From Libor to SOFR: DFIs anxiously waiting for transition

ISLAMABAD: Nearly a dozen Development Finance Institutions (DFIs) are anxiously waiting for transition from USD London Interbank Offer Rate (Libor) to Secured Over Night Financing Rate (SOFR) in the Pakistani energy sector, as a consensus has already evolved between the DFIs and concerned Pakistani entities, sources in PPIB told Business Recorder.

The ten DFI comprising Asian Development Bank (ADB), British International Investment plc (BI), DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG), US International Development Finance Corporation (DFC), Nederlandse Financierings- Maatschappij voor Ontwikkelingslanden N.V. (FMO), International Finance Corporation (IFC), Islamic Corporation for the Development of the Private Sector (ICD), Islamic Development Bank (IsDB), The Export-Import Bank of Korea (KEXIM) and Societe De Promotion Et De Participation Pour La Coopération Economique S.A. (Proparco) in a joint letter written to Pakistani authorities have referred to their earlier letters of November 22, 2022, April 5, 2023 and May 29 2023, regarding the transition from USD LIBOR to SOFR in the Pakistani energy sector ( LIBOR Transition).

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The joint letter of DFIs has also referred to the meeting of February 27, 2023, chaired by PPIB, and the meeting of May 8, 2023, chaired by (National Electricity Power Regulatory Authority (Nepra), both attended by IFC, ADB, BII, ICD and IsDB on behalf of the DFIs.

According to the DFIs, Ministry of Economic Affairs, Ministry of Energy, Ministry of Finance, AEDB, PPIB, CPPA-G, SBP and NEPRA had formed a Working Group to recommend an appropriate replacement benchmark for LIBOR (Government Working Group), saying that they look forward to continuing to work with the Government Working Group to ensure a successful and orderly transition to SOFR for the Pakistani energy sector.

According to DFIs, they are writing to follow-up on their previous communications with the Government Working Group, particularly their most recent letter of May 29, 2023, considering the change in certain representatives of the institutions forming the Government Working Group.

“We understand that the Government Working Group has recommended to the Economic Coordination Committee that (i) Term SOFR plus Credit Adjustment Spread (CAS) or (ii) Daily Simple SOFR plus CAS are appropriate replacement benchmarks for LIBOR in the Pakistani energy sector,” says the joint letter signed by the representatives of DFIs.

The lenders of IPPs are of the view that for the reasons detailed in the letter of May 29, 2023 to the Government Working Group, the DFIs believe Term SOFR + CAS is the most appropriate replacement benchmark for the DFIs’ loans/ financing, as it allows for a seamless transition and preserves the underlying economics for all parties.

“We look forward to a favourable decision from the ECC, which would enable the DFIs to use Term SOFR + CAS as the replacement benchmark for the DFIs’ loans/financing to the Pakistani energy sector,” says the joint letter.

Once the ECC approval is granted, the DFIs are ready to work with their IPPs to make the necessary amendments to financing agreements and project documents and the IPPs can also seek the relevant governmental authorisations for these amendments, so stated the letter.

In the meantime, and as noted in the letter of May 29, 2023 to the Government Working Group, the majority of DFIs will need to continue to invoice clients in LIBOR, which will be based on Synthetic LIBOR and the lenders have informed their IPP borrowers of this. The IPPs will consequently need to continue to receive LIBOR under their EPAs/ PPAs to match their loan financing agreement obligations.

As detailed in the letter of May 29, 2023, pursuant to Financial Conduct Authority of the United Kingdom’s decision, LIBOR’s administrator, ICE Benchmark Administration Limited, will continue to publish LIBOR beyond June 30, 2023 until September 30, 2024, by calculating LIBOR using a synthetic methodology, based on Term SOFR +CAS (Synthetic LIBOR).

A small number of DFI loans/financings to IPPs will invoice in Term SOFR + CAS pursuant to their documentation and the economic effect is the same as invoicing using Synthetic LIBOR

“We understand that Nepra and CPPA-G will continue to use LIBOR (i.e., Synthetic LIBOR) for tariff calculations until the earlier of September 30, 2024 and LIBOR’s replacement under each respective EPA/PPA,” stated the joint letter.

However, Chinese sponsors including their lenders maintain that due to various reasons including registration process, they are only allowed to opt for daily Simple SOFR and CAS over SOFR which is not negotiable.

Copyright Business Recorder, 2023