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ISLAMABAD: The world’s top ten Development Finance Institutions (DFIs) have expressed serious concern at government’s apathy in transitioning from USD LIBOR benchmark to Secured Overnight Financing Rate (SOFR) before June 30, 2023, well informed sources in Finance Ministry told Business Recorder.

On November 22, 2022, the DFIs’ comprising Asian Development Bank (ADB), British International Investment plc (BII), 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), Export-Import Bank of Korea (KEXIM) and Societe De Promotion Et De Participation Pour La Coopération Économique SA (Proparco), sent a letter to Government of Pakistan (GoP) regarding the transition from USD LIBOR benchmark to SOFR before June 30, 2023.

Foreign loans of IPPs: PPIB seeks guidance to replace Libor with SOFR

DFIs appreciated the response of the government to its letter, including the appointment of Private Power & Infrastructure Board (PPIB) as a focal point.

DFI representatives have been, and continue to be, engaged with PPIB and are grateful for the support and leadership PPIB has provided on this matter.

The government’s response also included a meeting held on February 27, 2023, between DFIs and various government representatives to discuss LIBOR transition.

During the meting; DFI representatives gave a presentation describing the different SOFR base rate replacements for LIBOR, mainly (i) Term SOFR and (ii) SOFR in arrears (also referred to as compounded SOFR), plus a Credit Adjustment Spread (CAS).

The DFIs proposed that Tem SOFR + CAS would be the most appropriate replacement rate, given its operational similarities to LIBOR and the existing tariff framework.

The ‘next steps’ identified during the meeting were: (i) PPIB to establish a LIBOR transition government working group, including representatives from Ministry of Finance (MoF) and State Bank of Pakistan (SBP) (the Government Working Group); and (ii) Government Working Group to finalize its decision as to what SOFR base rate would be most appropriate for the IPPs in the power sector. However, DFIs feel that progress on the proposed actions is negligible.

“Despite the welcome engagement from the government, the DFIs would like to express concern on the pace of progress being made. We are yet to receive conclusive direction, as inputs remain pending from other government bodies,” said the DFIs in their joint letter on April 5, 2023.

The new joint letter is duly signed by Maria Eufemia Apilado, Director, Portfolio Management Division, Asian Development Bank, Holger Rothenbusch, Managing Director, British International Investment plc, Luger Rochen, Director, Project Finance Europe & Aisa, Jeffrey Constantz, Director, US International Development Finance Corporation, Michael Jongeneel, Chief Executive Officer (CEO) Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV (FMO), Zeshan Sheikh, Country Director IFC for Pakistan and Afghanistan, Asheque Moyeed, Acting Director, Banking Department, Islamic Cooperation for the Development of the private sector, Mohammed Alsayed, Manager, Public Private Partnership, Islamic Development Bank, Wooyoung Choi, Director Power & Energy Finance Department, the Export-Import Bank of Korea and Anne Gautier, head of power & digital Aisa and Latam, Societe De Promotion Et De Participation Pour La Coopération Économique SA (Proparco).

According to DFIs’ information, the Government Working Group has yet to be formed and it does not appear the government has further developed its view on a SOFR base rate replacement for the IPPs in the power sector.

DFIs have reiterated that USD LIBOR will cease to be quoted after June 30, 2023. Hence, there remains only about three months to conclude the LIBOR transition for Pakistan’s power sector. Given the complexity and steps involved, completion by June 30, 2023 is starting to appear increasingly challenging.

As a reminder, the steps need to be completed are: (i) set-up of Government Working Group for LIBOR transition; (ii) Government Working Group to approve replacement rate for LIBOR (DFIs propose Term SOFR + CAS); (iii) formal approval by MoF/GoP of replacement rate; (iv) formal approval by NEPRA of replacement rate; (v) draft amendments agreed to Project Documents (e.g. energy purchase agreement and implementation agreement), tariff determination process, on the basis of the agreed replacement rate; (vi) execution of amendments to the project documents and any required updates to the tariff for each of the circa 31 projects impacted; (vii) State Bank of Pakistan approval of amendments, where needed; (viii) execution of amendment agreements to the finance documents for each of the circa 31 projects impacted and ; (ix) LIBOR sunset date (June 30, 2023).

In anticipation of a near-term decision by the Government Working Group (once set-up), DFIs have engaged external legal counsel to advise on LIBOR Transition, from a legal and regulatory perspective.

However, without clear direction from the government as to the proposed replacement rate, DFIs cannot make meaningful progress.

The DFIs have urged the government to expedite formation of the Government Working Group and reach a conclusion on which SOFR base rate should apply, at the earliest. Moreover, DFIs’ have requested the government to communicate their planned timeline, along with tangible next steps to progress and complete the LIBOR Transition.

Copyright Business Recorder, 2023

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Tulukan Mairandi Apr 10, 2023 09:14am
Eitherway Pakistan will default this month. That's a given.
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