Borrowers will now have an average maturity limit of 18 years on their portfolio of IBRD loans. (This compares with a previous maturity limit of 25 years, and an average maturity limit of between 10 years and three months and 14 years and three months, depending on per capita income.)

The changes are summarized in the following table:

The new policy also added flexibility and easier access to risk management tools for IBRD borrowers. IBRD’s Variable Spread and Fixed Spread loans were unified into a single product which offers all borrowers the ability to customize repayment terms at loan inception as well as options to access risk management tools. Previously, these risk management features were only available with a Fixed Spread Loan. Under the unified product, borrowers are offered the following options:

• choice of fixed (for the life of the loan) or variable (recalculated every six months) spread

• repayment schedule flexibility determined at the time of loan signing

• commitment- and disbursement-linked repayment schedules

• currency and interest rate conversions on disbursed amounts

• currency conversion on undisbursed amounts

• caps and collars on interest rate