MACROECONOMICS, TRADE AND INVESTMENT MACROECONOMICS, TRADE AND INVESTMENT EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT Managing Sovereign Loans - “A Bottom-up Approach” Guidance Note Andre Proite and Marcelo Vitorino © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. >>> Contents Abbreviations vii Summary 1 1. Introduction 3 Setting the Scene 3 Objectives and Scope 5 2. Important Definitions 7 2.1 Loans and Tranches 7 2.2 Financial Operations 10 2.2.1 Committed Undisbursed Balance (CUB) and Disbursed Outstanding Debt (DOD) 10 2.2.2 Amortization and Grace Period 10 2.2.3 Interest Accruals 15 2.2.4 Commitment Fees 17 2.2.5 Charges and Penalties 18 2.3 Currency Denomination 19 3. Recording and Monitoring Individual Tranches – How to Derive the Cash Flows? 20 3.1 Recording 20 3.2 Monitoring 21 3.2.1 Signed and Undisbursed Contracts 21 3.2.2 Fully Disbursed Contracts 22 3.2.3 Disbursed and Under Amortization 24 3.3 Accuracy Determinants 25 3.3.1 Calendar Issues: Obligations Due on Non-working Days 25 3.3.2 Day Count Convention (and Fraction Year) 26 3.3.3 Invoice Cut-Off Date 26 3.3.4 Rounding and Truncation Criteria 27 3.3.5 Currency Conversion 29 3.3.6 Indexed DOD 30 3.3.7 Variable Rates and The Special Case of the SOFR 32 3.4 Debt Service Suspension: Integrating Accrued Interest with the Principal 35 4. Preparing Debt Payments 37 4.1 Checklist for Preparing and Processing Debt Payments 39 4.1.1 Aligning Budget and Accounting Rules 39 4.1.2 Preparing Debt Payments (Checklist) 39 4.1.3 Executing Debt Payments 40 5. Conclusion 41 Notes 43 References 47 Annex I: Boxes for Detailed Cash Flows – Examples Provided 50 Annex II: Reference Interest Rates - IFIs -Terms and Conditions (Various Dates) 66 Annex III: Summary of Definitions and Transactions 68 Figures Figure 1: Composition of PPG Debt on LIDCs 4 Figure 2: International Financial Institutions (IFIs): Recent Commitments (USD Billion)-2021 5 Figure 3: Repayment Schedule of a Fixed Rate Loan With Two Tranches 9 Figure 4: Steps to Derive the Constant Amortization 11 Schedule (CAS) Figure 5: Example of CAS With 2 Amortization Profiles 12 Figure 6: Example of CAS With a Disbursement During the Amortization Phase 13 Figure 7: Steps to Derive the Percentage Amortization Schedule (PAS) 14 Figure 8: Example of PAS Cash Flow 14 Figure 9: Cash Flow of a Price Loan With a Disbursement 17 Figure 10: Changing DOD and Variable Interest Rate Cash Flow 23 Figure 11: Disbursement During the Amortization Phase and Variable Interest Rate 24 Figure 12: Effect of the Invoice Cut-off Date - Constant DOD and Fixed Interest Rate 27 Figure 13: Effect of Truncation Rules - Constant DOD and Fixed Interest Rate Cash Flow 28 Figure 14: Currency Conversion Cash Flow 30 Figure 15: Indexed DOD Cash Flow 31 Figure 16: SOFR Indexed Cash Flow 33 Figure 17: Debt Suspension: Interest Accruals Integrated Into the DOD 36 Figure 18: Deviations Between Payment Estimates and Creditor Invoices – Selected DMOs 38 Tables Table 1: Fundamental Identities Related to Debt Contracts 18 Table 2: Common Day Count Conventions 26 Table 3: Cash Flow - IBRD SOFR Loan 34 Table 4: Examples/Summary of Accuracy Determinants – Sensitivity Analysis 35 Boxes Box 1: Using Multiple Tranches to Represent a Cash Flow of a Fixed Rate Loan 51 Box 2: Example of CAS with 2 Planned Amortization Lines 52 Box 3: Example of CAS with a Disbursement during the Amortization Phase 53 Box 4: Detailed PAS Cash Flow 54 Box 5: Cash Flow of a Price Loan With a Disbursement 55 Box 6: Changing DOD and Variable Interest Rate – Detailed Cash Flow 56 Box 7: Disbursement During the Amortization Phase and Variable Interest Rate 58 Box 8: The Effect of Day Count Convention – The Case of Bhutan 59 Box 9: Effect of the Invoice Cut-off Date - Constant DOD and Fixed Interest Rate 59 Box 10: Effect of Truncation Rules - Constant DOD and Fixed Interest Rate Cash Flow 60 Box 11: Currency Conversion Cash Flow 60 Box 12: Indexed DOD Cash Flow 62 Box 13: SOFR Indexed Cash Flow 63 Box 14: Cash Flow for IBRD SOFR Loan 64 Box 15: Debt Suspension: Interest Accruals Integrated in the DOD 65 >>> Abbreviations ADB Asian Development Bank AfDB African Development Bank ATM Average Time to Maturity ATR Average Time to Refixing CAF Cooperación Andina de Fomento – Andean Development Bank CAS Constant Amortization Schedule CUB Committed Undisbursed Balance DeMPA Debt Management Performance Assessment DMIS Debt Management Information System DMO Debt Management Office DMS Debt Management Strategy DOD Disbursed Outstanding Debt EURIBOR Euro Inter-Bank Offered Rate FONPLATA River Plate Basin Development Bank FMIS Financial Management Information System IADB Inter-American Development Bank International Bank for Reconstruction and Development IBRD (World Bank Group) IDA International Development Association (World Bank Group) IIF International Institute of Finance IMF International Monetary Fund IsDB Islamic Development Bank IT Information Technology LIBOR London Inter-Bank Offered Rate LIC / LMIC Low Income Countries / Low Middle Income Countries LiM Line Ministries MoF Ministry of Finance MTDS Medium Term Debt Management Strategy vii >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” NDB New Development Bank PAS Percentile Amortization Schedule PCTG Cumulative percentage applied to DOD for PAS loans PFM Public Financial Management SOE State Owned Enterprises SOFR Secured Overnight Financial Rate SONIA Sterling Overnight Index Average SWIFT Society for Worldwide Interbank Financial Telecommunication TONA Tokyo Overnight Average Rate TSA Treasury Single Account WBG The World Bank Group viii >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” >>> Summary The objective of this note is to provide guidance for countries on how to manage contractual debt. It describes the steps necessary to manage debt after the loan becomes effective (or even during the negotiation’s final stages) and until the contract is serviced and closed. These steps include identifying the key components of a debt contract that are needed to accurately service the debt, with a focus on recording and monitoring events that impact cash flows. International Finance Institutions (IFIs) offer relatively similar financing products for developing countries, however, contracts may also be specific and may be tailored to meet the cash flows of the debtor. IFI loans have evolved significantly over the last 20 years, from very rigid structures to more flexible options that have choices in terms of currency, type of interest rate, amortization profile, among others. As this flexibility has increased, so too has the complexity for debt recording: meticulous recording and monitoring must capture all events that impact debt cash flows, a prerequisite for quality debt reporting. Evidence shows challenges in relation to debt recording and reporting.1 The main causes are: (i) poor understanding of loan terms and conditions; (ii) failure to capture the events that affect the outstanding debt and redemption profile; (iii) miscomputation of these events. Many countries have revealed that debt has been serviced based only on creditor invoices, instead of relying on their own checks and controls. Debt systems manuals, when available, may show how to navigate applications but do not describe how debt cash flows should be computed. Contractual debt generates various types of cash flows. The type of cash flow may change depending on the stage of the loan cycle, e.g., undisbursed, partially or fully disbursed. Other factors will also affect cash flows: (i) the calendar from the lender’s financial center; (ii) amortization schedules and total commitment; (iii) interest rate computational methods; (iii) currency denomination and conversions; (iv) day-count conventions; (v) rounding and truncation criteria; (vi) indexation of the DOD; (vii) variable vs fixed interest rates. Additional factors like (viii) commitment fees and the initial payment date; (ix) other fees and charges need to be identified and considered. 1 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” This note provides a step-by-step approach on how to Cash flow computations shown in the examples are manage contractual debt. The guidance provided will be detailed in an accompanying spreadsheet. Readers are beneficial immediately after the loans are signed with the encouraged to use this file to facilitate understanding the creditor. The target audience is debt officers who manage formulas applied to compute the cash flows. Users can edit central government debt but could also include officials who the main parameters with their own debt instruments. This are managing debt from government-related entities, such note (and accompanying spreadsheet) do not aim to substitute as Subnational Governments and State-Owned Enterprises, debt recording systems and should be used carefully by as long as they are able to keep track of events affecting users when monitoring their debt and approaching creditors their debt. regarding the debt cash flows. The formulas and templates are provided for didactic and illustrative purposes only. 2 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 1. >>> Introduction2 Setting the Scene Debt loans (contractual debt) remain prevalent across Low Income and Lower-Middle Income Countries. Bilateral creditors have become relatively more numerous3; recent studies show that non-Paris Club bilateral lender claims surpass those of the World Bank, the International Monetary Fund and all Paris Club official creditors combined (Gelpern et al. 2021). International financial institutions (IFIs) and commercial banks have expanded their balance sheets and lending. The main international development banks have increased their lending and diversified the types of lending products, taking advantage of the position they have in various capital markets (See Annex II). Financial instruments have generally become more tailored to debtors to account for different types of maturity profiles, customization of repayment terms, and embedded tools to manage interest rate and currency risk. Loans can be specifically designed based on the structure of the operation and how easily financial institutions can hedge their exposures in the global market. Bilateral creditors offer both traditional and specific types of loans. Government-to- government used to be the rule for bilateral lending, but the landscape has changed significantly in the past 15 years (see Figure 1). State-backed financial institutions such as local development banks, Exim-banks, and other agencies may lend at relatively high interest rates, with short maturities, and sometimes with collateral clauses that secure repayment using the proceeds from commodity exports. The recipient also has included state-owned enterprises, in addition to the sovereign debtor, who explicitly or implicitly guarantees the credit.4 3 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Commercial and investment banks can be flexible and well-managed, this can help countries control their currency agile in offering specific structures for borrowers. Like and interest rate risk exposure. Innovative credit lines have IFIs, commercial creditors can offer options for converting allowed sovereigns and government-related entities (GREs) the disbursed amounts to local currency, using their balance to secure financing under adverse economic conditions or sheet and relatively cheap access to the capital market. When sudden heightened borrowing needs. > > > F I G U R E 1 - Composition of PPG Debt on LIDCs 100 8% 90 10% 80 70 20% 60 11% 50 40 30 51% 20 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Multilateral Bilateral, PC Bilateral, Non PC Bonds Commercial and other private Source: WB-International Debt Statistics. Helping countries to improve the quality of debt data and denomination; (ii) maximum maturity; (iii) repayment scheme; reporting standards are key. Debt recording and monitoring and (iv) interest rate structure. These can be broken down into on an individual debt instrument level are the basis for interest rate (fixed or variable), and other charges such as the producing sound debt data. Contractual debt is representative front-end and commitment fees. Embedded options to allow for Low-Income Countries (LIC), and capacity building is currency conversion or interest rate swaps will affect the basic urgently needed in those countries. Transparency and data structure to the extent that they will alter the characteristics availability are key to facilitate debt restructuring and for of the cash flows, and change the risk exposure. Those regaining access to credit. characteristics are not always well understood by practitioners in LICs. Contractual debt instruments share a common structure. Typical loans have at least four building blocks: (i) currency 4 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Objectives and Scope This note aims to provide guidance for countries on how For project financing or budget support, loans can be to manage debt loans.5 Focus is on financial terms and tailored to meet specific cash flow formats. The increased conditions and on the steps necessary to manage the loan (or share of non-Paris Club lending for developing countries debt contract) as soon as the negotiation has been finalized means that countries must fully understand a loan terms and (or is in the final stages) until the end of the loan agreement. conditions before signing-off on any debt agreements. Accurate This guidance includes describing key components of a recording and monitoring practices can help enhance rigorous contract, with a focus on identifying, capturing, recording, and reporting, and must ensure to capture all events impacting the monitoring the events impacting the cash flows, and creating debt cash flows. In that regard, contractual debt may have the conditions to accurately service and report on the debt. different characteristics, there can be numerous variations These actions are the basis for reporting debt indicators and related to: (i) the lender’s calendar; (ii) amortization schedules; for laying the groundwork for analytical work. (iii) interest rate computational methods; (iii) currency denomination and conversions; (iv) day-count conventions; Several examples of loans are presented from different (v) rounding and truncation criteria; (vi) indexation of the types of lenders. The examples illustrate several loan’s DOD; (vii) variable and fixed interest rates. Factors such as structures, amortization schedules, interest rate types, (viii) commitment fees and initial payment date as well as repayment stages from IFIs, commercial and bilateral (ix) other applicable fees and charges also need to creditors. Annex I details how the flows are computed for the be identified. examples provided. > > > F I G U R E 2 - International Financial Institutions (IFIs): Recent Commitments (USD billion)-2021 27.1 18 14.1 10.6 5.6 4.4 4.2 3.4 3.6 3 2.4 1.64 1.3 0.7 1.03 0.1 0.3 IBRD IDA IADB CABEI AIDB ADB CAF IsDB OFID IFAD NDB AIIB Non-concessional loans Concessional loans Source: IFIs. Note: Data from Fiscal Year 2021. For IBRD and IDA (concessional) net commitments reached respectively USD 33.1 bn and 37.7 bn as of Fiscal Year ended in June 2022.6 5 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Evidence shows that countries fare poorly in deriving cash Countries in need of debt restructuring need to create and flows, resulting in weak reporting (WB DeMPA Reports and keep reliable databases and transparent records. In the Rivetti, 2021). The main causes are: (i) poor understanding wake of the COVID-19 pandemic and rising global inflation, of loan terms and conditions; (ii) ability to capture the events around 58 percent of the world’s poorest countries are in debt that affect the outstanding debt and redemption profile; and distress or at high risk of it.9 Debt managers and policy makers (iii) difficulties related to generating the correct cash flows. must understand the details of their entire portfolio and be able Many countries revealed that debt has been serviced based to accurately assess the implications that debt restructuring on creditor invoices only, and that they have not referenced may have on their debt. their own records. Debt systems manuals, when available, show how to navigate applications but do not describe how This paper provides a step-by-step approach on how to debt cash flows are computed. manage contractual debt after the creditor has signed off. It breaks down the essential components for recording loans The advent of new benchmark interest rates following and estimating the amortization schedule, and interest/fees the discontinuation of Libor7 has prompted creditors and accruals, and computing the stock. The primary audience are debtors to adapt their operations. As of 2021, around 7 central government debt managers, however, the mechanics percent of all LICs had loans referenced to the LIBOR8. SOFR and rationale presented here apply to the agents managing is the main replacement for Libor in the United States and contractual debt from government-related entities, such as other rates have been adopted in different financial centers. Subnational Governments and State-Owned Enterprises. The new reference rates have impacted the operations for debt managers, who will need to handle new loans with variable The note recommends that debt instruments should be interest rates while managing legacy LIBOR contracts at the treated individually, detailed to the tranche level, and same time. these need to be traced and recorded by debt managers. The note does not cover circular lending as defined by Failing to correctly capture debt transactions and events Bräutigam (2009), where the loans are disbursed directly to can have serious financial implications. Many countries the contracting firm that implements the construction project revealed that their debt was serviced based on creditor abroad and is essentially a closed circle.10 invoices only, omitting to apply their own internal controls. The elements that differentiate between invoices and bills sent by creditors to debtors can produce significant discrepancies across records. 6 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 2. >>> Important Definitions 2.1 Loans and Tranches Debt managers working on recording, monitoring and paying loans need to understand key concepts related to financial events, methods used to compute cash flows, and the fundamental identities of a loan (contractual debt). These debt management practices should be established independently from the set-up in which the country is operating. These practices need to reflect the existing PFM (Public Financial Management) practice, the use of Debt Management Information System (DMIS), the managerial setting and the existing technological infrastructure. What is a loan? A loan is a legally binding document stipulating financial obligations of a borrower in two parts: (i) a specific value of funds available for disbursement from the creditor; and (ii) repayment conditions. The first part defines disbursement conditions, dates and last date for drawdown. In the second part, the amount disbursed is to be serviced (principal and interest) following the exact terms as defined in the repayment schedule. The following standard elements are commonly found in loan agreements: key parties and responsibilities; the loan amount; number of tranches; currency and disbursement denomination; procedures for drawdown; grace period; amortization schedule; interest rate; computing methods; fees and penalties. 