Over half a dozen Development Finance Institutions (DFIs) have sought amendments in pacts with Independent Power Producers (IPPs) to replace USD LIBOR with Secured Overnight Financing Rate (SOFR), to be applicable from June 30, 2023, sources close to Chairman NEPRA told Business Recorder.
Development Finance Institutions (DFIs ) comprise of Asian Development Bank (ADB), British International Investment plc (BII), Deutsche Investitions – Und Entwicklungsgesellschaft mbH (DEG), Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO), International Finance Corporation (IFC), and 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), have investments in Pakistan’s power sector.
According to the Joint Letter of eight DFIs, USD LIBOR will cease to be quoted after June 30, 2023. The United States Federal Reserve’s Alternative Reference Rate Committee (ARRC) has selected the Secured Overnight Financing.
Rate (SOFR) as the alternate reference rate to replace LIBOR as a benchmark for variable rate USD loans which would also apply to USD Islamic financings. SOFR is a broad measure of the overnight borrowing costs, collateralized by US Treasury securities.
DFIs say that from January 1, 2022, globally financial institutions have started pricing all new variable rate USD loans, or USD Islamic finance transactions, using SOFR-based rates. Likewise, the amendment process for existing LIBOR-based loan, and Islamic finance, agreements have commenced to include provisions which allow for the use of a SOFR benchmark upon LIBOR cessation (LIBOR Transition).
Similarly, the DFI loan or Islamic finance agreements entered with Pakistan’s Independent Power Producers (IPPs) also require LIBOR Transition amendments. The DFIs are targeting these amendments as soon as possible, in view of the June 30, 2023 LIBOR cessation date, to ensure smooth transition to SOFR.
The DFIs maintain that the interest rate benchmark LIBOR is also relevant under the IPPs’ project documents (on each of the Energy Purchase Agreement, the tariff determination and Implementation Agreement). Accordingly, the transition to SOFR has an impact across not just financing documentation but also project documents, and specific amendments to these project documents will need to be made. Amendments to the project documents as well as the underlying regulatory process, are subject to government consents and authorizations.
The DFls are in the process of coordinating proposals for amendments to be made to the financing agreements and are sharing these with the IPPs to which they lend, with a request that the IPPs engage with relevant government authorities to agree amendments of the project documents and obtain necessary approvals.
”The DFIs understand that several IPPs have recently communicated with the government on this matter,” said the Joint Letter.
The DFls have requested the government to identify some officer to act as a focal point in agreeing to relevant amendments to project documents with representatives of the IPPs and coordinating authorizations by the other concerned government bodies. IPPs will be working with the DFls on a set of standard amendments to the projects documents and will share them with concerned authorities in due course for consideration.
According to sources, given the complexity of this transition and the upcoming LIBOR cessation date on June 30, 2023 DFIs have requested relevant government bodies to communicate tangible next steps at their earliest to initiate the LIBOR Transition, and then ensure regular follow up to ensure timely completion.