1. IBRD may charge a prepayment premium to cover the cost to IBRD of redeploying prepaid funds.1 The calculation of the redeployment cost for all or any portion of an FSL that has not been converted is carried out in accordance with para.2 (a) below and, for all or any portion of an FSL that has been converted, in accordance with para.2 (b) below.
(a) Prepayment of unconverted portions of FSLs
(i) The amount of the prepayment premium is based on the difference between the fixed spread payable on the prepaid loan and the fixed spread in effect for FSLs in the relevant loan currency at the date of prepayment.
(ii) Compute the present value of the cash flows using the difference in the fixed spread computed in (i). This present value computation takes into account current market rates and the fixed spread in effect for FSLs in the initial loan currency at the date of prepayment.
(iii) The present value computed in (ii) is the premium the borrower is charged by the Bank
(b) Prepayment of converted portions of FSLs
2. If all or any portion of an FSL has been converted, the prepayment premium will be calculated based on the following components:
(a) prepayment premium on account of the underlying floating rate FSL as outlined in (a) above;
(b) an "Unwinding Amount"2in connection with the early termination of any conversion. The "Unwinding Amount" is the mark-to-market value of any swap effected for the relevant conversion3and can result in a cost or gain to the Bank. Any such cost results in an additional amount payable by the borrower to the Bank, and any such gain is subtracted from the amount to be prepaid or paid by the borrower.4
(c) if an Unwinding Amount is payable by the borrower to the Bank, an amount computed by ascertaining the percentage rate that the Unwinding Amount bears to the debt-funded portion of the loan to be prepaid and then applying such rate to any equity-funded portion of the loan to be prepaid;
(d) transaction fee, which is applied to the amount of the principal that is being prepaid (see BCFBD website for transaction fee information: http://www.worldbank.org/fps).
Variable Spread Loans (VSLs)
3. The total spread on the VSL consists of a contractual lending spread5and a variable margin (adjusted every six months on the basis of the weighted average cost margin of the debt allocated to VSLs). The prepayment premium is based on IBRD's redeployment cost of the prepaid funds which is derived from the difference between the contractual lending spread of the prepaid loan and the contractual lending spread in effect for VSLs in the currency of the prepaid loan at the date of prepayment.6 The net present value of the cash flows is computed by taking into account current market rates and the total spread in effect for VSLs at the date of prepayment. Prepaid amounts are applied first to the latest maturities due on the loan.
Fixed Rate Single Currency Loans (FSCLs)
4. IBRD charges prepayment premium based on the cost of redeploying the full amount of the loan to be prepaid from the date of prepayment to the original maturity date. Under an FSCL, IBRD enters into rate-fixing swap transactions to provide the borrower with a fixed rate. At the end of each disbursement period, through a rate-fixing swap transaction, IBRD fixes the rate for the amount of the loan disbursed during that period. Thus an FSCL consists of multiple tranches, each with its own fixed rate. Upon a prepayment IBRD unwinds the rate fixing swap transaction(s) entered into in connection with the amount of the loan to be prepaid.7 The degree of off-marketness of each such rate-fixing swap issued to determine the redeployment cost of the full amount of the loan to be prepaid. If IBRD enters into more than one rate fixing swap transaction in connection with the loan amount to be prepaid, IBRD nets out any gains and losses resulting from the unwinding of such swap transactions. The borrower pays to IBRD the net amount, so calculated, as the prepayment premium; provided, however that if such netting results in a negative amount (i.e., in an amount due to the borrower), such amount is deemed to be zero. Prepaid amounts are applied in the inverse order of the disbursed amounts under the loan, with the disbursed amount, that was withdrawn last being prepaid first, and with the latest maturity of such disbursed amount being prepaid first. Within each tranche, the amount to be prepaid is applied in inverse order of maturity.
Pre-Pool Loans, Currency Pool Loans (CPLs), and Single Currency Pool Loans (SCPs)
5. Assessment of the prepayment premium waiver on Currency Pool Loans (CPLs), Single Currency Pool Loans (SCPs), and pre-pool loans is based on the following procedure:
(a) The latest available carrying values and estimated values for loans in various categories, as reported semiannually in IBRD's audited financial statements, are the basis for assessing whether a waiver of the contractual prepayment premium can be granted.8
(b) The prepayment premium on the loan is waived in its entirety if the estimated value of all loans in a particular category is less than or equal to the carrying value. However, the premium is applied if the estimated value is greater than the carrying value—with the added proviso that it will be the smaller of the computed contractual premium on the loan and the premium over the carrying value as determined by the estimated value. If interest rates were to rise, the "off-marketness" of the lending rates would be narrowed, and the contractual prepayment premium on these loans could be higher than the premium of the estimated value over the carrying value. In that case, the borrower would pay the latter as the premium, thus receiving a partial prepayment premium waiver.