7 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” What is a tranche? Why and when should one use multiple/single tranches? A tranche is a loan component with specific payment A fundamental aspect of debt recording is that it should conditions (e.g., schedule and interest rate) defined by the be undertaken on the individual effective tranche level, agreement and related to market conditions at the time of reflecting the most granular transactions. The use of disbursement. In a loan, a tranche may be represented by a a single tranche to represent the life cycle of a loan can be set of disbursements where repayment follows its own specific misleading when the contract specifies that the total amount financial terms, such as currency, interest rate, and principal will be drawn in multiple tranches. Repayments can assume payments. Each individually disbursed tranche generates a different structures and interest types according to each specific amortization and interest payment schedule. lender’s requirements, there will also be different initial and final payment dates for distinct groups of disbursements. Debt There are two important categories: (i) estimated tranches records should document each tranche as an individual line and (ii) effective tranches. An estimated tranche contains to be tracked. the disbursement forecasts based on the total commitment set in the contract and includes the amortization schedule The staff recording a loan should not bundle flows into and interest payments. Estimated tranches are useful for a single tranche if the contract states otherwise. When forecasting the stock and the maturity profile of the debt. recording a loan, staff should only bundle flows into a single They are helpful during budget preparation, and for estimating tranche if the contract specifically requires it. When this is not future cash needs, and debt levels. The sum of estimated expressly stated in the contract, staff should closely follow the tranches must be equal to the total amount contracted. characteristics of each disbursement to ensure that the stock Effective tranches are created after the actual disbursements and the maturity profile are correct. This is different to the and should contain the resulting real cash flow numbers. The situation where another party, for example, an implementing effective tranches are the basic input for debt records which agency, is overseeing or implementing the project. In this should be used to generate future debt service. A contract may case, and for administrative purposes, it may be sufficient for contain several effective tranches and together they should the agency to treat the total loan in a single tranche even if add up to total future payments. there are multiple tranches. Estimated and effective tranches are useful for reflecting Debt managers should capture the financial transactions different modalities of repayment schedules. The estimated directly from the primary source of information, i.e., tranche projects the future payment flow (amortization and the creditor. In the case that an implementing agency interest) of the committed and undisbursed balance, according or intermediary is the primary source of information, debt to the disbursement assumptions. They do not generate any managers need to connect with them and be informed by all real flow, but can be used to capture schedules, and different events that may change the cash flow of the debt. They also payment dates according to the agreement’s conditions.11 need to carefully evaluate all the information received before recording the transaction. Box 2 details. 8 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 3 - Repayment Schedule of a Fixed Rate Loan with Two Tranches 60,000 50,000 50,000 40,000 Amortization - $ 30,000 25,000 20,000 10,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Number of installments Tranche 1 Tranche 2 Source: Authors. Multiple (effective) tranches should be used when, for installments is fixed; (ii) the payment dates (amortization each individual disbursement: (i) different interest rates and interest) are set; (iii) the same interest rate applies (fixed or variable) apply; (ii) the spread over the interest across the outstanding balance. If the contract determines rate changes; (iii) the repayment dates or the periodicity that the DOD (Disbursed Outstanding Debt) needs to be (frequency) change; (iv) when part of the outstanding amortized in a pre-defined number of equal installments on debt is converted to a different currency for computing specific dates, and that interest shall be paid on the same the flow.12 To illustrate (iii) above, assume that the contract dates according to a fixed interest rate for the whole DOD, requires each disbursement to have 20 installments, and there it would be helpful to use a single tranche as the resulting are two disbursements with different repayment dates. In this cash flow should be set uniformly with regular principal and case, two tranches will be needed to record the debt, as the interest payments. amortization dates or interest payments will slide in time. Note that even if the contract fixes the same payment dates for all Recording different tranches also helps control debt. disbursements, the initial and final payment dates will not fully Doing so means that debt managers can easily observe coincide, meaning that each tranche needs to be recorded effective repayment dates and interest (and charges) accruals individually. Figure 3 illustrates the repayment schedule and for fixed and variables rates, in addition to any other event that Box 1 details how the flow is calculated (see Annex I). may affect the flow. Single (effective) tranches are useful when the following conditions have been met: (i) the total number of 9 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 2.2 Financial Operations Financial operations (or transactions) are events that 2.2.2 Amortization and Grace Period move money between the parties and affects the debtor’s The grace period is the period between the commitment original obligation. In general, these events are detailed date and the first amortization payment. The debtor is in earlier parts of the agreement such as the recitals and not required to make any principal payments during the definitions. The main transactions (also called “financial grace period, although interest and other fees are charged events”) associated with a loan are: (1) disbursements; throughout the grace period. For example, IDA concessional (2) amortization; (3) interest payment (and accruals); loans for small economies currently have a 10-year grace (4) commitment fees; (5) charges and penalties. period and a 40-year total maturity (see the example of IDA lending terms). 2.2.1 Committed Undisbursed Balance (CUB) and Disbursed Outstanding Debt (DOD) For IBRD and IDA loans the initial grace period depends When a loan contract is signed there is a Committed on the loan’s modality. For commitment-linked repayment Undisbursed Balance (CUB), and a schedule of expected schedules, the grace period starts from the commitment future disbursements. There is no outstanding amount date15, these are typically represented by a single tranche. or changes in the debt stock, as there was no transfer of For disbursement-linked repayment schedules, the grace resources from the lender to the borrower (commitment fees period starts at the end of the semester in which the relevant may apply as below). disbursement was made, these are normally represented by multiple tranches.16 Disbursement represents credit release or a transfer of the committed amount from the lender to the borrower. This Amortizations are repayments of the principal borrowed, can be in single or multiple portions, it will increase the debt these reduce the DOD of the debt (loan/tranche) until the stock of that contract/tranche and will trigger the calculation final payment date, when the DOD balance goes to zero. of interest.13 The disbursement period is the period from the IDA concessional loans set the amortization schedule based effective date of the loan to the final date of disbursement, the on total commitment. Amortization schedules may assume date after which no additional funds can be withdrawn. various formats as loan agreements (like securities) can be customized. For example, repayments can cover the total With disbursement, money changes hands and the loan amount on the last pre-determined day (bullet), they can respective amount creates the Disbursed Outstanding be balloon, percentage or constant payments, or they can Debt (DOD). The contracts will determine the first payment be customized.17 date, and the timeframe for the payment, key for deriving the cash flow. Disbursements can be reversed if the borrower For some creditors (e.g., WB and ADB) the amortization gives the money back to the creditor, this would decrease schedule may depend on whether the loan is: (i) linked the DOD. to commitment; or (ii) linked to disbursement. For (i), the amortization schedule is linked to the timing of loan This note focuses on cash disbursements14 that have commitment, and principal repayments are calculated as a implications for debt cash flows. Uncertainty regarding share of the total loan amount disbursed and outstanding. The the timing of the receipt of funds complicates forecasting. average repayment maturity limit is calculated as the weighted Disbursement procedures may be tied to the project’s execution average period between loan approval and scheduled and procedures can be time consuming, requiring matching repayments. For (ii) the amortization schedule is linked to funds requirements, extensive reporting arrangements, actual disbursements. Subsequent disbursements may have procurement, and auditing. Debt managers need to connect different repayment terms (grace period, final maturity, and with execution agencies, treasury units, and creditors to keep amortization profile).18 track of disbursements (Proite, 2020). 10 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Some common amortization schemes are: is completely repaid and the DOD of that tranche reaches zero. Note that the sum of installments (amounts) to be a. Constant Amortization Schedule (CAS) repaid cannot exceed the initial outstanding amount for the tranche. Under the Constant Amortization Schedule (CAS), the principal repayments are linearly distributed Figure 4 summarizes the steps for computing a CAS throughout the repayment period. Key information cash flow.19 points for deriving the cash flow are (i) the number of installments or repayments (n); (ii) the first amortization (1) At = DODt-1/(n) , date; (iii) the payment timeframe; (iv) the DOD. The (2) DODt = DODt-1 - At, where: simplest way of computing the CAS is to divide the DOD by the number of installments from disbursement date At : Amortization (principal payment) at time t and n is the until final payment date as defined in the contract. Each number of remaining installments; and paid installment is deducted from the DOD until the next DODt : Disbursed Outstanding Debt; event, in this case, the next amortization date according to t : time (installment date). equations (1) and (2) below. This continues until the loan > > > F I G U R E 4 - Steps to Derive the Constant Amortization Schedule (CAS) 1 2 3 4 5 6 Identify Identify Identify the Identify the Set the Divide the initial the First periodicity number of repayment DOD over (n) disbursement Amortization (e.g., semi- installments dates date and Date annual) (n) DOD amount Source: Authors. There can be more than one amortization profile. An amortization profile is a set of predefined dates with the amounts to be repaid. For a loan with a DOD of $1,000,000.00, the first profile may stipulate that four installments are to be repaid semi-annually starting on 03/15/23, while a second profile may determine that six installments need to be repaid quarterly with a different initial payment date: 03/15/30. When this is the case, the debt manager should observe steps 1 to 6 above (Figure 4) for each profile, installments for each profile would be equal. Figure 5 shows this example, and the result is a set of semestral payments in the short term, then about 4.5 years without any amortization, and then an extended set of quarterly amortizations.20 11 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Negotiating according to the example shown in Figure has already taken place. When the increase/decrease of 5 may help avoid the loan maturity being concentrated installments occur, the financial value of the amortization on any one period can be useful during the negotiation should decrease/increase linearly (everything else being of a loan to avoid maturity concentration over a period. constant). This type of analysis has implications on the Negotiating the terms of the contract could increase/ design of the loan, and highlights the links between decrease the number (and frequency) of installments back-office operations, strategic debt planning and of the remaining DOD, even after a set of amortizations loan negotiations. > > > F I G U R E 5 - Example of CAS with 2 Amortization Profiles 1,000,000 4 semi-annual installments 900,000 800,000 700,000 600,000 6 quarterly installments 500,000 400,000 300,000 200,000 100,000 0 21 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 30 30 03 1 31 / 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 / 2 / 20 0 5 /2 3/1 9/1 5 15 /15 /15 /15 /15 /15 15 /15 /15 /15 /15 /15 /15 /15 /15 /1 5 15 15 12 3/ 9 3 9 3 9 3/ 9 3 9 3 9 3 6 9 12 3/ 6/ DOD Amortization Source: Authors. The amortization phase is a significant part of the loan. Figure 6 illustrates how a new disbursement takes place while the tranche is already being amortized.21 In this case, the initial disbursement of $1,000,000 is executed on 12/20/2021 and each amortization is $100,000. A new disbursement of $500,000 is executed on 7/10/2023 while the tranche is already being amortized. This increases the DOD by the exact amount of the disbursement and would change the remaining installments to $155,555,56. This process is less frequent for concessional loans with a long grace period but can be verified in loans provided by multilateral and plurilateral financial institutions such as the IADB (Inter-American Development Bank). Box 3 details the flow. 12 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 6 - Example of CAS with a Disbursement during the Amortization Phase Initial disbursement of $ 1.000.000 (Dec-2021) with 10 semi-annual installments A new disbursement of $ 500,000 altered At on Jul-2023 1,400,000 155,556 1,200,000 100,000 1,000,000 800,000 600,000 400,000 200,000 155,556 0 1 3 3 3 4 4 5 5 6 6 7 7 02 02 02 02 02 02 02 02 02 02 02 02 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 / 20 15 10 15 15 15 15 15 15 15 15 15 12 3/ 7/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ DOD Amortization Source: Authors. b. Percentage Amortization Schedule (PAS) therefore the multiplication of the PCTG by the DOD from the previous period, in line with equations (3), (4), and Under the Percentage Amortization Schedule (PAS) (5). The computed installment is deducted from the DOD a predefined percentage is attached to several from the previous period and the DOD will be zero on the installments and is applied to the DOD to generate the last payment date. The sum of the percentages from all amortization. The key information for deriving the cash installments must reach 100 percent. Figure 7 describes flow is: (i) the number of installments (repayments); the steps to compute the PAS cash flow. (ii) the percentages associated with the installments; (iii) the first amortization date for each percentage; (3) At = PCTGt * DODt-1, (iv) the payment timeframe; (iv) the DOD. The simplest (4) PCTGt = (Pt / Sum (Pt : Pf)), way to compute the PAS cash flow is to find the cumulative (5) DODt = DODt-1 - At, where percentage (PCTG) to be applied to the DOD for all relevant dates. For any given date, the PCTG is equal At : Amortization (principal payment) at time t; to the percentage attached to the installments divided by DODt : Disbursed Outstanding Amount at time t; the sum of the remaining percentages to be applied to t : time (installment date) and; remaining installments.22 The value of the installment is f : final installment date. 13 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 7 - Steps to Derive the Percentage Amortization Schedule (PAS) 1 2 3 4 Identify the initial Identify the Identify the periodicity Identify the number disbursement date First Amortization Date (e.g., semi-annual) of installments (n) and DOD amount and derive the schedule 7 6 5 Multiply Compute the Identify the the PCTGt cumulative percentage percentages (%) by the DODt-1 for the amortization associated with (PCTGt) the installments Source: Authors. > > > F I G U R E 8 - Example of PAS Cash Flow 1,000,000 100% 900,000 105,000 90% 800,000 80% 700,000 70% $ DOD, Amortization 600,000 60% PCTG 500,000 50% 98,000 400,000 40% 300,000 30% 200,000 20% 83,000 100,000 10% 0 0 1 3 3 4 4 5 5 6 6 7 7 02 02 02 02 02 02 02 02 02 02 02 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 20 15 15 15 15 15 15 15 15 15 15 12 / 3/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ DOD Amortization PCTG Source: Authors. 