ISLAMABAD: Nine Development Finance Institutions have urged National Electric Power Regulatory Authority (NEPRA) to modify tariff determinations of the relevant IPPs to the extent required to reflect the change in the benchmark reference rate from LIBOR to Term SOFR+ CAS of 0.26161% or 0.42826% (as applicable).
This has been demanded by Maria Eufemia V. Apilado, Director, Portfolio Management Division Private Sector Operations Department in a letter to Chairman NEPRA on behalf DFIS comprising, Asian Development Bank (ADB), British International Investment Plc (BII), Deutsche Investitions- und Entwicklungsgesellschaft mbH (DEG). Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO), International Finance Corporation (IFC), Islamic Development Bank (ISDB), Societe De Promotion Et De Participation Pour La Coopération Économique S.A. (Proparco), Export-Import Bank of Korea (KEXIM), U.S. International Development Finance Corporation (DFC), and Islamic Corporation for the Development of the Private Sector (ICD).
Sharing the details, she has referred the letter March 4, 2024 sent by the Private Power & Infrastructure Board (PPIB) bearing the subject, “Transition from London Inter Bank Offer Rate (LIBOR) to Secured Over Night Financing Rate (SOFR)”; (ii) letter sent by the National Electric Power Regulatory Authority, bearing the subject, “Transition from LIBOR to Secured Over Night Financing Rate (SOFR)” of June 12, 2024 ;(iii) letter sent by the DFIs to the Authority bearing the subject, “Joint Letter from the DFIs to incorporate the transition from LIBOR to Term SOFR+ CAS as the Benchmark Interest/Mark-up Rate under the Foreign Currency Financing Facilities in the approved tariff determinations of the relevant IPPs” on July 30, 2024 ;(iv) the Suo Moto Notice (the “Suo Moto Notice”) giving notice of the hearing, in the matter of transition from London Inter-Bank Offered Rate (LIBOR) to Secured Overnight Financing Rate (SOFR), which took place on September 5, 2024 (the “Suo Moto Hearing”).
As described in the DFI Letter, the DFIs have provided financing to several Independent Power Producers (IPPs) in the Pakistani energy market.
The energy tariff determination of each IPP has the London Interbank Offered Rate as an element of the tariff and each IPP has foreign currency facilities with LIBOR as the applicable benchmark rate. LIBOR ceased to be published on 30 September 2024 and is no longer available for calculation for the purposes of the tariff determinations or the FCY financing facilities.
In the P.PIB Letter, PPIB gave the option to the relevant independent power producers to either opt for: (i) Daily Simple SOFR plus the relevant International Swaps and Derivatives Association (ISDA) recommended Credit Adjustment Spread (CAS); or (ii) Term SOFR plus the relevant ISDA recommended CAS (“Term SOFR+ CAS”) as the replacement for LIBOR. The CAS, as fixed by ISDA is 0.26161% for conversions of three-month LIBOR and 0.42826% for conversions of six-month LIBOR.
In the DFI Letter, the DFIs confirmed that the IPPs and the DFIs have decided to opt for term SOFR+CAS as the base rate for replacement of LIBOR. We understand the IPPS also responded to the Suo Moto Notice to confirm the same.
According to DFIs, they understand the Suo Moto Hearing was undertaken to discuss the following: (i) “what should be the agreed-upon lookback period? Should there be a uniform lookback period for all relevant power projects, or would it be justified to have different lookback periods for different plants? ;(ii) any other issues that may arise during the hearing with the approval of the Authority”.
Discussion point (i) is not relevant to Term SOFR (being a consideration for Daily Simple SOFR only) and we are not aware of any issues that arose during the Suo Moto hearing that should prevent the process of transition of the IPPs’ tariff determinations and FCY Financing Facilities to Term SOFR+ CAS. DFIs note that since 30 June 2023 and until 30 September 2024, LIBOR has been published based on a synthetic basis, being a rate equal to Term SOFR + CAS and so by confirming the transition from LIBOR to Term SOFR + CAS, there will be no economic change in the rate charged for the IPPS.
Once the Tariff Determinations have been modified, corresponding amendments will also need to be made to the project documents and financing documents (as stated in the PPIB Letter) of the IPPs. Such amendments need to be made prior to the next tariff indexation and interest/mark-up payment date of each IPP and will require further liaison with the PPIB and the State Bank of Pakistan to ensure the finance document amendments are approved; time is therefore now of the essence.
DFIs have also shared form amendment agreements to the Energy Purchase Agreement and Implementation Agreement (the “Draft Amendment Agreements”) as Annexure C to the DFI Letter for your review and non-objection.
As LIBOR has ceased to be published and is no longer available, DFIs would be grateful if the Authority could: (i) once the tariff determinations have been modified, corresponding amendments will also need to be made to the project documents and financing documents (as stated in the PPIB Letter) of the IPPs. Such amendments need to be made prior to the next Tariff indexation and interest/mark-up payment date of each IPP and will require further liaison with the PPIB and the State Bank of Pakistan to ensure the finance document amendments are approved; time is therefore now of the essence.
They have also attached form amendment agreements to the Energy Purchase Agreement and Implementation Agreement (the “Draft Amendment Agreements”) as Annexure C to the DFI Letter for your review and non-objection.
As LIBOR has ceased to be published and is no longer available, DIFs have requested the Authority to (i) issue a Suo Moto Order to modify the Tariff Determinations of the relevant IPPs to the extent required to reflect the change in the benchmark reference rate from LIBOR to Term SOFR+ CAS of 0.26161% or 0.42826% (as applicable); (ii) confirm that the Authority has no objection to the proposed draft amendment agreements, in which case please communicate your non-objection to us, PPIB and CPPA-G; and as a particularly urgent matter, confirm by letter to the IPPs that each IPP can use Term SOFR+ CAS as an alternate benchmark for the purposes of invoicing under the tariff determinations and the Project Documents until the Suo Moto Order is issued or the modification is otherwise complete.
Ends
