ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) on Thursday quizzed officials of Power Division on the decision to transition from LIBOR to SOFR for power projects.
Power Division in its letter of February 16, 2024 stated that the ECC approved a proposal on the transition of London inter-bank offered rate (LIBOR) to Secured overnight financing rate (SOFR).
As per the approved summary all project lenders with foreign financing are allowed to opt for any of the following options: (i) daily simple SOFR plus relevant international swaps and derivatives association recommended credit adjustment spread (0.26161 per cent for three months and 0.42826 per cent for six months; and (ii) term SOFR plus relevant ISDA recommended Credit Adjustment Spread (CAS).
Power sector: Nepra backs transition from Libor to ‘SOFR’
On March 4, 2024, PPIB advised power projects having foreign financing to approach Nepra for LIBOR to SOFR transition.
A letter on June 12, 2024 was issued by Nepra to 72 power projects having full or part of foreign financing directing them to formally file a Tariff Modification Petition (TMP) in accordance with Nepra’s laws.
In response, only two IPPs namely, Harappa solar (private limited and Gharo Solar Limited complied with the directions of the Authority and filed TMPs.
Recently Pakistan Wind Energy Associations and several Development Financial Institutions (DFIs) requested Nepra to exercise its suo motu powers in order to expedite this process.
According to Nepra written confirmation from 53 power projects has been received so far, of which 11 power projects have opted for daily SOFR, whereas 37 power projects have opted for term SOFR, however, three have requested for both options for different loans.
Two IPPs, Uch-II Power (private) limited and Laraib Energy Limited has requested to allow synthetic LIBOR for their remaining debt term of 1.5 year and 1 year respectively, while remaining power projects have not yet submitted their confirmation.
During the hearing, Nepra’s Authority raised different questions about the transition’s impact on tariff.
The officials of Power Division and representatives of IPPs responded to the questions including future line of action.
The ten DFI comprising Asian Development Bank (ADB), British International Investment plc (BI), DEG - Deutsche Investitions - und EntwicklungsgesellschaftmbH (DEG), US International Development Finance Corporation (DFC), Nederlandse Financierings- Maatschappijvoor 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) jointly wrote a letter to Pakistani authorities for the transition from USD LIBOR to SOFR in the Pakistani energy sector (LIBOR Transition).
The lenders of IPPs and DFIs believe that 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.
Majority of DFIs 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 (ie, 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.
Nepra is likely to announce its decision within a couple of weeks as the DFIs and foreign lenders of IPPs are anxiously waiting for the decision to proceed ahead.
Copyright Business Recorder, 2024
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