14 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Figure 8 illustrates a case where the percentual rate in the system, observing that the sum of programmed changes three times. The percentual rate (10.5%) is amortization correspond to the DOD at the beginning applied for the first five payments starting on 03/15/2023, of the period and should ensure that the amortization resulting in installments of $ 105,000, followed by four new schedule follows its specific chronological order.23 installments of $98,000 starting on 09/15/2025, when a 9.8% percentage rate (PCGT) is applied for the following 2.2.3 Interest Accruals 4 installments. This changes on the last amortization of Interest is the amount paid to lenders as compensation $83,000 on 09/15/2027, when 100% of the DOD must be for using their capital, it is calculated over the loan’s DOD. repaid, implying that the percentual rate must be 8.3%. Interest starts to accrue following the first disbursement, the The red line in the chart shows the cumulated percentage debtor needs to pay interest even when the loan is within the attached to the repayment schedule, its shape depends grace period. Interest is calculated by applying the contractual on how the percentages have been established in the nominal rate (usually % p.a.) to the outstanding debt if the agreement. The cumulative percentage shown on the axis DOD is greater than zero. It is a function of the number of days on the right side (PCTG) converges to 1 by the time the from the first disbursement and the next scheduled payment last amortization is paid. Formulas and flows are detailed date and is computed based on specific Day-Count rules, for in Box 4. example, a 360-day basis.24 Percentage rates can be customized when negotiating The interest rate method can be simple or compound, a loan and this calculation is used to decide how fixed or variable during the calculation period. The level of to distribute the proceeds over time. The predefined interest charged by lenders typically reflects their funding costs percentages may change between the initial and final at a given moment, added by a margin (spread). Borrowers can disbursement. This type of schedule is used by various estimate funding costs by checking bonds issued by the lender creditors, including the IBRD (International Bank for in the market (for different tenures) to raise money. Funding Reconstruction and Development). based on variable interest rates is commonly referenced by a benchmark rate such as the EURIBOR, SOFR, or SONIA.25 c. Tailored Amortization Schedule (TAS) Most creditors set a flooring (minimum level) if floating rates become negative, as it had been the case after global Tailored Amortization Schedule (TAS) can display any expansionary monetary policy (2009 and 2020). The following repayment profile resulting from the lender-borrower is a summary of fixed and floating rates: negotiation or product line. In this case, the loan must be accompanied by a clearly defined schedule specifying • Fixed rates: The interest rate does not change over the the dates and values of each amortization. Debt managers life of the loan; should be mindful of this type of schedule when recording transactions in the Debt Management Information System • Floating rates: The interest rate fluctuates with market (DMIS), as the software of choice may not be fully set up to conditions. It usually refers to a benchmark rate plus a record non-standard agreements. Debt managers should positive margin (spread). be able to parametrize the loan and record accordingly 15 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” The margin or spread can be fixed or variable. A fixed It is important to understand that the difference spread does not change over the life of the loan; and a variable between the two methods (simple and compound) spread changes over the life of a loan (e.g., IBRD loans). is typically quite small at low interest rates and A combination of both may occur. over short periods of time. Any differences can also be accounted for by adjusting the rate or margin The interest may be capitalized according to simple (NY Fed, 2019).26 or compound methods and specific capitalization frequencies, for example, daily, monthly, annually. The d. PRICE or Fixed Installments – Bundling Amortization creditor and borrower agree on the method and timeframe and Interest Payments together, and their choices do not necessarily affect the overall rate paid by the borrower as the difference can be Under the PRICE schedule, installments are equal adjusted to equal the overall cost. Loans typically use simple throughout the contract cycle. The installment (Payt) is interest expressed in annual rates (% p.a. or per annum). The composed of amortization (At) and interest (It), capitalized following summarizes simple and compound interest: over the DODt-1. The amortization is the difference between the installment (Payt) and the interest (It), i. Simple Interest (SI): Under this method, interest accrual resulting in a flow where the amortization increases over is calculated by applying the interest rate to the principal time. This scheme is used by multilateral organizations borrowed over a given period. and commercial lenders. This method is often used by international creditors and is The installments are computed according to calculated thus: the formula: (6) SIt = DODt-1 * it * FYt, where: (8) Payt = DODt * ((ρ*(1+ ρ)n)/((1+ ρ)n-1)), where: SIt : Simple Interest Amount at time t (expressed in $); Payt : Installment under PRICE scheme; DODt-1 : Disbursed Outstanding Debt at time t-1 ($); DODt : Disbursed Outstanding Debt; it : Interest Rate (% p.a.) at time t; ρ : ( i% / n), that is , interest rate (i) % p.a./ number of FYt : Fraction Year, which equals to the ratio ((Time installments to be paid within the year; elapsed since the last interest event) / ( Day-Count Basis)). n: remaining installments to be paid; t : time (installment date). ii. Compound Interest (CI): interest owed is not capitalized linearly. The amount of interest accrued over the relevant After the installment (Payt) is calculated, the period is calculated by applying the interest rate to the amortization and interest for each due date needs to principal. This method is commonly used to price securities be computed. The amortization and interest cash flows and loans and follows the general formula: will be computed separately. The amortization should be computed as: (7) CIt = DODt-1 *(1+ it ) FYt, where: (9) At = Payt – (DODt-1 * it), where: CIt : Compound Interest Amount at time t (expressed in $); DODt-1 : Disbursed Outstanding Debt at time t-1 ($); At : Amortization (principal payment) at time t; it : Interest Rate (% p.a.) at time t; (DODt-1 * it ) : represent the actual interest accrued in case FYt : Fraction Year (Time elapsed since the last interest there is no disbursement between installments. event / Day-Count Basis). In the case that there is a disbursement between Fraction year (FY) is affected by the Day Count basis two installments, one should consider that the DOD (or standard) between two different points in time was impacted on the last payment date. Once the to compute the interest payment. There are many amortization (At) and the installment (Payt) are computed standards used such as Actual Days (AD)/360; 30/360, the actual interest should be calculated based on the where each month is normalized to have 30 days and number of days between the actual disbursement date the year 360 days (see Section 3.3 for examples of Day- and the next payment date. Count standards). 16 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Figure 9 shows an example of a PRICE cash flow with three disbursements (D1, D2, D3). The debt service size is constant for the periods between D1 and D2; D2 and D3; and D3 to the last payment day. Each disbursement increases the DOD, and the mix between amortization and principal will change to make debt service constant between the relevant dates. This type of cash flow limits the debt service per month (or per period), which can be useful for debtors that have specific budget caps. Box 5 details the components of the cashflow and how the total amount is billed. > > > F I G U R E 9 - Cash Flow of a PRICE Loan with a Disbursement 60,000 1,000,000 900,000 50,000 800,000 Amortization + Interest - $ 700,000 40,000 600,000 DOD - $ 30,000 D2 500,000 400,000 D3 20,000 D1 300,000 200,000 10,000 100,000 0 0 11 5/2 0 12 5/2 22 1/ /20 2 /2 2 3 12 /2 0 5/ 0 2/ /20 0 5/ /20 2 6/ /20 2 2 2 9/ /20 2 10 5/2 2 11 5/2 2 3/ /20 1 4/ /20 1 5/ /20 1 6/ /20 1 6/ /20 1 7/ /20 1 7/ /20 1 8/ /20 1 9/ /20 1 10 /2 1 11 5/2 21 12 5/2 21 1/ /20 1 2/ /20 1 3/ /20 2 4/ /20 2 15 2 15 2 15 2 15 2 11 2 15 2 15 2 20 2 15 2 15 2 /1 02 15 2 5 2 15 2 15 2 15 2 15 2 15 2 15 2 2 /1 02 15 2 15 2 02 /1 02 5 2 /1 02 15 2 /1 0 /1 0 /1 0 /1 0 7/ /20 8/ 20 /1 0 1/ 20 10 7/2 / 5 1 1 9/ Interest billed Amortization DOD Source: Authors. Note: D1- Disbursement 1= $ 250k; D2- Disbursement 2 = $ 537.3k; D3- Disbursement 3 = 212.6k 2.2.4 Commitment Fees Used by most creditors, commitment fees are usually calculated using the simple method: Commitment fees (CoFee) are charges levied on the Committed Undisbursed Balance (CUB). The contract will (10) CoFeet = CUBt-1 * FeeR * FYt, where: define the start date for fee accrual. There are cases where the fee will be applied to the overall commitment, i.e., the total CoFeet : Commitment fee at time t (expressed in $); amount the creditor has agreed to lend immediately after the CUBt-1 : Committed Undisbursed Balance at time t-1 ($); loan becomes effective. The longer the drawdown period, FeeRt : Commitment Fee Rate (% p.a.) at time t; the more commitment fees are paid. Commitment fees can FYt : Fraction Year ((Time elapsed since the last interest amount to significant sums if the debtor has large amounts of event) / (Day-Count Basis)). committed but undisbursed portfolios.27 17 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Commitment fees and interest rate accruals are computed Charges can be defined as a percentage rate applied over analogously. The formula above displays the simple method, a predefined base. The base can be: (i) the total amount and the main difference is that CoFee is charged on the CUB commitment as defined in the contract; (ii) the DOD; or (iii) whereas the SI (interest accrued) is charged on the DOD. the loan’s estimated debt service (amortization and interest). Like interest rate accruals, the CoFee can be fixed or floating. Charges can be financed or can be an integrated part of: the If floating, it will assume different values over time according DOD, a tranche; or the loan (if lump sum). In other cases, to a predefined calendar or business rule. they are predefined values to be repaid at specific dates, depending on the contract’s design. 2.2.5 Charges and Penalties Most agreements include penalty fees for late payments. Creditors apply different types of charges on borrowers. The charge is normally higher than the interest rate applied Management fees are common and are also known as over the DOD and are generally computed as follows: “administrative fees” or “front-end fees”. They are usually a one-off charge and are paid close to the signing date; they (11) PENALTYt = (ADUEt * TDUEt * (PENRATE)) / (DC), can be paid with the country’s own resources or can be where: included in the loan amount (e.g., IBRD). Agency fees may also apply for syndicated loans and consist of a fixed sum PENALTYt : Penalty Fee at time t (expressed in $); paid periodically (e.g., annually) to the financial institution ADUEt : Amount due at time t ($); representing the syndicate, these are usually payable as a TDUEt : (Overdue date – Payment date) expressed in days; fixed amount. There may be additional miscellaneous costs PENRATE : Penalty Rate (% p.y); such as legal charges for drafting the agreement, travel, or DC : Day-Count basis. documentation activities.28 > > > T A B L E 1 - Fundamental Identities Related to Debt Contracts Identity Description 1 - The sum of future amortizations = Disbursed This identity should be the first verification point for debt Outstanding Debt (DOD) at a given reference date. managers when looking for inconsistencies in the database. It ensures that the whole outstanding debt will be amortized and that debt payments respect the total amount disbursed. This identity can be applied to specific tranches or to the whole contract. 2 - Total Commitment (ToCom) = (CUB) Committed This identity reflects estimated disbursements of the contract. Undisbursed Balance by the date the loan If there are several tranches, all future disbursements should was signed. be considered. 3 - Sum of disbursements + Committed Undisbursed This identity should limit disbursements to the overall Balance (CUB) = Total Commitments (ToCom) contracted debt and it should be used for verification when contractual amendments stipulate changes in the amounts. Source: Authors. Table 1 presents a few identities that are commonly applicable to loans.29 The fundamental identities are useful for identifying potential errors and inconsistencies in financial flows or outstanding stock after the contract has been set up on debt management information systems. Evidence from WB/IMF missions and DeMPA reports30 have shown that datasets are often poorly managed in LIDCs. Debt managers can use those identities to run periodic checks on the database to improve the quality of debt records. 18 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 2.3 Currency Denomination All loan agreements stipulate the currency of commitment, amount disbursed is converted into a U.S. dollar equivalent disbursement, and repayment. The borrower should seek to amount, using the applicable exchange rate on the day devise a proper mechanism for capturing the exchange rate of disbursement. The U.S. dollar (or other hard currency) prescribed for each transaction. For instance, central banks, equivalent amount is then divided by the pool unit value on IFIs and data stream services publish daily foreign exchange the day of disbursement to determine the pool units disbursed. rates for a variety of currencies. The source of the currency The pool units are what the borrower will have to repay. When information should be agreed with the creditor. pool units are to be repaid, they are converted back into the dollar equivalent amount using the prevailing pool unit Most loans are denominated in hard currencies. The value. That mechanism for currency conversion is covered in IBRD, for example, currently offers loans in USD, EUR, GBP, section 3.3.5. and JPY. The IMF and the IDA offer loans in Special Drawing Rights (SDR), which is a pool of five currencies that serves Development banks have moved away from currency as the unit of account for the IMF and other international pool-based loans. For example, the IBRD used to offer organizations. Countries with outstanding debt denominated in currency pool-based products, which have been discontinued SDR need to manage the currency pool to accurately compute in favor of new loan commitments. For those few loans that cash flows.31 are still outstanding, the IBRD will offer hedging alternatives and currency swaps (for some currencies) to help countries What is a currency pool loan? managing foreign exchange risk. Currency pool loans are multicurrency obligations committed in U.S. dollar-equivalent terms. The currency 19 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 3. >>> Recording and Monitoring Individual Tranches – How to Derive the Cash Flows? 3.1 Recording This section has been developed to help debt managers tasked with recording and monitoring events and process the information to derive the cash flows to the tranche level. The current literature on this topic is scarce and describes general processes that need to be in place for sound recording and monitoring throughout the cycle of a loan.32 The first step is to interpret the loan’s terms and conditions by reading the contract and the term sheet, this could be undertaken during the final stages of the negotiation. Back- office officials do not typically participate in negotiations, but they should be informed about the loan’s terms and conditions as soon as possible. The following elements need to be identified in the contract: (i) total commitment; (ii) principal or amortization profile – and how disbursements are captured (e.g., client-connection; term-sheets); (iii) initial and final dates for disbursement; (iv) interest rates, accrual method and initial payment date; (v) currencies and relevant foreign exchange dates; (vi) rounding and truncation standards, and day-count basis; (vii) invoice cut-off dates; (viii) commitment fee rates and initial payment date; (ix) other applicable fees and charges. 20 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” During the initial step, the official responsible for by the DMO, even if an implementing agency or line ministry recording should register the estimated tranches and the is responsible for the project.34 respective financial conditions in the DMIS. This will allow staff to provide financing estimates and inputs for the budget. The loan’s cycle and financial parameters affect DMO- monitored cash flows. Contracts are very specific and have The second step is to ensure the accounts that will a variety of rules during the disbursement and amortization receive the funds are known and traceable. The debtor may phase that affect such financial flows as calendar definitions, have to create a credit account within a financial institution, day-count standards, invoice cut-off dates, rounding and or a special account for holding foreign currency, they may truncation criteria, currency conversion rates, and interest and also make arrangements to hold the funds in the Treasury fees calculation. Single Account. Monitoring the DOD and the Maturity Profile The third step is to ensure that upcoming debt flows are incorporated in future cash flow estimates and integrated Monitoring the outstanding debt and the maturity profile in budget estimates. This step will depend on the existing is one of the most important DM functions. When the Public Financial Management (PFM) practice, which debt stock is updated and the maturity distribution over is a function of the current institutional structure and time is accurate the DMO should be able to produce budget framework. Debt managers should be able to coordinate with forecasting, estimate cash needs, generate inputs for their government counterparts and should be clear about the debt management strategies, and compute key cost and following key PFM processes: (i) Budget Planning - sharing risk indicators. future debt service estimates to facilitate budget formulation; (ii) Treasury Systems - to enable: budget authorizations, After the contractual debt has been created and recorded commitment control, payment releases, cash flow forecasting, in a DMIS, debt management staff need to monitor it and financial programming; (iii) Budget Monitoring - for until payment flows are complete and the contract has accounting; and reporting. Accounting routines need to reflect been closed. Contractual debt goes through various phases upcoming transactions. each with their own specific controls, which means that debt managers need to establish close contact with creditors, The above responsibilities are often shared between implementing agencies or line ministers (LiM) responsible different government units. Debt managers should for managing the disbursements to get precise, financial connect with the responsible units to ensure that flows are information. This information should be checked against well captured when money starts moving within and outside records on the use of the proceeds, which is normally the the government.33 Treasury (or the unit with Treasury functions) or the LiM if implementation has been decentralized.35 3.2 Monitoring Each phase of the contract may require different levels of monitoring: After the debt is created, debt managers need to ensure that it is regularly monitored, and they must record any 3.2.1 Signed and Undisbursed Contracts and all relevant transactions. Monitoring refers to capturing There are payments during this phase, even if information and recording all subsequent events that may disbursement hasn’t yet occurred. Commitment fees will be affect the cash flow until the end of the loan’s life cycle. Any calculated based on the CUB, principal and interest projections changes in the outstanding debt must be checked and the same are calculated based on the estimated tranche (see section unit responsible for recording could track stocks and flows by 2.2). Incoming disbursements are accompanied by one or verifying events and transactions with creditors and with the more tranches. An error at this stage compromises the entire definitions embedded in the contract. The DMO needs to be cash flow impacting the stock and will create inconsistencies involved in timely transaction capture, e.g., disbursements, between the future invoices and internal records. changes in interest rates etc., and all loans must be monitored 21 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 3.2.2 Fully Disbursed Contracts c. There are 10 installments under a Constant Amortization Schedule (CAS) a. Under Grace Period • The timeframe is semi-annual If the contract has been fully disbursed but is still d. The disbursements and reversed disbursement39 are the: within the grace period, debt managers should focus on the amortization schedule and on interest accruals. • 04/15/2022 => + $ 250,000.00 Once the last disbursement date has been confirmed, the • 08/15/2022 => + $ 250,000.00 following is key: (i) interest accruals (fixed or variable); • 02/15/2023 => - $ 100,000.00 (ii) first interest and principal payment dates; (iii) setting • 10/15/2023 => + $ 600,000.00 the payment calendar according to the stated time period; and (iv) deriving the flow according to the predefined e. The Commitment Fee (CoFee) is fixed at 0.25% p.a. schedule. If interest rates are variable, monitoring should focus on: (v) updating interest rates. There should be no f. The applicable Interest Rates (i) change according to discrepancies between creditor invoices and the records the following: if the steps above are followed properly. • 01/15/2022 => 3.00% p.a. b. Under Amortization • 01/15/2026 => 2.00% p.a. • 07/15/2027 => 1.50% p.a. Debt managers should verify that the amortization has accurately decreased the outstanding debt.36 g. The First CoFee and i payment date is 07/15/2022. A series of events takes place between the effective date the loan is activated and the amortization phase, for which According to section 3.1, the first step that needs to be debt managers should follow the above instructions. If the taken is to set up the calendar to capture the key financial DOD has been fully disbursed before the first amortization events, to include: (1) Commitment Fee; (2) Disbursements; date and if the interest rate is fixed, the only event that (3) Interest Accruals. This calendar will be used to mark the will change the calculation is the semi-annual principal day-count between each event that needs to be factored in on payment or a voluntary pre-payment, in which case, the accruals and amortization schedule. debt managers need to make sure that the amortization schedule is correct. If interest rates are variable, monitoring Commitment Fees (the rate of which is fixed at 0.25 should focus on updating those.37 percent) and the following disbursements are the first events to be captured. The CUB will be the computing base Figure 10 shows an example of a loan with changing DOD until the first disbursement date (04/15/22), resulting in a and a discrete variable interest rate, such as the Eurolibor. CoFee of $ 616.44 (as shown by the red dots – Figure 10). Consider the following inputs: Because CUB = ToCom – DOD, the value of the commitment fee will decrease when disbursements increase. Once the loan a. that the Total Commitment (ToCom) is $ 1,000,000.00, is fully disbursed, the commitment fee is no longer charged. Debt managers need to be mindful of the applicable definition b. the Effective Date (Effday) as of 03/15/202238 with a 3.3 of the effective date. For example, the IBRD will define the years (1,218-days) Grace Period (GP). Effday in the agreement and the CoFee will apply after 60 days after that. • These two pieces of information determine the First Amortization date: 07/15/2025 (which equals Effday + GP). 