Chinese lenders agree on daily SOFR

Islamabad:

Chinese lenders to independent power producers (IPPs) refused to accept the Secured Overnight Financing Rate (SOFR) Term but agreed to switch from the London Interbank Offered Rate (Libor) to the overnight SOFR.

The issue was discussed during suo motu proceedings on Thursday on the transition from Libor to SOFR for calculating borrowing costs. The public hearing was informed that 22 IPPs had not yet submitted their response and would provide the response sometime later. He was asked if it will affect any decision of the National Electricity Regulatory Authority (Nepra).

It has been revealed that the Chinese lenders did not want to opt for the SOFR term in order to avoid the US Treasury benchmark for IPPs set up under the China-Pakistan Economic Corridor (CPEC). However, they were willing to accept daily SOFR.

During the hearing, it was suggested that the daily SOFR be carefully reviewed to consider its impact on the government and consumers. When asked about its impact, Power Division officials said there will be no long-term impact.

It is recalled that the Ministry of Energy (Department of Energy) had announced on 16 February 2024 that the Economic Coordination Committee (ECC) had approved the transition from Libor to SOFR. The decision came as part of a proposal submitted by the Energy Directorate on January 23, 2024. According to the approved summary, all foreign-funded power projects were given two options for the transition.

First, the daily Simple SOFR plus the relevant International Swap and Derivatives Association (ISDA) recommended credit adjustment spread (0.26161% for three months and 0.42826% for six months). Second, the SOFR Term plus the relevant credit adjustment margin recommended by ISDA.

Chinese lenders to IPPs agreed on daily SOFR. A total of 23 power projects have sought the switch while five projects namely Metro, Gul Ahmed, Jhimpir, Hawa and Master have asked Nepra to exercise its suo motu powers. Recently, the Pakistan Wind Energy Association and several development finance institutions (DFIs), through letters dated July 20 and July 30, 2024, respectively, urged Nepra to expedite the process by exercising its suo motu powers.

All power projects with foreign borrowing linked to Libor, either in whole or in part, have been asked to submit written confirmation of the option chosen by 5 September 2024.

The options included the daily Simple SOFR plus the relevant ISDA-recommended credit adjustment margin and the term SOFR plus the relevant ISDA-recommended credit adjustment margin.

Key issues for discussion in the procedures for projects selecting Simple SOFR daily included establishing a single review period for all relevant power projects and addressing any other concerns that may arise with authority approval. So far, 53 power projects have submitted their written confirmation. About 11 projects chose Daily SOFR and 37 projects chose Term SOFR. Three project sponsors have requested both options for different loans.

In addition, two IPPs – Uch-II Power and Laraib Energy – want to continue using synthetic Libor for the remainder of their debt, which is set to expire in 1.5 years and one year, respectively. Many projects have yet to submit their confirmation.