ISLAMABAD: The National Electric Power Regulatory Authority (NEPRA) has supported indiscriminate transition from USD London Interbank Offer Rate (Libor) to Secured Overnight Financing Rate (SOFR) in the power sector, well-informed sources told Business Recorder.
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 Credit Adjustment Spread (CAS) over SOFR which is not negotiable.
Power Division has made two efforts to get approval from the Economic Coordination Committee (ECC) of the Cabinet for transition from LIBOR to SOFR but failed to convince the economic decision making body led by the caretaker Finance Minister. The ECC directed Power Division to also prepare a comparative statement of financial benefits of transition.
From Libor to SOFR: DFIs anxiously waiting for transition
Power Division has prepared a third summary and sent it for comments to the concerned stakeholders including the power sector Regulator which argues that it does not have new comments and is relying on its views offered in July 2023.
The NEPRA, in its comments in July had stated that the summary was considered and it was clarified that NEPRA determines tariff under Guidelines for Determination of tariff for IPPs 2005 and relevant power policies which allows LIBOR as cost of debt for adjustment of foreign debt component.
The NEPRA stated that SOFR equivalence to LIBOR needs to be determined by Ministry of Finance, in consultation with EAD and State Bank of Pakistan for uniform application due to its implication on debt servicing/cost of debt. NEPRA further argued that the transition from LIBOR to SOFR should be implemented uniformly across the power sector industry with only one type of SOFR being applied.
Therefore, NEPRA appreciated one type of SOFR that may be applied uniformly across the power sector of Pakistan for a consistent transition.
Recently, 10 DFIs 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) in a joint letter written to Pakistani authorities 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).
The joint letter of DFIs 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 maintain 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,” the joint letter said.
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, the letter so stated.
Copyright Business Recorder, 2023