22 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 1 0 - Changing DOD and Variable Interest Rate Cash Flow 1,000,000 900,000 800,000 700,000 600,000 500,000 500,000 $ 400,000 750,000 300,000 600,000 200,000 14,876.71 100,000 100,000 616 467 159 524 106 616 378 0 0 23 9 9 0 2 22 8/ 022 2 2/ 023 3 23 4 4 5 5 6 15 6 7 7 8 8 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 03 20 20 0 /2 /2 2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 5/ 5/ 5/ 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 /1 1 1 1/ 7/ 1/ 4/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 10 Interest accrued Amortization CUB DOD CoFee Source: Authors. Note: The CoFee and Interest shown in the chart refers to accruals on specific dates. For billing purposes, they would be aggregated to match with the payment dates (Jan and Jul 15th). For example, the sequence of CoFee charges would be ($1,083.9; $683.22; $722.60; $378.08) between Jul-15th-22 and Jan-1st-24. Interest is accrued when a disbursement takes place. to ensure that the DOD converges to zero on 01/15/2030, as The applicable interest rate will be applied over the DOD for shown by the blue line. The correct amortization schedule is the relevant period, and debt managers need to compute the the basis for all remaining calculations. Box 6 details how the interest accrued between each relevant date (e.g., when the values above are calculated for each period. DOD changes) observing the interest rate that has been set for the period. The correct interest rate on the DOD must be In sum, debt managers must detail each individual event applied throughout the billing cycle. and its financial impact. To do so, they need to be familiar with the definition of the events and financial transactions, The flow changes when amortization begins. The first they need to understand their impact on remaining variables, amortization date is 07/15/2025 and there will be ten equal and they need to create a calendar to accurately reflect all of payments (every six months during the next five years). The this. The objective is to describe the way money is moving dates in the amortization schedule need to be perfectly aligned through time and to reflect any factors that disrupt that path. 23 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” a. Fully Repaid contract’s records, this would remain in the database for consultation only. In the case that all committed values have been disbursed and all resulting payments have been 3.2.3 Disbursed and Under Amortization executed, the DOD will have reached zero.40 Debt When the loan reaches the amortization phase, but a management staff should certify that the final invoice positive committed undisbursed balance (CUB) remains, matches with the last principal payment and that the changes to the amortization schedule and DOD amounts outstanding balance is cleared or zeroed. The creditor should be executed carefully. New disbursements will should send a state of account indicating this status. increase the DOD and alter the computational base for the If the actions are executed correctly, the contract will principal and interest (A and I), these should be redistributed be closed and the staff can change the loan status in across the remaining scheduled dates. The installments will the DMIS and block any future amendments to the necessarily increase if the maturity date is not extended. > > > F I G U R E 1 1 - Disbursement During the Amortization Phase and Variable Interest Rate 1,000,000 1,100,000 1,500,000 1,250,000 1,000,000 700,000 5,206 350,000 250,000 14,877 300,000 100,000 2,268 0 925 779 265 1,048212 1,130315 23 9 9 0 2 2 2 22 2/ 023 3 23 4 4 5 5 6 15 6 7 7 8 8 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 03 20 20 0 /2 /2 2 2 2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 /2 5/ 5/ 5/ 5/ 5/ 15 15 15 15 15 15 15 15 15 15 15 15 15 15 15 /1 1 1 1 1 1/ 7/ 1/ 4/ 7/ 8/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 7/ 1/ 10 Interest accrued Amortization CUB DOD CoFee Source: Authors. Note: The CoFee and Interest shown in the chart refers to accruals on specific dates. For billing purposes, they would be aggregated to match with the payment dates (Jan and Jul 15th). For example, the sequence of CoFee charges would be ($1,703.7; $1,313.3; $1,342.5; $1,008.22; $938.3; $1,253.4; $1,250; $619.9) between Jul-15th-22 and Jan-1st-26. Figure 11 replicates the example shown in Figure 10, but now introduces a $500,000.00 disbursement executed on 01/15/2029. This event changes the DOD from $200,000.00 to $700,000.00 (displayed on installment number 8 from and respectively, see Box 7), which now must be redistributed equally across the last two remaining payments in 2029 and 2030. 24 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 3.3. Accuracy Determinants Several factors can affect the accuracy computation confidence is determined by operational risk guidance and of outstanding debt and future payments. Key governance practices. factors include: (i) the lender’s financial center calendar; (ii) amortization schedules and total commitment; (iii) interest 3.3.1 Calendar Issues: Obligations Due on rate computational methods; (iii) currency denomination; Non-working Days (iv) day-count conventions; (v) rounding and truncation Calendar discrepancies and bank holidays are a criteria; (vi) indexation of the DOD; (vii) variable vs fixed common source of discrepancy between the creditor’s interest rates; (viii) commitment fees and initial payment date; invoices and debt records. To preserve accuracy, the (ix) other applicable fees and charges. Debt managers need computation of principal, interest and other charges should to work with and understand the proportionally more complex take into consideration any obligations that will come due controls that are needed to capture all possible events listed in on non-working days. In such cases, the debt service must the contract, they should also work within these parameters to be dislocated to consider all relevant bank holidays (for the capture the accuracy required for computing cash flows. Debt specific financial center) are entered in the Debt Management Management Information Systems (DMIS) are instrumental to Information System (DMIS) or any other type of control providing precision while recording, monitoring, and paying spreadsheets, for the installments to be calculated. public debt. Debt managers ought to consider the particulars of the Mismatches can be significant, the DMO needs to financial center’s calendar and the conditions stipulated be mindful of the above to ensure that there are no in the contract. In general, commercial banks tend to be discrepancies between their own checks and creditor more specific on calendar issues than multilateral institutions. payment notifications. Sound practice indicates that it There are cases where the payment date is transposed is possible to perfectly reconcile their own checks against to the following business day, and others where creditors invoices as long as they have collected the necessary prefer to use the last business day before a holiday or even information accurately and timely. Some practitioners define another specific date. Dealing conclusively with may be comfortable with relatively small deviations, e.g., calendar issues will influence debt invoices, this is particularly within one to three percentage points, and in such cases, important when payments are automated using straight- they would proceed to payment execution. The degree of through processes. 25 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 3.3.2 Day Count Convention (and Fraction Year) Defining the Day Count basis for interest and commitment fee accruals impacts the accuracy of debt records. Sound debt recording should incorporate the criteria applied to each tranche/contract. Debt systems (DMIS) typically offer a menu of options for each transaction, allowing the user to select the appropriate day count standard, and inputting the correct financial center’s calendar in the system is essential for recording accuracy (see Box 8 ).41 > > > T A B L E 2 - Common Day Count Conventions Convention Description Example of Creditor/Market Actual/360 Calendar days over 360 IBRD / IDA42 Actual/365-366 Calendar days over 365 and 366 for Leap Years IDB, some European Bank loans; Eurobonds denominated in EUR; US T-Bills and T-Bonds Actual/365 Calendar days over 365 JICA; Samurai Bonds; Saudi Loans and Sukuks 30/360 Calendar days assume all months have 30 days Some private creditors (commercial loans) over 360 and Global Bonds (under NY Law) Source: ICMA – International Capital Market Association, US Treasury and Creditors. A contract can have distinct Day Count convention 3.3.3 Invoice Cut-Off Date for different financial operations (e.g., interest, fees). The cut-off date chosen for the invoice also impacts cash Furthermore, the convention can diverge between interest flow and billing amount calculations. Creditors generally charges and commitment fees, and in such cases. In these specify a cut-off date when capitalization of interest and fees cases, it is necessary to parametrize correctly for each are frozen to process the invoice and remit to the debtor. financial operation within each tranche. Like ordinary credit card statements, the invoice cut-off date defines the transactions (disbursements/reversals/cancelling) Some creditors alter the Day Count convention within for computing the installments. a tranche. This is the case when the interest rate is converted (e.g. floating to fixed). Variable rates typically Creditors have not established time standards, and use the standard actual/360, while fixed rate loans use contracts are often silent about cut-off dates, making it the 30/360 standard. Unfortunately, loan agreements and difficult to accurately factor this in. For each tranche, debt invoices rarely state these nuances clearly, making it difficult managers should monitor the cashflow and use their own for debt managers to spot such inconsistencies, debt spreadsheets to evaluate the requirements of each billing managers therefore need to create a specific parameter to cycle. The objective is to edit the dates to consider and to correctly capture these discrepancies. This will inevitably add capture the financial transactions that would impact the complexity as there cannot be one single standard by tranche calculation of each installment. It is up to debt managers to or operation. Ideally, creditors should clearly state the day ensure conformity with the payments they prepare, and they count convention to simplify the debtor’s job. should maintain close contact with creditors to make sure that invoice cut-off dates match their records. 26 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 1 2 - Effect of the Invoice Cut-Off date - Constant DOD and Fixed Interest Rate 35,000 3,611 30,000 25,000 20,000 15,000 25,139 25,556 25,139 10,000 5,000 3,611 0 1/15/2022 7/15/2022 1/15/2023 7/15/2023 Interest accrued ($) Effect of the cut-off date on interest Source: Authors. Figure 12 shows an example of how a one-month invoice increase to 1.4% if the invoice cut-off date were 2 months, as cut-off date could reach 0.4% of the DOD. The example it is the case for some creditors. The invoice cut-off date effect considers a DOD of $1,000,0000 and a fixed interest rate of is directly proportional to interest rates, DOD, and time. Box 9 5 percent per annum. For each payment date, debtors will details the effect of the invoice cut-off date. receive an invoice which will transpose all events between the payment date and the full month preceding that date to 3.3.4 Rounding and Truncation Criteria the next billing cycle. In this case funds were disbursed on Creditors adopt different criteria for rounding and 12/20/2021, e.g., five days after the invoice cut-off date, truncating interest rates and interest accruals, impacting which explains why the first invoice shows a zero balance to the financial amounts to be paid. Rounding and truncation be paid. However, the debtor is due to pay interest accrued criteria should be parametrized, to ensure computational from the disbursement date until the first payment date in the accuracy, especially when calculating principal payments, amount of $3,611.11, which will be charged on the second commitment fees and other charges. To consider those, invoice from 07/15/2022. On this date, the total charge would officers could identify the criteria used by creditors and apply be $28,750.00, accounting for the interest from Jan-Jul 2022 the number of decimals (consider the correct parameter) to ($ 25,138.89) and the amount that would appear on the first be used. invoice ($3,611.11), if not for the invoice cut-off date. This resulted in a difference of 0.4% of the DOD. This effect would 27 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” The general rule is to round or truncate the interest factor to the sixteenth digit (decimal) and the financial amount of any operation on the second decimal. However, there are contracts where the financial amounts are rounded up on the thousands, hundreds, tens, or units. The criteria can also vary across financial transaction modality within a single tranche, or within multiple tranches. The rounding criteria should be identified in the loan agreement, and in disbursement requests, and should be applied while computing the flows (principal, interest, and fees/charges). > > > F I G U R E 1 3 - Effect of Truncation Rules - Constant DOD and Fixed Interest Rate Cash Flow 35,000 30,000 25,000 20,000 $ 15,000 10,000 5,000 0 9/ 26 2/ 32 9/ 33 4/ 33 4 1/ 4 1/ 35 36 8/ 22 3/ 22 3 1/ 3 4 1/ 4 2/ 25 4/ 26 7 1/ 7 1/ 28 8/ 29 3/ 029 0 0 1 1/ 1 12 03 03 11 02 2 11 03 03 12 02 02 10 02 02 10 03 03 0 20 20 20 20 20 20 20 20 20 20 20 20 2 /2 2 /2 2 /2 2 /2 2 /2 2 2 /2 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ 1/ /1 /1 /1 /1 /1 /1 5/ 1/ 5/ 7/ 7/ 6/ 6/ Interest payment due Interest payment with wrong rounding criteria Source: Authors. Figure 13 shows an example of how the difference in difference of $139,583.25 or 14% of the DOD. The rounding rounding rules could reach roughly 14% of the DOD. and truncation effect is directly proportional to interest rates, The example presents the same cash flow as shown in the DOD, and time. Box 10 details. previous section (Box 9)43. Here, it covers a period of 15 years (30 interest payments), where the interest factor and the Differences related with rounding rules should be small. interest accrued (financial amount) were rounded on the 16th The example above is distortive because the interest factor and 2nd decimals respectively. This resulted in a total interest lost 14 decimals which would be unlikely to happen, except payment of $740,416.75. If the rounding criteria is changed from operational errors such as “fat finger”, or a problem in the to the 2nd and 1st decimals, the total interest payment (all DMIS’ parameter. else being constant) would reach $880,000.00, resulting in a 28 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” When calculating amortization installments, rounding (see Box 11 for details). Figure 14 shows that the debt rules create a residual amount that is not immediately service profile is very similar, as the flows in the computing included in the new creditor invoice. The residuals are currency are a linear function of the original currency cash transposed to the future cash flow to ensure that the flow. The notional amounts are very different as a result of the outstanding balance is cancelled following the final cash conversion. principal payment. The residual created by the truncation/ rounding needs to be reallocated to the principal amount Currency conversion switches the cash flows for a according to the rules established in the contract, and debt common currency base and converts back to the currency managers should parametrize how this is going to unfold. In denominated in the contract. Repayments may diverge fact, there are various rules defining how the residuals are significantly from original values if this is not done going to be distributed, including: (i) allocation in the next properly. In the case of pool-based loans, the proportions installment; (ii) allocation in the last installment; (iii) uniform of the currency bundle and their respective values should be distribution across remaining installments. used to compute the cash flow and converted it back to the payment currency. These are the values billed by the creditor. 