ISLAMABAD: The Private Power and Infrastructure Board (PPIB) has resubmitted the transition from LIBOR to SOFR for energy sector projects sans Chinese IPPs, with the observation that due to manipulation of several financial institutions and weakness in governance oversight of LIBOR as benchmark rate, the Federal Reserve’s Alternative Reference Rate Committee’s recommended SOFR as benchmark rate is more resilient and robust than LIBOR.

Sources close to Managing Director PPIB stated that LIBOR was based on future projection of certain banks and was being manipulated while SOFR is based on overnight rate based on actual transactions duly backed by US Treasury, therefore, PPIB understands that due to this transition from LIBOR to SOFR and decision related thereto there will be no additional financial implications for the consumers.

Nearly a dozen DFIs through joint letters are urging Islamabad to transit from LIBOR to SOFR for power generation projects.

From Libor to SOFR: DFIs anxiously waiting for transition

On September 12, Power Division submitted following proposal to the ECC: (i) IPPs/ITC (Independent Transaction Companies) may be allowed to adopt either of the following as replacement for LIBOR, ie, term SOFR plus ISDA recommended Credit Adjustment Spread (CAS) and daily SOFR plus ISDA recommended CAS.

The ECC, on September 15, 2023 considered the proposal and directed the Power Division to submit the revised summary in its next meeting, after incorporating therein as follows: (a) the financial implications involved in shifting from LIBOR to SOFR based on simulation for the previous year; (b) to explicitly mention in the summary that Credit Adjustment Spread is only applicable to the legacy contracts/loans and not the future contracts; (c) to mention in the summary about Chinese exception for SOFR while submitting proposal for approval of the ECC; and (d) to mention that SOFR instruments should be aligned with the tenor agreed in the legacy contract.

PPIB argued that with regards to financial analysis based on simulation for previous year, a detailed analysis has been undertaken to assess the implications of transitioning from the LIBOR to the SOFR.

The analysis reveals that had the Term SOFR plus the relevant CAS of42.826 basis points for a 6-month tenor, 26.16 basis points for a 3-month tenor, respectively, along with the Daily Simple SOFR plus the relevant CAS of 0.0064 basis points been implemented in lieu of LIBOR during the FY 2023, a sum of $ 79.20 million for 3- month Term SOFR and $ 50.09 million for Daily Simple SOFR would have been saved in interest payments.

Copyright Business Recorder, 2023

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