(c) For pre-pool loans with interest rates lower than 7 percent, prepayment premia waivers may be granted on a loan-by-loan basis. (All pre-pool loans are fixed-rate loans).
(d) For financial intermediary loans with flexible amortization schedules, IBRD waives the premium if the financial intermediaries make the prepayments after receiving the prepayments from the sub-borrowers.
6. Prepayment premium schedules for pre-pool loans, CPLs, and SCPs are included in the Loan Agreements for those loans. Premia are calculated in accordance with these schedules as illustrated below. Pre-Pool Loans, Fixed-Rate CPLs, Fixed-Rate SCPs
7. For fixed rate pre-pool loans, fixed-rate CPLs, and fixed-rate SCPs, the premium is computed in the following manner: for each of the maturities of a loan being prepaid, the premium is calculated by multiplying the amount of the maturity by the appropriate premium rate appearing in the Loan Agreement. The total prepayment premium for the loan is the sum of the premia computed for all maturities being prepaid.
Variable-Rate CPL and Variable-Rate SCPs
8. For a variable rate CPL or SCP, for each of the maturities being prepaid, the premium rate is calculated by multiplying the current interest rate on the loan with the appropriate factor from the "Premiums on Prepayment" schedule in the Loan Agreement. The premium rate so computed is then applied to the appropriate maturity to arrive at the prepayment premium for that maturity. Premia computed for all maturities being prepaid are added together to arrive at the prepayment premium for the loan.
9. As an illustration, assume a Category III country prepays any variable-rate pool loan with four remaining maturities. Each maturity is $1 million and the total prepayment is US$4 million. Assume further that the current interest rate on the loan is 6.5 percent and the factor from the "Premiums on Prepayment" schedule in the Loan Agreement is 0.18. The premium rate for the maturities being prepaid is (.065*.18), which is .0117, or 1.17 percent. Multiplying $4 million by the premium rate of 1.17 percent, produces the total premium of $46,800 for the loan.
A loan to a borrower may be funded by IBRD by a combination of debt and equity. The calculation of redeployment cost covers both portions, debt and equity. If IBRD does a market transaction or applies a screen rate in order to effect a conversion, it does so only with respect to the debt-funded portion of the loan. Thus, for portions of FSLs that have been converted, any calculation of redeployment cost has to be adjusted so as to include the redeployment cost of the equity funded portion. This is detailed in component (ii) of para. 1 (b).
"Unwinding Amount" is defined in the General Conditions Applicable to Loan and Guarantee Agreements for Fixed Spread Loans dated September 1, 1999, Article 2.01 (46).
The Bank may have effected the relevant conversion by entering into a hedge transaction with a market counterparty or, by applying a screen rate (in the circumstances described in the Conversion Guidelines). In both cases an Unwinding Amount may be payable either by the Bank or the borrower as the Bank would have taken a position in order to effect the conversion that would have to be reversed or undone because of a loan prepayment.
The Bank will effect a market transaction or use a screen rate calculation on the prepayment date or shortly thereafter, and it generally takes two business days to settle a swap.
As approved by the Board of Executive Directors from time to time.
Article III, Section 3.04 (c) of the General Conditions applicable to VSLs provides that the premium payable on prepayment of any maturity shall be an amount reasonably determined by the Bank to represent any cost to the Bank of redeploying the amount to be prepaid from the date of prepayment to the maturity date. Although the spread on the VSL includes a variable margin that is adjusted every six months on the basis of the weighted average cost margin of the debt allocated to VSLs, under current practices, the calculation of the redeployment cost derived from the difference in the variable margins would result in a de minimis amount being payable to the Bank (being the difference in spreads for the period from the date of prepayment until the next following interest payment date). As this amount is not likely to be significant, under current practices, the difference in the VSL's variable margin is not included in the calculation of the prepayment premium.
The Bank effects a market transaction or uses a screen rate calculation on the prepayment date or shortly thereafter, and it generally takes two business days to settle a swap.
"Carrying" value and "estimated" value are terms used in IBRD's financial statements. The "carrying" value of an IBRD loan is synonymous with the book value of the loan and is expressed in USD equivalent terms. It can be defined as the historical value of currencies in USD equivalents outstanding on the loan, plus the translation adjustment on the loan. IBRD loans do not have a secondary market. "Estimated" values of IBRD loans published in IBRD's financial statements are used as a proxy for the market-to-market value of IBRD loans.