3.3.5 Currency Conversion In some cases, billed amounts are converted by the rate set Currency conversion is a mechanism commonly used by the invoice cut-off date. Creditors may adjust the values for loans denominated in foreign currency.44 Borrowing in the next billing cycle if the invoice cut-off date is different in foreign currencies risks potential increases in debt and from the payment date, to reflect currency fluctuations. debt service if the local currency depreciates. Converting to local currency helps clients avoid that risk. For some loans Commitment fees are usually based on the loan’s currency referenced in hard currency and for pool-based loans, the debt denomination. This is because the computation base is the amount needs to be converted daily into a single currency, committed undisbursed balance (CUB) denominated in the which will transform the calculation base for the DOD. All flows original loan’s currency. The CUB is always expressed in the are calculated based on this currency unit (normally published original loan currency to ensure that the sum of disbursements by the creditor) and the debtor will be billed in the converted matches the total committed value. currency. However, the creditor will present all balances in the original currency, converted back from the original calculations. The flows described on Figure 14 do not provide guidance on managing exchange risk. Instead, they show how to As such, it is necessary to use daily exchange rates (and derive the cash flows of currency loans denominated keep the historical series) for converting the original in hard currency and bundled-based currency such as currency denominating each tranche. The exchange the SDR. IFIs are increasingly flexible in allowing debtors to rates need to be linked to each financial operation for each swap the loan’s original currency into a hard or local currency. specific. Those interested in designing a DMIS capable of Countries can alter the currency terms of a loan obligation accommodating a user’s needs should mind this application if risk management requirements change, and clients can to allow users to follow the financial events affecting their convert the currency of an IBRD Flexible Loan (IFL) into one payment notices.45 of the four lending currencies: USD, EUR, GBP, JPY, using options embedded in the loan agreement. For IBRD loans Figure 14 and Box 11 show an example of currency without embedded options or for debt owed to creditors other conversion. It is assumed that there is only one currency than IBRD, clients may access swaps by signing a Master and one initial disbursement of $100 million before the first Derivatives Agreement with IBRD. Availability of currency amortization date. The amortization schedule is constant and hedging products presupposes a sufficiently liquid swap consists of 30 payments of monthly installments, the interest market in the desired currency.46 rate is fixed at 5.0% p.a. and the accrual method is compound 29 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 1 4 - Currency Conversion Cash Flow 760,000 Computing currency 710,000 660,000 610,000 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 1/ 2 /2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 /2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 /2 1/ 2 9/ /1 1/ 3/ 5/ 7/ 9/ /1 1/ 3/ 5/ 7/ 9/ /1 1/ 11 11 11 Amortization (currency computing base) Interest accrued (currency computing base) 4,000,000 3,800,00 S biliing currency 3,600,000 3,400,000 3,200,000 3,000,000 2 2 3 3 3 3 3 3 4 4 4 4 4 4 5 02 02 02 02 02 02 02 02 02 02 02 02 02 02 02 1/ 2 /2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 /2 1/ 2 1/ 2 1/ 2 1/ 2 1/ 2 /2 1/ 2 9/ /1 1/ 3/ 5/ 7/ 9/ /1 1/ 3/ 5/ 7/ 9/ /1 1/ 11 11 11 Amortization billed ($) Interest billed ($) Source: Authors. 3.3.6 Indexed DOD CAPt : Capitalization Factor at time t; INDEXt : value of the reference INDEX at time t; This section shows how to compute loans where the INDEXt-1 : value of the reference INDEX at time t-1. DOD is denominated in local currency and updated by an index, like inflation, GDP, or another reference rate. The above indices are usually valued on specific dates. Debt management staff need to understand capitalization The latest index is valued at time (t) and generally lines up factor rules. In general, the DOD is updated following a with payment dates, whereas the previous index is valued disbursement, payment or anything that affects the balance. at (t-1), lining up with the first disbursement date; or the The capitalization factor can be found by applying the last disbursement (when such event happens between two following formula: payment dates); or the last payment date. (12) CAPt = INDEXt / INDEXt-1, where: 30 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 1 5 - Indexed DOD Cash Flow 120,000,000 2.0550 2.0500 100,000,000 2.0450 80,000,000 2.0400 2.0350 Index 60,000,000 $ 2.0300 40,000,000 2.0250 3,336,039 2.0200 20,000,000 2.0150 0 2.0100 22 22 22 3 3 3 3 23 23 4 4 4 4 24 24 5 02 02 02 02 02 02 02 02 02 20 20 20 20 20 20 20 /2 /2 /2 /2 /2 /2 /2 /2 /2 5/ 5/ 5/ 5/ 5/ 5/ 5/ 15 15 15 15 15 15 15 15 15 1 /1 /1 /1 /1 /1 /1 8/ 2/ 4/ 6/ 8/ 2/ 4/ 6/ 8/ 2/ 10 10 10 12 12 12 DOD Amortization Index Source: Authors. Indices’ time series are typically published by an official schedule consists of 30 payments of monthly installments, source. Inflation and overnight interest rates are often and the interest rate is fixed at 5.0 % p.a. the accrual method published by national statistical bureaus and central banks. is compound.48 Creditors may choose to publish the index they are following or indicate the exact reference for computation of cash flows.47 The first two steps are to set up the amortization dates (monthly and under CAS) and to compute the capitalization The next step is to compute the updated DOD. This can be factor (CAP) using the respective indices, which are done using the following formula: published daily. The capitalization factor (1.00081174) is the quotient of the index between two dates (e.g., INDEX9/15/2022 / (13) DODt = CAPt *DODt-1 – At, where: INDEX8/15/2022). This yields the amortization installment, which is the product of the capitalization factor by the initial DOD CAPt : Capitalization Factor at time t; ($1,000,000) over the number of installments remaining. The DODt : Disbursed Outstanding Amount at time t; DOD will be updated by the index, which will have a defined DODt-1 : Disbursed Outstanding Amount at time t-1; time frame.49 At : Amortization at time t. The next step is to compute the interest payment, which Figure 15 shows an example of an indexed DOD under will be based on the updated DOD.50 This will be repeated CAS, which will be a function of the index applied. It is for the following 29 months, and practitioners must capture assumed that there is only one initial disbursement of $100 the correct indices and ensure that the DOD is updated by the million before the first amortization date. The amortization new capitalization factor (CAP). Box 12 details the calculation. 31 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 3.3.7 Variable Rates and The Special Case basic methods: (1) some creditors (e.g., IBRD/IDA, IADB, NDB) have replaced the Libor-linked and USD-denominated of the SOFR loans by the SOFR (using the rates and the SOFR index); There are at least two important aspects to consider when and (2) other creditors (e.g., CAF – Cooperación Andina de computing variable interest rates. Floating interest rates Fomento, and some commercial lenders) have adopted the can: (i) be fixed during the entire billing cycle of a tranche; CME Term SOFR Reference Rates. (ii) change multiple times during the billing cycle of a tranche. Debt managers need to track the floating interest rate changes Computation of interest accruals under method (1) is and must apply the correct rate for accruing interest payments based on the SOFR index and rates, but there can be over the relevant period. substantial differences in calculations. For instance, the IADB, NDB, FONPLATA compute the interest accruals as: When the interest rates are known they will be updated after the invoice cut-off date. In such cases, debt managers (14) InterestT = DODt * ( INDEXT – 1 ) + SPREADT , where: INDEX need to incorporate the difference in interest payments in t the next installment. This is very common with multilateral t : initial date for the relevant period; variable rate loans, where the cut-off date is relatively far from T : final date for the relevant period; the payment date. DODt : Disbursed Outstanding Amount at time t; SPREADt : margin added to the SOFR - described by The Special Case of SOFR – Secured Overnight equation 16. Financing Rate Practitioners should note the following: First, the day- With the end of the Libor rate set for June 2023, the count and the fraction year (FY) are already included on the Secured Overnight Financing Rate (SOFR) has emerged percentage change of the SOFR index. Second, the invoice as one of the most used reference rates for multilateral cut-off date freezes the SOFR Index to the last available lenders. The SOFR is a broad measure of the cost of day (k). borrowing cash overnight (duration of one day) collateralized by Treasury securities, it is calculated as a volume-weighted Therefore, debt managers need to estimate the index median of transaction-level tri-party repo data collected from for each day for the entire period between k and T. This US Treasury repo daily transactions. Each business day, the follows the formula: New York Federal reserve publishes the SOFR rates and SOFRk-1 the SOFR index, which measures the cumulative impact of (15) INDEXk+1 = INDEXk * (1 + ) * (W) , where: 360 compounding the SOFR on a unit of investment over time, with the initial value set to 1.0000 on April 2, 2018, the first k : date of the last available Index; value date of the SOFR. The SOFR Index value reflects the SOFRk-1 : SOFR rate observed at date k-1; effect of compounding the SOFR each business day and W : number of working days between the reference days for allows for calculation of compounded SOFR averages over the indexes; custom time periods.51 Note: INDEXk-1 is rounded at the 8th decimal. The market has created products based on these new Adjustments will happen in the next billing cycle (invoice) reference rates, such as the CME Term SOFR Reference once the SOFR is known for the period (T-K). This is Rates. These rates provide an indicative, forward-looking because the estimated index is likely to be different from measurement of SOFR rates, based on market expectations the observed. implied from leading derivatives markets. Some creditors are only changing the Libor to the CME Rate and interest accruals Debt managers will often need to compute the index for will follow the same method as used for the Libor.52 Despite non-working days, observing the New York calendar, and these preferences, regulators have been cautious about the they should use the above formula. This is useful because robustness of CME term SOFR rates and have encouraged both the index and rates are published only for working days, the use of the regular SOFR rate.53 but a creditor may set the payment dates for non-NY working days. Accurate interest accruals must consider all days, which Creditors are taking different approaches as they phase means that this aspect cannot be ignored. out the Libor in favor of the SOFR. There are at least two 32 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Spreads are computed based on Day-Count Actual/360 9/9/2022, and a reverse disbursement of $2,000,000 (DOD3) days and simple interest method, following equation 16. takes place on 9/20/2022. Spreads (or margin) can be reset during the billing cycle, e.g., quarterly. If there are changes in the spread, a proportional Interest accruals are calculated separately for each change will be applied for the period. The computed spread transaction (disbursement) using the indices for the initial (expressed in $) will be added to the interest accrued. and final dates for each DOD. The indices are published for all three disbursement dates: Index3/15/22 = 1.04248653; DAYST–t (16) SPREADT–t $= DODt * SPREADT–t% * ( ), where: Index9/9/2022 = 1.04853218; Index9/20/2022 = 1.04926141. Because 360 the invoice cut-off date is in the beginning of October and the t : initial date of the cycle; payment date is 15 days later, all daily indices up to the final T : final payment date; payment day 10/20/2022 need to be estimated. DaysT-t : number of days between T and t; SPREADT-t% : applicable margin (in percentual terms). The estimation follows equation (15), where the latest available information before the cut-off date is Index10/5/2022 Figure 16 presents an example where there is one initial = 1.05052585 (date k) and the SOFR10/4/2022 = 3.04% disbursement of $10,000,000 (DOD1) on 3/15/2022. The (date k-1). Hence, the estimated index for the next day is initial payment date is 3/15/2022 and the final payment date Index10/6/2022 = 1.05052585*(1+(3.04%/360))*(1) = 1.05061456. is 10/20/2022, while the invoice cut-off date is 10/05/2022. This is repeated until the final payment date (T), where A second disbursement of $1,000,000 (DOD2) follows on Index10/20/2022 = 1.0518572454. > > > F I G U R E 1 6 - SOFR Indexed Cash Flow $12,000,000 $89,888.07 1.05400 $10,000,000 1.05200 1.05000 $8,000,000 10,000,000 $ Disbursements / DOD 1.04800 $6,000,000 1.04600 SOFR $4,000,000 1.04400 1,000,000 $3,171.16 ¢2,000,000 -2,000,000 1.04200 $ 1.04000 $(2,000,000) 1.03800 $(4,947.92) $(4,000,000) 1.03600 7/15/2022 1/15/2023 7/15/2023 Interest accrued ($) Disbursement / DOD $ INDEX SOFR t (initial) INDEX SOFR T (estimated) Source: Authors. 33 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” When the Index for the final date (T) has been estimated, SPREADk : margin for all-in cost for period k (in %). interest accrual may be computed using equation (14). This yields InterestDOD1 = 10,000,000 * (1.05185724 / 1.04248653 Interest is accrued according to equation 19: - 1) = $ 89,888.07; InterestDOD2 = 1,000,000 * (1.05185724 / 1.04853218 - 1) = $ 3,171.16; and InterestDOD3 = -2,000,000 * (19) INTERESTk = ( DODk * COSTk% * ), where: DAYSk, k–1 (1.05185724 / 1.04926141 - 1) = $ - 4,947.92.55 Box 13 details 360 the cash flow. DODk : Disbursed Outstanding Debt at date k; COSTk : all-in cost for period k (in %); The IBRD/IDA also consider the above two components Daysk, k–1 : number of days between period k and k-1. (SOFR charge rate and Spread), but have a different algorithm. The SOFR charge rate follows equation 17: Table 3 shows an example for the IBRD, where the DOD is fixed at $10,000,000 as of 5/15/2022, the initial date for INDEXk – INDEXk–1 360 (17) SOFRt = ( ( INDEXt ) * (DAYS ) * 100 ), where: accrual. The payment date is six months ahead (11/15/2022) k, k–1 and the invoice cut-off date is 9/15/2022 - 60 days before Daysk+1,k, : the number of days between dates k and k-1; payment date. The first step is to consider the indices INDEXk,t : index of the reference dates (e.g., t for initial published from the starting date up to the invoice cut-off date.56 reference period); The second step is to estimate the SOFR charge rates using SOFRk : the rate estimated for reference period k. equation 17. This can be seen on the SOFR Rate column, where, for the first 15 days, SOFR5/15 to 6/1= ((1.04351039 - The spread (margin %) is added to the SOFR charge rate, 1.04312379)/ 1.04312379) *(360/17) * 100) = 0.7848372. This resulting in the all-in rate, represented by equation 18: is repeated for the following three months and for the 14 days up to the cut-off date. For the last 60 days, the estimated SOFR (18) COSTk% = ( SOFRk% + SPREADk% ), where: charge rate takes into account the index variation for the last 30 days from the cut-off date (from 8/15/2022 to 9/15/2022). COSTk : all-in cost for period k (in %); SOFRk : rate estimated for reference period k (in %); > > > T A B L E 3 - Cash Flow - IBRD SOFR Loan Total interest From date To date % of days SOFR rate (%) Spread (%) All-in rate (%) accrued (%) 5/12/2022 6/1/2022 17 0.7848372 1.50 2.284837 10,789.51 6/1/2022 7/1/2022 30 1.11288805 1.50 2.612888 21,774.07 7/1/2022 8/1/2022 31 1.62962133 1.50 3.129621 26,949.52 8/1/2022 9/1/2022 31 2.29086595 1.50 3.790866 32,643.57 9/1/2022 9/15/2022 14 2.29510358 1.50 3.795104 14,758.74 For the last 60 days of the billing cycle 8/15/2022 9/15/2022 31 2.2846853 1.50 3.784685 Estimated all-in rate 9/15/2022 11/15/2022 61 64,129.39 Total interest 171,044.79 Source: Authors. 34 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Once the SOFR charge rates are calculated, the spread In sum, the factors presented can significantly impact the is added, and interest is accrued (equations 18 and 19)). debt’s cash flows. To monitor and control these factors, debt For the first period, the COST5/15 to 6/1= 0.7848372 + 1.50 = managers should create parameters and adjust the cash flows 2.28% and Interest5/15 to 6/1 = $10,000,000* 2.28%*17/360 = in their DMIS (or computing tools) to ensure accuracy and to $10,789.51. compare expected payments with incoming creditor invoices. There is a clear trade-off between accuracy and complexity. The total interest accrued is the sum of the interest Practitioners need to consider the organizational setting and for each accrued period. This is shown in the table for the markets in which they operate, as well as applicable the reference dates. Hence, the interest charged in that governance practices to determine their comfort zone with semester was $171,044.79. Box 14 details the calculation and checks that do not align exactly with the payments released. series used. > > > T A B L E 4 - Examples/Summary of Accuracy Determinants – Sensitivity Analysis Factor Difference between invoices and estimated payments (financial impact) 1 - Calendar Issues Positive or negative depending on the days added or excluded 2 - Day Count Convention Increases when more days are counted 3 - Invoice Cut-Off Date Increases when the cut-off date is farther from payment date. Increases with DOD, interest rate and time 4 - Rounding and Truncation Increases with DOD, interest rate and time 5 - Currency Conversion The difference increases on each billing cycle 6 - Indexed DOD Positive or negative depending on the index changes 7 - Variable Rates Positive or negative depending on the interest rate and index changes Source: Authors. 