1. LIBOR-Based Loan (LBL) Treasury Department Controller’s Department Office of the General Counsel Introduction to Maturity-based Pricing

2. Agenda  Main Features of LBL  Maturity-based Pricing Background and Rationale Maturity Premium Average Loan Maturity Repayment Terms  Sample Calculations  Comparison with MDBs  Summary  Q & A 2

3. LBL Main Features 3

4. Background 4  In the past, ADB has not differentiated its sovereign loan pricing according to the tenor of its loans.  Same lending spread is charged for a loan with 10-year maturity and 25-year maturity  Issues: Price distortions Lack of incentives to optimize loan terms De facto subsidization among borrowers

5. Rationale  Consistent with the pricing practices in the financial markets  Encourages borrowers to select a debt management approach driven more by a cost-benefit analysis  Improves economic efficiency, ensuring maturity and repayment profile of a loan properly reflect the actual cash flow requirements of the project  Eliminates the de facto subsidies that are implicit in the undifferentiated pricing structure. 5

6. Maturity Premium (Sovereign and sovereign-guaranteed borrowers, other than project design facility) 6 Average Loan MaturityMaturity Premium a Less than or equal to 13 yearsNIL Greater than 13 years up to 16 years0.10% Greater than 16 years up to 19 years0.20% Applicable to loans for which formal loan negotiations are completed on or after 1 April 2012 The average loan maturity is subject to a limit of 19 years. a To be applied for the entire life of the loan

7. Average Loan Maturity  The weighted average time to repay a loan.  Considers both repayment dates and amounts to provide a better estimation of how quickly a loan is repaid Average Loan Maturity = Sum of Weighted Repayments Sum of Total Repayments 7

8. Sample Calculation of Average Loan Maturity 8 Loan Amount:US$ 60 million Loan Term (inc. Grace Period) :5 years Grace Period:2 years Repayment Term:Straight-Line Average Loan Maturity

9. LBL Repayment Terms - Considerations  Economic life of the project  Financial condition of the borrower  Revenue earning capacity of project  Debt service capacity of borrowing DMC  Borrower  Flexibility to tailor repayment terms during loan preparations  Repayment schedules cannot be changed after loan signing 9

10.  Fixed at loan signing  Annuity with discount rate in any percentages  Straight-line  Bullet repayment  Custom-tailored repayment  Linked to disbursement in tranches  Straight-line LBL Repayment Terms 10

11. Repayment Terms 11 Loan Amount: US$ 60 million Loan Term (inc. Grace Period) : 15 years Grace Period: 5 years

12. 12 Sample Average Loan Maturity and Maturity Premium Computation: Loan amount:US$ 60 million Loan Term (inc. Grace Period): 20 years Grace Period:5 years Average Loan Maturity (10% Annuity): 14.52 years Maturity Premium: 0.10% Average Loan Maturity (Equal Repayments): 12.75 years Maturity Premium: NIL

13. Average Loan Maturity Table (Annuity-type Repayment – 10% Annuity) 13 Loan Term (inc. Grace Period):20 years Grace Period:5 years Average Loan Maturity (10% Annuity): 14.52 years

14. Average Loan Maturity Loan (Equal Repayments) 14 Loan Term (inc. Grace Period):20 years Grace Period:5 years Average Loan Maturity (Equal Repayments): 12.75 years

15. Comparison of Current and Revised ADB, and Current IBRD Loan Pricing (in basis points) 15 Item ADB (Current) ADB (Revised)IBRD a ≤ 13 years > 13 years up to 16 years > 16 years up to 19 years up to 12 years 12–15 years 15–18 years A. Interest Spread 1. Contractual spread40 50 2. Maturity premium 1020 1020 3. Funding cost margin b (21) 4. Net spread over LIBOR (I)19 2939293949 (A.1 + A.2 + A.3) B. Commitment Charge15 Spread equiv. – commit. charge c (II) 10131211 C. Front-End Fee 25 Spread equiv. of front-end fee c (III) 544 D. Total Spread Equiv. over LIBOR (I + II + III)29324150344353 a IBRD uses a variable spread loan charge based on average loan maturity. b Funding cost margin as of 1 July 2011 c Based on disbursement profiles and repayment terms and could vary across MDBs. Source: ADB Treasury Department.

16. (for loan with formal negotiations completed on or after 1 April 2012) Loan ChargesBasis% A. Net Lending Rate Cost Base RateAdjusted every 6 months6-month LIBOR Effective Contractual Spread Fixed for the life of the loan (Loan Negotiation Date) 0.40% Maturity Premium Fixed for the life of the loan (Average Loan Maturity) ≤ 13 years NIL >13 years up to 16 years 0.10% > 16 years up to 19 years 0.20% (with limit of 19 years average loan maturity) Rebate/Surcharge on Funding Cost Margin Adjusted every 6 months (ADB calculation) -0.19% (Applicable for 1 Jan – 30 Jun 2012) B. Commitment Charge Applied on full amount of undisbursed balance 0.15% C. Front-End Fee (FEF)Eliminated̶ Loan Charges (US$) (Sovereign and Sovereign-guaranteed LBLs) 16

17. LBL Net Lending Rate (Sample pricing for a sovereign loan with a 15-year average loan maturity) USD Cost base rate6-month LIBOR Effective contractual spread0.40% Maturity premium0.10% Less: Rebate on funding cost margin-0.19% Net lending rate6-month LIBOR + 0.31% 17 (for loan with formal negotiations completed on or after 1 April 2012)

18. Loan Processing 18 Borrowers should be notified by the project team of the applicability of the maturity premium as early as possible in the loan processing cycle. The maturity premium for a proposed LBL should be agreed with the Borrower during the loan fact-finding mission and reflected in the memorandum of understanding or aide-memoire for the fact- finding mission.

19. Summary 19 Applicable to loans with formal negotiations completed on or after 1 April 2012 The average loan maturity is subject to a limit of 19 years. Average Loan MaturityMaturity Premium Less than or equal to 13 yearsNIL Greater than 13 years up to 16 years0.10% Greater than 16 years up to 19 years0.20% A. Maturity-based Pricing B. Choice of Repayment Terms is an important consideration given its effect on Average Loan Maturity C. Project team should discuss with the borrower on the applicability of maturity premium in the early stage of loan processing.

20. Thank you. 20