3.4 Debt Service Suspension: Integrating Accrued Interest with the Principal This section describes a debtor renegotiating to extend the number of installments may have changed, in which case the debt servicing period beyond the original agreement.57 there would be a deferral over time. Interest accrued during In this case the creditors agree to freeze the debt service for the suspension period is incorporated into the DOD using the a period, integrate the capitalized interest and fees into the original payment dates. Once capitalized, the new DOD will principal and then generate a new cash flow according to the be the base for computing the following interest installments, new computing base. which will in turn, be incorporated into the DOD until payments comply with the renegotiated agreement. If applicable, During the freezing period, the amortization is suspended commitment fees and other charges will also be incorporated until a new agreed-upon date. When amortization resumes, into the DOD. 35 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > F I G U R E 1 7 - Debt Suspension: Interest Accruals Integrated into the DOD 4,000 10 3,500 $ Amortization / Interest - Thousands Interest capitalized into the DOD 3,000 $ DOD - Millions 2,500 2,000 50 1,500 1,000 500 0 0 2 3 3 4 4 5 5 6 6 7 7 8 8 9 02 02 02 02 02 02 02 02 02 02 02 02 02 02 1/ 2 /2 1/ 2 /2 1/ 2 /2 1/ 2 /2 1/ 2 /2 1/ 2 1/ 2 1/ 2 1/ 2 8/ 2/1 8/ 2/1 8/ 2/1 8/ 2/1 8/ 2/1 8/ 2/ 8/ 2/ Interest accrued ($) Amortization ($) DOD ($) Source: Authors. Figure 17 shows an example of debt suspension where the freeze was introduced, the DOD12/15/2023 was $46,666,666.69 interest accrual is integrated into the DOD. It is assumed and Interest12/15/2023 was equal to $208,333.3358. Therefore, there is only one initial disbursement of $100 million before the the first DOD1/15/2024 pertaining to the freezing period equals first amortization date. The original amortization schedule is $46,867,592.62 (DOD12/15/2023 + Interest1/15/2024 = 46,666,666.69 constant for 30 monthly installments, the interest rate is fixed + 200,925.93). at 5.0 % p.a., and the accrual method is simple. The above is repeated for 24 months, when the Debt service is suspended after 15 months. After the first 15 freezing period ends. After that, the DOD12/15/2025 will be months (1/15/2024), the creditor agreed to freeze debt service $51,642,430.68, setting a new base for the remaining 38 for 24 months: there will be no payments, but interest will still amortization installments, which will be fixed at $1,359,011.33. be accrued monthly and summed to the DOD, as highlighted in The cashflow is detailed in Box 15. Figure 17 (red line). The example shows that, by the time the 36 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 4. >>> Preparing Debt Payments Debt payments should be prepared based on the DMO’s internal records. Eventual inconsistencies between debt records and billing notices should be clarified before any payment release. The first step is to compare creditor invoices against the estimates generated by the DMIS, which should be updated when monitoring the debt. DM staff should frequently monitor budget releases authorizing the payment, ensuring that they are consistent with the debt maturity’s calendar. Several factors can create mismatches between invoices and internal records: (i) the level of accuracy specified and implemented in the DMIS; (ii) creditor errors; (iii) human errors from the DMO; (iv) incomplete or imprecise loan clauses. Factor (i) is the most important and, to control for that, staff must understand the accuracy level for payments as generated by their DMIS or their own spreadsheet calculation. Debt managers should be able to map out eventual sources of divergence between their own estimates and creditor invoices. When the divergence is clearly identified, the staff should define a threshold or a range at which they would be comfortable to proceed with debt payments. The DMO could do this by analyzing past payments and verifying any historical divergence from creditor invoices from their own payment estimates. Ideally, the threshold will fall into zero to 1 percent of the debt payment and the causes of the divergence should be explained in the payment note. Some practitioners would be fine with a 3 percent threshold. The country examples below show that the 1-percent threshold is unlikely to be breached if all transactions and relevant factors (FX, interests, commitment fees etc.) are correctly accounted for. 37 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Debt officers need to consider the financial instruments Turkey, Denmark, North Macedonia, South Africa) prefer to at hand; the level of engagement with creditors; the debt be more precise. what is important is being able to explain market in which they operate; capacity constraints from eventual divergences within a pre-determined range. The the staff; and the technological infrastructure supporting range of confidence may be determined by PFM practices and their activities. Some countries may be comfortable executing compliance or audit practices. payments that deviate from invoices while others (e.g., Brazil, > > > F I G U R E 1 8 - Deviations between Payment Estimates and Creditor Invoices – Selected DMOs a) Brazil manages about 45 sovereign contracts and potential discrepancies between debt system (SID) estimates and creditor invoices fully align, this is a requisite for all payment execution. Another 1,500 loan guarantee contracts from subnational governments (SNG) and State-Owed Enterprises (SOE) are monitored. Because the DMO is not the primary debtor, guaranteed debt monitoring is not as accurate as with sovereign debt. Still, in the wake of a wave of called guarantees that started in 2016, the DMO adjusted its processes and system to secure a 0.1% maximum discrepancy to monitor and execute called guarantees. b) Turkey, North Macedonia and South Africa have strict criteria for executing debt payments. Every creditor’s invoice must match down to the cent before payment is processed. In North Macedonia, most discrepancies come from the values from variable interest rates and calendar issues related to business days and non-working days. In South Africa the discrepancies are less than 5 percent of the payment and are normally a result of day- count and currency conventions. c) Similar issues apply to more advanced settings. Denmark does not have contractual debt on its portfolio, which consist of securities and derivatives; the DMO uses swaps to change the debt currency and interest exposure with selected counterparts. Such transactions typically require the parties to post collateral, and debt managers have been diligent in avoiding incorrect collateral posting from the counterparties (banks), who used a slightly different average interest rate period accruing in the transaction, affecting the amount owed to the government. Unfortunately, country evidence shows that few LIC countries are diligent with this aspect of payments. Source: Debt Management Offices from Brazil, Turkey, Denmark, North Macedonia, South Africa, Bolivia. Each payment should be prepared and released if it fully aligns with its own records or if it falls within a predetermined threshold (reflecting the DMO’s comfort zone). The DMO (or treasury department) specifies a deviation threshold before releasing the payment for execution. 38 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 4.1 Checklist for Preparing and Processing Debt Payments 4.1.1 Aligning Budget and 4.1.2 Preparing Debt Payments (Checklist) Accounting Rules The following checklist should be verified against the Debt payments typically move significant resources from creditor invoice when preparing a payment: the government to creditors and need to be handled diligently, DM staff must comply with the rules and a. Outstanding Debt procedures governing accounting standards and the budget and financial programming. As a part of budget • Outstanding debt referenced in the invoice must be programing, governments (Treasury or DMO) typically prepare correct, otherwise will disturb all financial operations monthly budget provision profiles59 to allocate funds or issue in the contract. payment warrants on a monthly or quarterly basis. A monthly cash plan may be associated with the profiles, and in these • If not, the staff should check: cases that would be focused on debt service cost.60 • Cross-check that all disbursements / The DMO should ensure that the budget for each specific cancellations are captured; debt payment can accommodate eventual fluctuations • The amortization schedule is correct. in the notional amount of the expenditure given any fluctuations in exchange rates, interest rates or other b. Amortization factor affecting the amount. The cash plan should be monitored and updated at least monthly, so the individual • The amortization schedule referred to in the invoice budget authorization may access it for reference. must be correct Accounting or budgeting offices are generally responsible • If not, the staff should check: for defining the principles and routines applicable to debt payments. Debt managers need to remain in contact with • Amortization schedule type (Constant, these units to make sure debt payments are prepared and Price etc.); processed according to protocol to avoid execution delays • Dates and schedule of payments ; and flawed records.61 • Invoice cut-off date. 39 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” c. Interest Payments Debt managers should persist in engaging with creditors if inconsistencies are detected in billing notices. From • Interest payments are correct a governance and financial point of view, close, frequent contact with creditors is essential to making sure all events are • If not, the staff should check: accurately captured and reflected in their checks. Creditors need to be receptive to providing clarification when asked in • The outstanding debt; order to preserve client-creditor relations. • That interest rates have been accrued correctly; 4.1.3 Executing Debt Payments • Outdated variable rates (series); While the DMO commonly initiates the payment process, • The correct Day-Count Standard; final execution can be undertaken by a financial agent or • Invoice Cut-Off dates. a unit responsible for treasury-related functions in the MoF or CB. Payment processing is execution of the payment d. Commitment Fee order using dedicated resources and budgetary authorization in the relevant currency for a specific beneficiary. • Fees are correctly calculated It is good practice to have legal and administrative • If not, the staff should check: provisions give priority to debt payments over other budgetary expenditures. Late payments can result in • Undisbursed committed values; negative financial and reputational consequences of late • That Commitment Fees are payments. For example, in Iraq, the absence of such accrued correctly; provisions has almost delayed international payments, • Outdated variable fees (series); which would penalize the government. The MoF has no • The correct Day-Count Standard; institutional arrangement to make sure the accounting • Invoice Cut-Off dates. department (responsible for treasury functions) will execute the operations timely. The debt management department e. Charges and Penalties relies on the willingness and the relationship they have built with the accounting unit. • If charges are applied to the outstanding debt, the validation should be similar to interest Debt managers should monitor all activity from execution payments above through settlement. This is to correctly reflect the transactions • If there are other types of charges in the official records and ensure conformity and compliance with budgetary and accounting rules. • If not, the staff should check: • That the percentage rate applied, and the calculation basis are correct. 40 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 5. >>> Conclusion This Note focused on contractual debt and provided guidance for practitioners on basic definitions and transactions common to all loans. It can be used for capacity building on debt management for sovereigns, subnational governments and SOEs borrowing through loans. Loans follow a dynamic different from securities and tend to be less standardized as they are not actively traded in the market. The main message is that debt managers need to fully understand the terms and conditions applicable to each debt instrument, down to the tranche level, this will ensure that cash flows are broken down correctly into principal, DOD (and stock), and interest payments. Debt recording and monitoring should be undertaken at the most granular level for each individual tranche. Once debt is created, a myriad of factors will determine cashflow accuracy. The stage of the loan’s disbursements and amortizations are the foundations for determining relevant transactions that will change the computation base, and this will affect all other parameters. As such, the following should be considered: (i) calendar issues; (ii) amortization schedules (and total commitment); (iii) interest rate methods; (iii) currency denomination (and conversion); (iv) day-count conventions; (v) rounding and truncation criteria; (vi) indexation of the DOD; and (vii) variable interest rates. Additional factors to be identified include: (viii) commitment fee rates and initial payment date; (ix) other applicable fees and charges. 41 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” Various examples have illustrated how all these factors can be edited, and readers may input their own information affect loan cash flow accuracy. Debtors should engage to simulate what would happen with their cash flows. The with creditors to get a clear understanding of parameters objective is to help DM practitioners familiarize themselves used when computing cash flows. Debt management with the concepts presented and build capacity within the practitioners should understand all components of the loans DMO. The spreadsheets provided do not substitute Debt they are managing, and any events that could change the Management Information Systems. loan’s dynamics as this this will impact the debt stock and the maturity profile. Debtors need to get all the information Debt managers should prepare debt payments based they need from creditors before signing a loan, including all on their own assessments, and these should match information on: the exact days that financial transactions take creditor invoices. The steps presented should help DM place; the source of interest/exchange rates used; truncation/ officials increase the efficacy of their operations and boost rounding conventions; and invoice-cut-off dates. governance and accountability. Public debt is typically the largest financial portfolio managed by government, and This note is companied by a downloadable spreadsheet debt-related transactions have implications for public and describing the cash flows of each example presented in private sectors. the text and in Annex I. The formulas and key parameters 42 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” >>> Notes 1. After updating the DeMPA (Debt Management Performance Assessment) Methodology in 2021, the World Bank (WB) assessed around 25 countries. The updated DeMPA highlighted the government official’s ability to articulate the steps for borrowing, recording and the processes and technological solutions to service debt. 2. This Note has been prepared by Andre Proite (Senior Debt Specialist EMFMD, MTI, World Bank) and Marcelo Vitorino (DMO, Brazilian Treasury). It has been peer reviewed by Rodrigo Cabral (Senior Financial Officer, TRECI, World Bank) and Lars Jessen (Lead Specialist, MTI/EMFMD, World Bank). Frederico Gil Sander (Practice Manager) and Manuela Francisco (Global Director) provided overall guidance. Additional comments were provided by Marina Batkovic, Susan Evans, Sridharan Srinivasan, Valerie Asfour (Finance Analysts and Officers, WFAAS, World Bank) and Tessy Vasquez (EMFMD/MTI, World Bank). The Note has benefited from many conversations with IFIs, development agencies, commercial banks, debt managers from OECD, and Emerging and Developing Countries. 3. China’s direct loans and trade credits have climbed from almost zero in 1998 to 1.6 trillion USD, or close to 2% of world GDP in 2018. 4. See WB-IDS (International Debt Statistics, 2020). Reinhart, C., Horn, S. and Trebesch, C. (2019), have found that, based on 200 microdata-level Chinese-financed projects, the median grace period is 5 years and most projects (85%) are implemented and fully disbursed within 4 years. Most loans are USD-denominated and reflect interest rates on a par with commercial lending. 5. Loans and contractual debt will be used interchangeably. 6. IBRD and IDA outstanding loans reached USD 227 bn and USD 174.5 bn- respectively by Jun-22. IMF non-concessional (GRA) and concessional (PRGT) outstanding loans reached USD 131.2 and 21.5 bn respectively as of Dec-22. 7. LIBOR – London Interbank Offered Rate – discontinued in July 2021. SOFR (Secured Overnight Financial Rate) is the new US benchmark rate. SONIA, TONA and EURIBOR have become the reference rates respectively in the UK, Japan and the Eurozone. 8. Source: IDS-World Bank’s International Debt Statistics. 9. See World Bank 2022. 43 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 10. This is the case for several Chinese lending schemes. For risky debtors, China’s state- owned policy banks often choose to not transfer money to accounts controlled by the recipient government. Instead, the funds are transferred directly to the Chinese contractor; loans thus remain within the Chinese financial system. 11. See definitions on Section 2.2.2. 12. Currency conversion is detailed in Section 3.3.5. 13. Contracts/loans/agreements and tranches will be used interchangeably in this section. 14. There are three main disbursement methods: cash, reimbursement, direct disbursements where the debtor receives goods and services and the creditor pays the provider directly. 15. For example, the date approved by the board. In practice, the calculation of the grace period is similar to disbursement linked loans. 16. See WB – Instructions for IFL – Completing the Loan Choice Worksheet with Variable Spread. IBRD and IDA loans are typically repaid on the 1st or 15th of any two months which are six months apart as selected by the borrower. For example, if the expected loan approval date is January 5, 2022, then the first payment date must fall between January 15 and July 1, 2022. It follows that for a commitment-linked repayment schedule, a 5-year grace period means the first principal repayment would be due between January 15 and July 1, 2027 (depending on the exact selection of payment dates by the borrower). 17. A balloon payment is a larger-than-usual one-time payment at the end of the loan term. Other types are detailed later in the text. 18. In the case of the IBRD, the client can fix the conditions and the grace period / amortization would be 5 / 20 years. 19. IDA loans use the Total Commitment to derive the Amortization schedules. Equation (1) would typically hold because most IDA loans are fully disbursed before starting the amortization phase. 20. See Box 2 for details. 21. This particular case will be further explored in Section 3. 22. That is, from that date until the last payment date. 23. There are other less common amortization schedules for loans such as balloon schemes where there are intermediary fixed payments followed by a large final repayment. Bullet payments are lump sum principal repayments at the maturity of the debt. 24. Set to be phased out by 2023, LIBOR has been substituted by new risk-free reference rates such as: SOFR (Secured Overnight Financing - US); SONIA (Sterling Overnight Index – UK); TONA (Tokyo Overnight Average – JPN); ESTER (European Short-Term Euro – EU); SARON (Swiss Average Rate – SUI). 25. See Section 3.3. 44 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 26. Compound interest would more accurately reflect the time value of money, which becomes a more important consideration as interest rates rise. 27. For the IBRD, the CoFee is applied 60 days after signing. 28. In the case of international bonds, costs are related to roadshows, preparation of prospectus, etc. 29. See Annex III for details. 30. https://www.worldbank.org/en/programs/debt-toolkit/dempa 31. Respectively US Dollar, Euro, GB Stirling Pound, Japanese Yen. The IMF’s SDR adds the Chinese Renminbi to the aforementioned currencies and this is revised every 5 years – see SDR for details. 32. See Proite (2020) and Debt Management Performance Assessment – DeMPA (2021). 33. For example: Segregated functions are performed by “Treasury”- Mongolia; “Accountant General” – Somalia; “Financial Comptroller and Auditor General” – Nepal. Conversely, integration is observed in most OECD countries. Brazil, Mexico have advanced practices for sharing debt flows with the treasury department (see Proite, 2020). 34. Monitoring can be seen as a special case of recording. For didactical purposes, it will be kept separate from recording. 35. Conciliating the stock with creditors monthly is essential for sound debt monitoring. Debt manager should verify if their recorded outstanding matches with creditors’ figures. This activity allows government officials to see if all disbursements have been captured or if there is any discrepancy on the expected cash flow. For a broader discussion, see Proite, 2020. 36. Reverse disbursements will increase the DOD and future amortization installments. 37. Assuming no acceleration legal clause has been triggered. IDA credits can also be accelerated when a country’s GNI exceed a certain threshold. 38. Consider the last possible disbursement date is 12/15/2025. 39. When the debtor cancels the disbursement and send the cash back to the creditor. 40. Assuming there were no cancellations on the total commitment. 41. In addition to loans, day count conventions also affect the present value of securities, with impacts on pricing financial instruments to the extent that they change the discount factor 42. The standard Day-Count convention for SOFR and US money markets. The same standard used to apply to Libor loans denominated in USD, JPY, EURO. For GBP, the standard was Actual/365. 43. All other variables are replicated in Box 8, i.e., the DOD is constant at $1mn and the interest rate is fixed at 5% p.a. 45 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 44. It was used for pool-based currency loans, which are no longer being offered at the moment. 45. As conversion rates change daily, there may be differences in payment flow calculations that need to be adjusted in subsequent invoices, although some contracts ignore these fluctuations. Increasingly complex parametrization is needed to account for t these fluctuations and improve cash flow accuracy. 46. To manage interest rate risk, clients have the option of changing from a floating market reference rate to the fixed rate equivalent of that reference rate or vice versa. To access built-in conversion options in the IFL, the client can request the desired type and terms of the conversion. See details on the WB Treasury website. 47. Besides checking the correct data sources, debt managers also need to verify truncation/ rounding rules for the index and capitalization factor. 48. Although the amortization schedule is constant, installments will change because the DOD will be updated every month. 49. A9/15/2022 is $ 3,336,039.13 (Amortization = (1.00081174 * 100,000,000) / 30). DOD9/15/2022 is $ 96,745,134.79 ($ 100,000,000*1.00081174 - $ 3,336,039.13). 50. The accrual method is compound. Hence, for the first payment date 9/15/2022, FY = (1+5%) (31/ 360) -1 = 0.004210213. As of 9/15/2022 the value is $ 421,363.10 (Interest = 0.0042102 * 100,000,000*1.00081174. 51. https://www.newyorkfed.org/markets/reference-rates/sofr-averages-and-index. 52. https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term- sofr.html 53. See NY Fed’ website. 54. See column “Estimated SOFR Index” – Box 14. 55. See column “Interest Accrued” - Box 14. 56. See column “INDEX”. 57. Similar to the G-20’s Debt Service Suspension Initiative, implemented in the wake of the Covid-19 pandemic. Note that in general, multilateral institutions are typically excluded from debt renegotiations/restructurings. 58. The accrual method is simple. Hence, FY= (5%) *(Days/ 360). 59. The budget profile is the agreed pattern of expenditure across the year of the approved annual budget. It may be the basis for the release of spending authority; but in any event will be used to monitor budget execution. See WB DeMPA (2021). 60. In general, cash plans also cover all receipts, and financing. 61. See (Proite, 2020) for details. 46 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” >>> References Abbas, S. A., N. Belhocine, A. El Ganainy, and M. Horton. 2010. “A Historical Public Debt Database.” IMF Working Paper 10/245, International Monetary Fund, Washington, DC. ADB (Asian Development Bank).2018. “Proposal for ADB’s New Products and Modalities“ – Policy Paper Jun-2018. 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World Bank. 2016. “Public Financial Management (PFM)- Staff Guidance” Washington, DC. ———. 2015. “Debt Management Performance Assessment Methodology” Washington, DC. ———. 2014. “A Handbook on Financial Management Information Systems for Government: A Practitioners Guide for Setting Reform Priorities, Systems Design and Implementation” Washington, DC. ———. 2007. “Managing Public Debt: From Diagnostics to Reform Implementation”. Washington, DC. ———. 2003. “Institutional Arrangements for Public Debt Management- Policy Research Working Paper 3021” Washington, DC. 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Boxes for Detailed Cash Flows – Examples Provided > > > B O X 1 - Using Multiple Tranches to Represent a Cash Flow of a Fixed Rate Loan Consider a loan that initially disbursed $1.0 million on Dec-15th 2021, and that all disbursements will be repaid in 20 semi-annual installments (of $ 50,000) set on Jan-15th and Jul-15th of each year. Assume a second $ 0.5 million disbursement1 takes place on Mar-15th 2023 starting to amortize on Jul-15th 2023 also in 20 semi-annual equal installments (of $25,000). Tranche 1 would be repaid in 9.6 years while Tranche 2 would be repaid in 11.2 years, which have different impact in the loan’s total cash flow. Disbursement 1 Disbursement 2 Dec-2021 Mar-2021 $ 1,000,000 $ 500,000 # of installments Dates Tranche 1 # of installments Tranche 2 1 1/15/2022 50,000.00 2 7/15/2022 50,000.00 3 1/15/2023 50,000.00 3/15/2023 New disbursement 4 7/15/2023 50,000.00 1 25,000.00 5 1/15/2024 50,000.00 2 25,000.00 6 7/15/2024 50,000.00 3 25,000.00 7 1/15/2025 50,000.00 4 25,000.00 8 7/15/2025 50,000.00 5 25,000.00 9 1/15/2026 50,000.00 6 25,000.00 10 7/15/2026 50,000.00 7 25,000.00 11 1/15/2027 50,000.00 8 25,000.00 12 7/15/2027 50,000.00 9 25,000.00 13 1/15/2028 50,000.00 10 25,000.00 14 7/15/2028 50,000.00 11 25,000.00 15 1/15/2029 50,000.00 12 25,000.00 16 7/15/2029 50,000.00 13 25,000.00 17 1/15/2030 50,000.00 14 25,000.00 18 7/15/2030 50,000.00 15 25,000.00 19 1/15/2031 50,000.00 16 25,000.00 20 7/15/2031 50,000.00 17 25,000.00 21 1/15/2032 18 25,000.00 22 7/15/2032 19 25,000.00 23 1/15/2033 20 25,000.00 N. of years Tranche 1 9.6 N. of years Tranche 2 11.2 Source: Authors. 1. 51 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 2 - Example of CAS with 2 Planned Amortization Lines Total Amount Disbursed 1,000,000.00 Number of installments - Line 1 4 First Amortization Date 3/15/2023 Periodicity - Semi-Annual 6 Number of installments - Line 2 6 First Amortization Date 3/15/2030 Periodicity - Quarterly 3 Date Disbursement DOD Amortization ($) 12/20/2021 1,000,000.00 1,000,000.00 - 3/15/2023 900,000.00 100,000.00 9/15/2023 800,000.00 100,000.00 4 semi-annual 3/15/2024 700,000.00 100,000.00 installments 9/15/2024 600,000.00 100,000.00 3/15/2025 600,000.00 - 9/15/2025 600,000.00 - 3/15/2026 600,000.00 - 9/15/2026 600,000.00 - 3/15/2027 600,000.00 - 9/15/2027 600,000.00 - 3/15/2028 600,000.00 - 9/15/2028 600,000.00 - 3/15/2029 600,000.00 - 9/15/2029 600,000.00 - 3/15/2030 500,000.00 100,000.00 6/15/2030 400,000.00 100,000.00 9/15/2030 300,000.00 100,000.00 6 quarterly 12/15/2030 200,000.00 100,000.00 installments 3/15/2031 100,000.00 100,000.00 6/15/2031 - 100,000.00 Source: Authors. 52 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 3 - Example of CAS with a Disbursement during the Amortization Phase The key dates are: (a) 12/20/21- the original disbursement date and volume ($ 1.0 mn); (b) 3/15/23 - the first amortization date; and (c) 7/10/2023 – the second disbursement date and volume ($ 0.5 mn), which changes the remaining amounts to be amortized. Total Amount Disbursed 1,500,000.00 Disbursement Date Amount Number of installments 10 12/20/2021 1,000,000.00 First Amortization Date 3/15/2023 7/10/2023 500,000.00 Periodicity - Semi-Annual 6 Total 1,500,000.00 Date Disbursement DOD Amortization ($) 12/20/2021 1,000,000.00 1,000,000.00 - 3/15/2023 900,000.00 100,000.00 7/10/2023 500,000.00 1,400,000.00 9/15/2023 1,244,444.44 155,555.56 3/15/2024 1,088,888.88 155,555.56 10 semi-annual 9/15/2024 933,333.33 155,555.55 installments 3/15/2025 777,777.77 155,555.56 A new disbursement 9/15/2025 622,222.22 155,555.55 altered At 3/15/2026 466,666.66 155,555.56 9/15/2026 311,111.11 155,555.55 3/15/2027 155,555.55 155,555.56 9/15/2027 - 155,555.55 Source: Authors. 53 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 4 - Detailed PAS’ Cash Flow The percentual rate (10.5%) is applied for the first five payments starting on 03/15/2023. The cumulative percentage (PCTG) equals to 10.50% = 10.5% / (5*10.5% + 4*9.8% + 1*8.3%). Hence, the installment A for DOD for 03/15/2023 equals to $ 105,000.00. This amortization value is repeated until 09/15/2025, where a new percentage rate (9.8%) is applied. At that date, the PCTG equals to 20.6316% = 9.8% / (4*9.8% + 1*8.3%). Hence, the installment A for DOD for 09/15/2025 equals to $ 98,000.00. The computation is carried out until the last payment date 09/15/2027 shows that 100% of the DOD has been amortized, generating a final principal payment of $ 83,000.00. Total Amount Disbursed 1,000,000.00 First Amortization Date Number of installments Percentual 3/15/2023 5 10.5% 9/15/2025 4 9.8% 9/15/2027 1 8.3% Periodicity - Semi-annual 6 Cumulative Installment/ Percentage Amortization Date Disbursement DOD Percentual (P) (PCTG) ($) 12/20/2021 1,000,000.00 1,000,000.00 3/15/2023 895,000.00 10.5000% 10.5000% 105,000.00 9/15/2023 790,000.00 10.5000% 11.7318% 105,000.00 5 semi-annual 3/15/2024 685,000.00 10.5000% 13.2911% 105,000.00 installments 9/15/2024 580,000.00 10.5000% 15.3285% 105,000.00 at 10.5% 3/15/2025 475,000.00 10.5000% 18.1034% 105,000.00 9/15/2025 377,000.00 9.8000% 20.6316% 98,000.00 3/15/2026 279,000.00 9.8000% 25.9947% 98,000.00 4 semi-annual installments 9/15/2026 181,000.00 9.8000% 35.1254% 98,000.00 at 9.8% 3/15/2027 83,000.00 9.8000% 54.1436% 98,000.00 1 installment 9/15/2027 - 8.3000% 100.0000% 83,000.00 at 8.3% 100.0000% Source: Authors. 54 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 5 - Cash Flow of a PRICE Loan with a Disbursement The disbursement undertaken in 6/11/2021 increments the DOD and a new installment must be computed. The example considers that interest will be accrued for the full period between 05/15/2021 and the installment payment day to calculate the total installment (Pay) and its components: principal and interest due. Once the amortization payments are found (see formula above), interest is accrued (DOD*i*FY). In the example below this is represented by the column “waiver of interest”, computed between 05/15/2021 and 06/11/2021 (disbursement date). This interest charge is deducted from the full interest of the period. Total commitment 1,000,000.00 Date Disbursement ($) Interest rate (fixed) (% p.y.) 6% 9/17/2020 250,000.00 Periodicity (monthly) 1 6/11/2021 537,334.82 Interest rate method Simple interest 7/20/2021 212,665.18 Day-count basis 360 Total 1,000,000.00 First amortization date 1/15/2021 Number of installments 25 # of Fraction Waiver of Interest Total Date Disbursement DOD n days year Amortization Interest Installment interest billed billed ($) 9/17/2020 250,000.00 250,000.00 10/15/2020 250,000.00 28 0.0777778 - 1,166.67 1,166.67 1,166.67 1,166.67 11/15/2020 250,000.00 30 0.0833333 - 1,250.00 1,250.00 1,250.00 1,250.00 12/15/2020 250,000.00 30 0.0833333 - 1,250.00 1,250.00 1,250.00 1,250.00 1/15/2021 240,587.04 25 30 0.0833333 9,412.96 1,250.00 10,662.96 1,250.00 10,662.96 2/15/2021 231,127.01 24 30 0.0833333 9,460.03 1,202.94 10,662.96 1,202.94 10,662.96 3/15/2021 221,619.68 23 30 0.0833333 9,507.33 1,155.64 10,662.96 1,155.64 10,662.96 4/15/2021 212,064.81 22 30 0.0833333 9,554.87 1,108.10 10,662.96 1,108.10 10,662.96 5/15/2021 202,462.17 21 30 0.0833333 9,602.64 1,060.32 10,662.96 1,060.32 10,662.96 6/11/2021 537,334.82 739,796.99 - 6/15/2021 704,533.50 20 30 0.0833333 35,263.50 3,698.98 38,962.48 (2,328.45) 1,370.53 36,634.03 7/15/2021 669,093.68 19 30 0.0833333 35,439.82 3,522.67 38,962.48 3,522.67 38,962.48 7/20/2021 212,665.18 881,758.86 8/15/2021 834,821.31 18 30 0.0833333 46,937.55 4,408.79 51,346.34 (177.22) 4,231.57 51,169.12 9/15/2021 787,649.07 17 30 0.0833333 47,172.24 4,174.11 51,346.34 4,174.11 51,346.34 10/15/2021 740,240.97 16 30 0.0833333 47,408.10 3,938.25 51,346.34 3,938.25 51,346.34 11/15/2021 692,595.83 15 30 0.0833333 47,645.14 3,701.20 51,346.34 3,701.20 51,346.34 12/15/2021 644,712.47 14 30 0.0833333 47,883.37 3,462.98 51,346.34 3,462.98 51,346.34 1/15/2022 596,589.69 13 30 0.0833333 48,122.78 3,223.56 51,346.34 3,223.56 51,346.34 2/15/2022 548,226.29 12 30 0.0833333 48,363.40 2,982.95 51,346.34 2,982.95 51,346.34 3/15/2022 499,621.08 11 30 0.0833333 48,605.21 2,741.13 51,346.34 2,741.13 51,346.34 4/15/2022 450,772.84 10 30 0.0833333 48,848.24 2,498.11 51,346.34 2,498.11 51,346.34 515/2022 401,680.36 9 30 0.0833333 49,092.48 2,253.86 51,346.34 2,253.86 51,346.34 6/15/2022 352,342.42 8 30 0.0833333 49,337.94 2,008.40 51,346.34 2,008.40 51,346.34 7/15/2022 302,757.78 7 30 0.0833333 49,584.63 1,761.71 51,346.34 1,761.71 51,346.34 8/15/2022 252,925.23 6 30 0.0833333 49,832.56 1,513.79 51,346.34 1,513.79 51,346.34 9/15/2022 202,843.51 5 30 0.0833333 50,081.72 1,264.63 51,346.34 1,264.63 51,346.34 10/15/2022 152,511.38 4 30 0.0833333 50,332.13 1,014.22 51,346.34 1,014.22 51,346.34 11/15/2022 101,927.60 3 30 0.0833333 50,583.79 762.56 51,346.34 762.56 51,346.34 12/15/2022 51,090.89 2 30 0.0833333 50,836.71 509.64 51,346.34 509.64 51,346.34 1/15/2023 - 1 30 51,090.89 255.45 51,346.34 255.45 51,346.34 Source: Authors. 55 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 6 - Changing DOD and Variable Interest Rate – Detailed Cash Flow The first relevant date is the Effday where the DOD will equal zero, but the CUB will equal ToCom: $1,000,000.00. This is relevant because the CoFee will be computed over 31 days on the full ToCom, that is from Effday until the first disbursement date (04/15/22), resulting in a CoFee of $ 616.44 (1,000,000.00 * 0.25% * (90/365)). Note that the example shows transactions that increase and decrease the DOD. For simplicity, the loan is fully disbursed before the first amortization date (07/15/2025). From this day on, the loan starts to be amortized ten times and the amortization installment A equals $100,000.00 (under CAS, A = DOD/n = $1,000,000.00 / 10). A 3.00% p.y rate will be charged on the DOD as soon as DOD > 0 up to 01/15/2026 the date it is set to change. Debt managers need to compute the interest accrued between each relevant date (the dates where the DOD changes) until it is paid as of 07/15/2022, the first payment date. On that date, it will be levied during 91 days over a $ 250,000.00, resulting in I = $ 1,869.86 (I = 250,000.00 * 3.00% * (91/365)). Interest rate i will change from 3.00% p.a. to 2.00% p.a. from 01/15/2026 onwards, yielding I7/15/2026 = $ 7,934.25 (I = 100,000.00 * 2% * (181/365)), and that rate is applicable for the next three billing cycles. Then the applicable i changes again to 1.50% p.y as of 07/15/2027 onwards, affecting I1/15/2028 and the remaining four billing cycles. Total commiitment 1,000,000.00 Number of installments 10 Periodicity of amortization Semi-annual Amortization schedule Constant (CAS) Effective (sign-off) date 1/15/2022 Final disbursement date 12/15/2025 First amortization date 7/15/2025 Interest rate (initial) (% p.y.) 3.00% Day-count basis: DC/365 365 Commitment fee (% p.y.) 0.25% Periodicity interest and fees Semi-annual Effective grace period (days) 1,277 First interest and ConFee payment date 7/15/2022 Invoice cut-off date (# of months before payment date) 2 Date Disbursement ($) Interest rate % p.y. 4/15/2022 250,000.00 3.000% 8/15/2022 250,000.00 2.000% 2/15/2023 - 100,000.00 1.500% 10/15/2023 600,000.00 Total 1,000,000.00 56 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” # of Interest # of Date Disbursement installments Amortization accrued CoFee DOD days CUB 1/15/2022 0 0 0 0 0 1,000,000.00 0 4/15/2022 250,000.00 - - 616.44 250,000.00 750,000.00 90 7/15/2022 - 1,869.86 467.47 250,000.00 750,000.00 91 8/15/2022 250,000.00 - 636.99 159.25 500,000.00 500,000.00 31 1/15/2023 - 6,287.67 523.97 500,000.00 500,000.00 153 2/15/2023 -100,000.00 - 1,273.97 106.16 400,000.00 600,000.00 31 7/15/2023 - 4,931.51 616.44 400,000.00 600,000.00 150 10/15/2023 600,000.00 - 3,024.66 378.08 1,000,000.00 - 92 1/15/2024 0 - 7,561.64 - 1,000,000.00 - 92 7/15/2024 0 - 14,958.90 - 1,000,000.00 - 182 1/15/2025 0 - 15,123.29 - 1,000,000.00 - 184 7/15/2025 - 1 100,000.00 14,876.71 - 900,000.00 - 181 1/15/2026 - 2 100,000.00 13,610.96 - 800,000.00 - 184 7/15/2026 - 3 100,000.00 7,934.25 - 700,000.00 - 181 1/15/20247 - 4 100,000.00 7,057.53 - 600,000.00 - 184 7/15/2027 - 5 100,000.00 5,950.68 - 500,000.00 - 181 1/15/2028 - 6 100,000.00 3,780.82 - 400,000.00 - 184 7/15/2028 - 7 100,000.00 2,991.78 - 300,000.00 - 182 1/15/2029 - 8 100,000.00 2,268.49 - 200,000.00 - 184 7/15/2029 - 9 100,000.00 1,487.67 - 100,000.00 - 181 1/15/2030 - 10 100,000.00 756.16 - - - 184 Source: Authors. 57 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 7 - Disbursement During the Amortization Phase and Variable Interest Rate Total commiitment 1,500,000.00 Date Disbursement ($) Number of installments 10 4/15/2022 250,000.00 Periodicity of amortization Semi-annual 8/15/2022 250,000.00 Amortization schedule Constant (CAS) 2/15/2023 - 100,000.00 Effective (sign-off) date 1/15/2022 10/15/2023 600,000.00 Final disbursement date 12/15/2025 1/15/2029 500,000.00 First amortization date 7/15/2025 Total 1,500,000.00 Interest rate (initial) (% p.y.) 3.00% Day-count basis: DC/365 365 Commitment fee (% p.y.) 0.25% Periodicity interest and fees Semi-annual Effective grace period (days) 1,277 First interest and ConFee payment date 7/15/2022 Invoice cut-off date (# of months before payment date) 2 # of Interest Date Disbursement installments Amortization accrued CoFee DOD CUB 1/15/2022 - - 0 - - 0 1,500,000.00 4/15/2022 250,000.00 - - 924.66 250,000.00 1,250,000.00 7/15/2022 - 1,869.86 779.11 250,000.00 1,250,000.00 8/15/2022 250,000.00 - 636.99 265.41 500,000.00 1,000,000.00 1/15/2023 - 6,287.67 1,047.95 500,000.00 1,000,000.00 2/15/2023 -100,000.00 - 1,273.97 212.33 400,000.00 1,000,000.00 7/15/2023 - 4,931.51 1,130.14 400,000.00 1,100,000.00 10/15/2023 600,000.00 - 3,024.66 693.15 1,000,000.00 500,000.00 1/15/2024 - - 7,561.64 315.07 1,000,000.00 500,000.00 7/15/2024 - - 14,958.90 623.29 1,000,000.00 500,000.00 1/15/2025 - - 15,123.29 630.14 1,000,000.00 500,000.00 7/15/2025 - 1 100,000.00 14,876.71 619.86 900,000.00 - 1/15/2026 - 2 100,000.00 13,610.96 - 800,000.00 - 7/15/2026 - 3 100,000.00 7,934.25 - 700,000.00 - 1/15/20247 - 4 100,000.00 7,057.53 - 600,000.00 - 7/15/2027 - 5 100,000.00 5,950.68 - 500,000.00 - 1/15/2028 - 6 100,000.00 3,780.82 - 400,000.00 - 7/15/2028 - 7 100,000.00 2,991.78 - 300,000.00 - 1/15/2029 500,000.00 8 100,000.00 2,268.49 - 700,000.00 - 7/15/2029 - 9 350,000.00 5,206.85 - 350,000.00 - 1/15/2030 - 10 350,000.00 2,646.58 - - - Source: Authors. 58 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 8 - The Effect of Day Count Convention – The Case of Bhutan By mid-2022 the Bhutanese DMO noticed that the day count convention described in the Mangdechhu hydroelectric project loan could be interpreted as Actual Days or DC/365, the latter being the traditional standard used by the Government of India (GoI), the single creditor. The INR 35.1 billion (USD 790 million) loan was signed in April 2010 the repayment would start only in January 2021. All disbursement was executed before the first amortization date. The amortization schedule would be constant (CAS) in 34 semi-annual installments, and the interest rate would be 10% p.a. (simple interest method), and the day count convention was actual days. The authorities estimated interest payments for the full loan cycle using both standards and found a difference of INR 4.8 million or 2 basis points over the overall DOD, which could cause a discrepancy between their controls and the invoices they receive from the creditor. Although the notional amount is relatively small compared to the stock, the staff needs to ensure that debt records and payments are precise, otherwise the records could be subject to audit recommendations. This is a positive example where the authorities in the Bhutanese Debt Management Unit (within the MoF) have been diligent while monitoring the portfolio’s debt instruments and, eventually, uniformized the day count for loans with the Government of India - one of the most important creditors. Source: Authors. > > > B O X 9 - Effect of the Invoice Cut-off Date - Constant DOD and Fixed Interest Rate Interest rate (% p.y.) 5.00% Financial operation Date Amount First interest payment date 1/15/2022 Disbursement 12/20/2021 1,000,000.00 Invoice cut-off date (months) 1 Total 1,000,000.00 Periodicity (months) 6 Day count (DC) standard or (fraction year) 360 Rounding rule - interest factor 16 Rounding rule - financial amount 2 non-working day rule Observe maturity date # of Interest Interest Adjustment with Total interest Date DOD days Fraction year factor accrued ($) the previous period payment ($) cut-off freezes 12/15/2021 up to 1/15/2022 12/20/2021 1,000,000.00 0 0 0 1/15/2022 26 0.072222222 0.003611111 3,611.11 Payable if there were no freezing 1/15/2022 1,000,000.00 0 0 0 0 0 - 7/15/2022 1,000,000.00 181 0.502777778 0.025138889 25,138.89 3,611.11 28,750.00 1/15/2023 1,000,000.00 184 0.511111111 0.02555556 25,555.56 0 25,555.56 7/15/2023 1,000,000.00 181 0.502777778 0.025138889 25,138.89 0 25,138.89 ... ... ... ... ... ... ... ... Source: Authors. 59 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 1 0 - Effect of Truncation Rules - Constant DOD and Fixed Interest Rate Cash Flow # of Interest Interest # of Total interest Date DOD days Fraction year factor accrued ($) installments payment ($) 12/20/2021 1,000,000.00 Rounding = 16 decimals Rounding = 2 decimals 1/15/2022 1,000,000.00 36 0.1 0.005 5,000.00 1 5,000.00 7/15/2022 1,000,000.00 181 0.5027778 0.0251389 25,138.89 2 25,138.89 1/15/2023 1,000,000.00 184 0.5111111 0.0255556 25,555.56 3 25,555.56 ... 1,000,000.00 ... ... ... ... ... ... 1/15/2036 ... 182 0.5055556 0.0252778 25,277.78 30 25,277.78 TOTAL 1,000,000.00 740,416.25 Rounding = 2 decimals Rounding = 1 decimal 1/15/2022 1,000,000.00 36 0.1 0.01 10,000.00 - 10,000.00 7/15/2022 1,000,000.00 181 0.5027778 0.03 30,000.00 - 30,000.00 1/15/2023 1,000,000.00 184 0.5111111 0.03 30,000.00 - 30,000.00 ... ... ... ... ... ... ... ... 1/15/2036 1,000,000.00 182 0.5055556 0.0252778 25,277.78 30 25,277.78 TOTAL 880,000.00 Source: Authors. > > > B O X 1 1 - Currency Conversion Cash Flow The first two steps are (i) to set up the amortization dates (monthly); and (ii) to convert the DOD ($100 mn) to the currency computing base (CC) by its respective exchange rate (4.995870), which is predefined or published daily. This results in a DOD equal to CC 20,016,533.7. The next step is to find the value of the 30 amortization fixed installments, in this case equal to CC 667,217.8 (CC 20,016,533.7 / 30). One must consider the number of days between each payment date to compute the fraction year. With that, the interest can be accrued based on the converted DOD (Interest = 0.004210213 * CC 20,016,533.7 = CC 84,273.9) as of 9/15/2022. The DOD for the following month deducts the interest computed (DOD9/15/2022 = CC 19,349,315 = 20,016,533.7 - 667,217.8). The total billed amount would be CC 751,491.7 (Interest + Amortization. The remaining lines replicate the mechanics above. It follows that all amortization and interest payments are derived based on the currency computing base. Once these values are found they are converted back to the currency denomination of the loan by the respective rate to the effective payment. As of 9/15/22, the interest and amortization would be multiplied by the corresponding rate 5.055695 resulting in $ 426,063.0, and $ 3,373,249.6 respectively. The total service billed would be $ 3,799,312.7. The cash flow is computed by the mechanism above until the DOD equals zero, that is, the loan final repayment date 2/15/2025. 60 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 61 >>> Total commitment 100,000,000.00 Day-count basis: DC/360 360 Date Disbursement ($) Interest rate (fixed) (% p.y.) 5.00% Amortization method Constant 8/15/2022 100,000,000.00 Periodicity (monthly) 1 First amortization date 9/15/2022 Total disbursed 100,000,000.00 Interest rate method Compounded Number of installments 30 Disbursement Conversion DOD (Currency # of Fraction Amortization Interest accrued Total billed (Currency Interest Amortization Total Date ($) rate computing base) days year (Currency computing base) (Currency computing base) computing base) accrued ($) ($) billed ($) 8/15/2022 100,000.00 4.995870 20,016,533.7 9/15/2022 5.055695 19,349,315.9 31 0.00421 667,217.8 84,273.9 751,491.7 426,063.0 3,373,249.6 3,799,312.7 10/15/2022 5.057335 18,682,098.1 30 0.00407 667,217.8 78,831.5 746,049.3 398,677.3 3,374,343.9 3,773,021.2 11/15/2022 5.058978 18,014,880.3 31 0.00421 667,217.8 78,655.6 745,873.4 397,917.1 3,375,440.1 3,773,357.2 12/15/2022 5.030515 17,347,662.5 30 0.00407 667,217.8 73,394.9 740,612.6 369,213.9 3,356,449.1 3,725,663.0 1/15/2023 5.031976 16,680,444.7 31 0.00421 667,217.8 73,037.4 740,255.1 367,522.3 3,357,423.9 3,724,946.2 2/15/2023 5.033516 16,013,226.9 31 0.00421 667,217.8 70,228.2 737,446.0 353,494.9 3,358,451.4 3,711,946.3 3/15/2023 5.034336 15,346,009.1 28 0.0038 667,217.8 60,882.3 728,100.1 306,501.9 3,358,998.5 3,665,500.4 MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” 4/15/2023 5.035496 14,678,791.3 31 0.00421 667,217.8 64,610.0 731,827.8 325,343.3 3,359,772.5 3,685,115.8 5/15/2023 5.036454 14,011,573.6 30 0.00407 667,217.8 59,803.2 727,021.0 301,196.1 3,360,411.7 3,661,607.8 6/15/2023 5.037416 13,344,355.8 31 0.00421 667,217.8 58,991.7 726,209.5 297,165.8 3,361,053.6 3,658,115.8 7/15/2023 5.038378 12,677,138.0 30 0.00407 667,217.8 54,366.6 721,584.3 273,919.3 3,361,695.4 3,635,614.7 8/15/2023 5.039578 12,009,920.2 31 0.00421 667,217.8 53,373.5 720,591.2 268,979.9 3,362,496.1 3,631,475.8 9/15/2023 5.040568 11,342,702.4 31 0.00421 667,217.8 50,564.3 717,782.1 254,872.9 3,363,156.6 3,618,029.6 10/15/2023 5.041416 10,675,484.6 30 0.00407 667,217.8 46,211.6 713,429.4 232,971.8 3,363,722.4 3,596,694.2 11/15/2023 5.043080 10,008,266.8 31 0.00421 667,217.8 44,946.1 712,163.9 226,666.6 3,364,832.7 3,591,499.3 12/15/2023 5.044695 9,341,049.0 30 0.00407 667,217.8 40,774.9 707,992.7 205,697.0 3,365,910.2 3,571,607.3 1/15/2024 5.046545 8,673,831.3 31 0.00421 667,217.8 39,327.8 706,545.6 198,469.6 3,367,144.6 3,565,614.2 2/15/2024 5.047947 8,006,613.5 31 0.00421 667,217.8 36,518.7 703,736.5 184,344.4 3,368,080.0 3,552,424.4 3/15/2024 5.049487 7,339,395.7 29 0.00394 667,217.8 31,530.5 698,748.3 159,212.7 3,369,107.6 3,528,320.2 4/15/2024 5.050618 6,672,177.9 31 0.00421 667,217.8 30,900.4 698,118.2 156,066.2 3,369,862.2 3,525,928.4 5/15/2024 5.051038 6,004,960.1 30 0.00407 667,217.8 27,183.3 694,401.1 137,303.8 3,370,142.4 3,507,446.2 6/15/2024 5.051500 5,337,742.3 31 0.00421 667,217.8 25,282.2 692,500.0 127,712.9 3,370,450.7 3,498,163.5 7/15/2024 5.051696 4,670,524.5 30 0.00407 667,217.8 21,746.6 688,964.4 109,857.3 3,370,581.4 3,480,438.8 8/15/2024 5.051696 4,003,306.7 31 0.00421 667,217.8 19,663.9 686,881.7 99,336.1 3,370,581.4 3,469,917.5 9/15/2024 5.051705 3,336,088.9 31 0.00421 667,217.8 16,854.8 684,072.6 85,145.4 3,370,587.4 3,455,732.8 10/15/2024 5.051696 2,668,871.2 30 0.00407 667,217.8 13,591.6 680,809.4 68,660.8 3,370,581.4 3,439,242.3 11/15/2024 5.048970 2,001,653.4 31 0.00421 667,217.8 11,236.5 678,454.3 56,732.8 3,368,762.6 3,425,295.4 12/15/2024 5.051696 1,334,435.6 30 0.00407 667,217.8 8,115.0 675,372.8 41,196.5 3,370,581.4 3,411,777.9 1/15/2025 5.051700 667,217.8 31 0.00421 667,217.8 5,618.3 672,836.0 28,381.8 3,370,584.1 3,398,965.9 2/15/2025 5.051715 0.0 31 0.00421 667,217.8 2,809.1 670,026.9 14,190.9 3,370,594.1 3,384,785.0 Source: Authors. > > > B O X 1 2 - Indexed DOD Cash Flow For the first date 9/15/2022 the capitalization factor is 1.00081174 (INDEX9/15/2022 / INDEX8/15/2022). Hence, the amortization installment is $ 3,336,039.13 (Amortization = (1.00081174 * 100,000,000) / 30). The updated DOD9/15/2022 is $ 96,745,134.79 ($ 100,000,000*1.00081174 - $ 3,336,039.13). As of 9/15/2022 the value is $ 421,363.10 (Interest = 0.0042102 * 100,000,000*1.00081174). With that, the total amount billed would be $ 3,757,402.23 (Interest + Amortization). Total commitment 100,000,000.00 Day-count basis: DC/360 360 Date Disbursement ($) Interest rate (fixed) (% p.y.) 5.00% Amortization schedule Constant 8/15/2022 100,000,000.00 Periodicity (monthly) 1 First amortization date 9/15/2022 Total disbursed 100,000,000.00 Interest rate method Compounded Number of installments 30 # of Capitalization # of Fraction Interest Total remaining Date Disbursement INDEX factor (CAP) DOD days year accrued Amortization billed ($) installments 8/15/2022 100,000.00 2.024049 100,000,00.00 9/15/2022 2.025692 1.00081174 96,745,134.79 31 0.004210213 421,363.10 30 3,336,039.13 3,757,402.23 10/15/2022 2.027335 1.00081108 93,484,857.99 30 0.004074124 394,471.34 29 3,338,744.93 3,733,216.27 11/15/2022 2.028978 1.00081042 90,219,169.59 31 0.004210213 393,910.18 28 3,341,450,73 3,735,360.91 12/15/2022 2.030515 1.00075752 86,943,530.84 30 0.004074124 367,842.50 27 3,343,981.96 3,711,824.46 1/15/2023 2.031976 1.00071952 83,659,700.59 31 0.004210213 366,314.20 26 3,346,388.02 3,712,702.22 2/15/2023 2.033216 1.00061024 80,362,323.24 31 0.004210213 352,440,14 25 3,348,430.13 3,700,870.27 3/15/2023 2.034336 1.00055085 77,056,316.32 28 0.003802 305,705.85 24 3,350,274.62 3,655,980.47 4/15/2023 2.035496 1.00057021 73,748,069.67 31 0.004210213 324,608.53 23 3,352,184.98 3,676,793.51 5/15/2023 2.036424 1.00045591 70,427,978.77 30 0.004074124 300,595.75 22 3,353,713.27 3,654,309.02 6/15/2023 2.037416 1.00048713 67,106,939.28 31 0.004210213 296,661.26 21 3,355,346.96 3,652,008.22 7/15/2023 2.038378 1.00047217 63,781,693.69 30 0.004074124 273,531.07 20 3,356,931.25 3,630,462.32 8/15/2023 2.039278 1.00044153 60,451,441.64 31 0.004210213 268,653.11 19 3,358,413.42 3,627,066.53 9/15/2023 2.040268 1.00048547 57,120,744.94 31 0.004210213 254,637.03 18 3,360,043.82 3,614,680.85 10/15/2023 2.041416 1.00056267 53,790,950.72 30 0.004074124 232,847.93 17 3,361,934.42 3,594,782.35 11/15/2023 2.043080 1.00081512 50,470,122.03 31 0.004210213 226,655.98 16 3,364,329.55 3,591,330.78 12/15/2023 2.044692 1.00078900 47,142,613.65 30 0.004074124 205,783.76 15 3,369,882.19 3,573,113.31 1/15/2024 2.046242 1.00075806 43,808,468.41 31 0.004210213 198,630.92 14 3,372,690.09 3,568,513.11 2/15/2024 2.047947 1.00083323 40,472,281.06 31 0.004210213 184,596.68 13 3,375,226.26 3,557,268.77 3/15/2024 2.049487 1.00075197 37,127,488.85 29 0.003938053 159,501.82 12 3,377,088.86 3,534,728.08 4/15/2024 2.050618 1.00055185 33,770,888.62 31 0.004210213 156,400.91 11 3,377,780.54 3,533,489.77 5/15/2024 2.051038 1.00020482 30,400,024.91 30 0.004074124 137,614.96 10 3,378,541.40 3,515,395.50 6/15/2024 2.051500 1.00022525 27,028,331.17 31 0.004210213 128,019.42 9 3,378,864.18 3,506,560.82 7/15/2024 2.051696 1.00009554 23,652,049.27 30 0.004074124 110,127.29 8 3,378,874.06 3,488,991.47 8/15/2024 2.051696 1.00000000 20,273,185.09 31 0.004210213 99,580.17 7 3,378,864.18 3,478,444.35 9/15/2024 2.051702 1.00000292 16,894,370.32 31 0.004210213 85,354.69 6 3,374,374.83 3,464,228.75 10/15/2024 2.051696 0.99999708 13,515,456.73 30 0.004074124 68,829.55 5 3,378,864.18 3,447,693.73 11/15/2024 2.048970 0.99867134 10,123,124.50 31 0.004210213 56,827.35 4 3,374,374.83 3,431,202.18 12/15/2024 2.051696 1.00133042 6,757,728.37 30 0.004074124 41,297.73 3 3,378,864.18 3,420,161.91 1/15/2025 2.051700 1.00000195 3,378,870.77 31 0.004210213 28,451.53 2 3,378,870.77 3,407,322.30 2/15/2025 2.051712 1.00000585 - 31 0.004210213 14,225.85 1 3,378,890.53 3,393,116.38 Source: Authors. 62 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 1 3 - SOFR Indexed Cash Flow Estimated SOFR published dates (working days) # of days SOFR Index* SOFR rate** SOFR INDEX Tuesday, October 4, 2022 3.04% Wednesday, October 5, 2022 1.05052585 1.05052585 Thursday, October 6, 2022 1 1.05061456 Friday, October 7, 2022 1 1.05070328 Tuesday, October 11, 2022 4 1.05105818 Wednesday, October 12, 2022 1 1.05114694 Thursday, October 13, 2022 1 1.05123570 Friday, October 14, 2022 1 1.05132447 Monday, October 17, 2022 3 1.05159081 Tuesday, October 18, 2022 1 1.05167961 Wednesday, October 19, 2022 1 1.05176842 Thursday, October 20, 2022 1 1.05185724 DOD $10,000,000.00 Initial date 3/15/2022 Payment date 10/20/2022 Invoice cut-off date 10/5/2022 Disbursement $1,000,000.00 Disbursement date 9/9/2022 Reverse disbursement $(2,000,000) Reverse disbursement date 9/20/2022 INDEX SOFR t INDEX SOFR T Date DOD ($) (initial) (estimated) Interest accrued ($) 3/15/2022 $10,000,000.00 1.04248653 1.05185724 $89,888.07 9/9/2022 $1,000,000.00 1.04853218 1.05185724 $3,171.16 9/20/2022 $(2,000,000.00) 1.04926141- 1.05185724 $(4,947.92) $88,111.31 Source: Authors. Note: Gray cells represent the unknown values at the cut-off date • SOFR Index is published on the current date •• SOFR Index is published on the following working day 63 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 1 4 - Cash Flow for IBRD SOFR Loan Date Index DOD $10,000,000.00 5/15/2022 1.04312379 Initial date 5/15/2022 6/1/2022 1.04351039 Payment date 11/15/2022 7/1/2022 1.04447779 Invoice cut-off date 9/15/2022 8/1/2022 1.04594159 8/15/2022 1.0468708 9/1/2022 1.04799935 9/15/2022 1.04893038 # of SOFR rate Spread All-in rate Interest From date To date days (%) (%) (%) accrued ($) 5/15/2022 6/1/2022 17 0.7848372 1.50 2.284837 10,789.51 6/1/2022 7/1/2022 30 1.11288805 1.50 2.612888 21,774.07 7/1/2022 8/1/2022 31 1.62962133 1.50 3.129621 26,949.52 8/1/2022 9/1/2022 31 2.29086595 1.50 3.790866 32,643.57 9/1/2022 9/15/2022 14 2.29510358 1.50 3.795104 14,758.74 For the last 60 days of the billing cycle 8/15/2022 9/15/2022 31 2.2846853 1.50 3.784685 Estimated all-in rate 9/15/2022 11/15/2022 61 62,129.39 Total interest 171,044.79 Source: Authors. 64 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” > > > B O X 1 5 - Changing DOD and Variable Interest Rate – Detailed Cash Flow Total commiitment 1,000,000.00 Date Disbursement ($) Interest rate (fixed) (% p.y.) 5.00% 8/15/2022 100,000,000.00 Periodicity (months) 1 Total disbursed 100,000,000.00 Interest method Simple Day-count basis: DC/360 360 Amortization schedule Constant First amortization 9/15/2022 Original number of installments 30 Renegotiated number of installments 24 on top of remaining 15 from the original agreement # of Disbursement # of Fraction Interest remaining Amortization Total billed Date ($) DOD ($) days year accrued ($) installment ($) ($) 8/15/2022 100,000,000 100,000,000.00 815/2022 96,666,666.67 31 0.004306 430,555.56 30 3,333,333.33 3,763,888.89 10/15/2022 93,333,333.34 30 0.004167 420,777.78 29 3,333,333.33 3,736,111.11 11/15/2022 90,000,000.01 31 0.004306 401,851.85 28 3,333,333.33 3,735,185.18 ... ... ... ... ... ... ... ... ... 11/15/2023 50,000,000.02 31 0.004306 229,629.63 16 3,333,333.33 3,562,962.97 12/15/2023 46,666,666.69 30 0.004167 208,333.33 15 3,333,333.33 3,541,666.66 Suspended payments 1/15/2024 46,867,592.62 31 0.00431 200,925.93 - - 2/15/2024 47,069,383.64 31 0.00431 201,791.02 - - 3/15/2024 47,258,968.66 29 0.00403 189,585.02 - - ... ... ... ... ... ... ... ... ... 11/15/2025 51,428,146.74 31 0.00431 220,477.46 - - 12/15/2025 51,642,430.68 30 0.00417 214,283.94 - - Payments are resumed 1/15/2026 50,283,419.35 31 0.004306 222,349.35 38 1,359,011.33 1,581,360.68 2/15/2026 48,924,408.02 31 0.004306 216,498.06 37 1,359,011.33 1,575,509.39 3/15/2026 47,565,396.69 28 0.003889 190,261.59 36 1,359,011.33 1,549,272.92 ... ... ... ... ... ... ... ... ... 11/15/2028 4,077,034.00 31 0.004306 23,405.20 4 1,359,011.34 1,382,416.54 12/15/2028 2,718,022.67 30 0.004167 16,987.64 3 1,359,011.33 1,375,998.97 1/15/2029 1,359,011.33 31 0.004306 11,702.60 2 1,359,011.34 1,370,713.94 2/15/2029 0.00 31 0.004306 5,851.30 1 1,359,011.33 1,364,862.63 Source: Authors. 65 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” >>> Annex II. Reference Interest Rates - IFIs -Terms and Conditions (Various Dates) Creditor Acronym Type General Information: Most lenders offer fixed and variable interest rates e.g. SOFR/TONA/EURIBOR and constant semi-annual, percentual semi-annual, customizable repayment schedules. Spreads, grace period, commitment (and other) fees will vary and can be found on the links below. ADB (Asian Development Bank) ADB Non-Concessional ADB (Asian Development Bank) ADB Concessional AfDB (African Development Bank) AfDB Non-Concessional AIIB (Asian Infrastructure Investment Bank) AIIB Non-Concessional CAF (Cooperación Andina de Fomento) CAF Non-Concessional CBD (Caribbean Development Bank) CDB Non-Concessional and Concessional EBRD (European Bank for Reconstruction and Development) CDB Non-Concessional and Concessional IADB (Inter-American Development Bank) IADB Non-Concessional IADB (Inter-American Development Bank) IADB Concessional IDA (International Development Association) WBG Concessional IBRD (International Bank for Reconstruction and Development) WBG Non-Concessional IMF (International Monetary Fund) IMF Non-Concessional and Concessional (PRGT)* NDB (New Development Bank) NDB Non-Concessional and Concessional Note: For ADB; IBRD; IDA; CAF; EBRD; IADB; IMF: Data from Mar-2023 . For AfDB: Jan-2022 For AIIB, NDB: 2021 *Poverty Reduction and Growth Trust 67 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH” >>> Annex III. Summary of Definitions and Transactions a. Total commitment (ToCom)– The maximum amount e. Amortization (A) – Repayment of the principal amount contracted that can be disbursed by the time the contract borrowed. Amortizations reduce the DOD. is signed. Amendments to the agreement can increase or decrease the ToCom. f. Grace Period (GP) – Period of time elapsed from the commitment date to the first amortization payment date. b. Disbursements (DIS) – A transfer of funds from the lender to the borrower with a positive effect on outstanding debt. g. Interest (I) – The amount paid to a lender as a compensation for using his capital. c. Disbursed Outstanding Debt (DOD)- The sum of disbursed values minus the amortization at any given time. This can h. Commitment Fee (CoFee) – Charge levied on the be computed for each tranche. The sum of all DOD for undisbursed amount by a percentage fee rate (FeeR). each tranche results on the total loan outstanding debt. Cancelled disbursements (when the borrower sends the i. Penalty Fee (PENALTY) – Charge levied when there is a money back to the lender) reduce the DOD. late payment by a predefined rate (PENRATE). d. Committed Undisbursed Balances (CUB) – It is the total Sometimes the estimated amortization and interest amount secured by the loan agreement available at a payments are the basis of charges. Late payment fees given date. may be applied over those amounts. 69 >>> MANAGING SOVEREIGN LOANS - “A BOTTOM-UP APPROACH”