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Guidelines for Conversion of Loan Terms for ADB LIBOR-Based Loan Product : Section 4: Basis for Executing Conversion Transactions
I. Interest Rate Cap or Collar4.23 Interest Rate Cap: Upon establishment of an Interest Rate Cap on the Floating Rate, the Borrower shall, for each Interest Period during the Conversion Period, pay interest on the principal amount of the Loan withdrawn and outstanding from time to time to which said Conversion applies at said Floating Rate, unless on any Reference Rate Reset Date during said Conversion Period such Floating Rate exceeds such Interest Rate Cap, in which case, for the Interest Period to which said Reference Rate Reset Date relates, the Borrower shall pay interest on such principal amount at a rate equal to such Interest Rate Cap. 4.24 The Borrower may request the establishment of an Interest Rate Cap by specifying the upper limit applicable to the Floating Rate. 4.25 Interest Rate Collar: Upon establishment of an Interest Rate Collar on the Floating Rate, the Borrower shall, for each Interest Period during the Conversion Period, pay interest on the principal amount of the Loan withdrawn and outstanding from time to time to which said Conversion applies at said Floating Rate, unless on any Reference Rate Reset Date during said Conversion Period such Floating Rate: (i) exceeds the upper limit of such Interest Rate Collar, in which case, for the Interest Period to which such Reference Rate Reset Date relates, the Borrower shall pay interest on such principal amount at a rate equal to such upper limit: or (ii) falls below the lower limit of said Interest Rate Collar, in which case, for the Interest Period to which such Reference Rate Reset Date relates, the Borrower shall pay interest on such principal amount at a rate equal to such lower limit. 4.26 The Borrower may request the establishment of an Interest Rate Collar by specifying the upper limit(cap) and lower limit (floor) applicable to the Floating Rate. 4.27 Premium on Interest Rate Cap or Collar: Upon establishment of an Interest Rate Cap or an Interest Rate Collar, the Borrower shall pay to ADB a premium on the principal amount of the Loan withdrawn and outstanding from time to time to which said Conversion applies, calculated: on the basis of the premium, if any, payable by ADB in respect of an Interest Rate Cap or Collar purchased by ADB from a counterparty for the purpose of establishing said Interest Rate Cap or Interest Rate Collar. 4.28 In order to reduce the premium payable by the Borrower in respect of establishing an Interest Rate Cap on the Floating Rate, the Borrower may choose to establish an Interest Rate Collar instead of the Interest Rate Cap. By establishing an Interest Rate Collar, the Borrower, in addition to establishing an upper limit (a cap) on its Floating Rate for which it pays a premium to ADB, also established a lower limit (a floor) on the same Floating Rate for which it receives a premium from ADB. The premium the Borrower pays is netted against the premium it receives. 4.29 The premium payable by ADB to the Borrower in respect of the floor may not exceed the premium to be paid by the Borrower in respect of the cap (thus, the Borrower will never receive a net premium payment). If, as a result of interest rate fluctuations during the Execution Period, the premium on the floor were to exceed the premium on the cap, then ADB may lower the floor to reduce the premium, so that it will not exceed the premium on the cap. The Borrower may also request that ADB determine the floor so that the premium in respect of such floor will be equal to the premium in respect of the cap, thereby establishing an interest rate collar at no premium cost (Zero Cost Collar). 4.30 Payment out of the Loan Proceeds: The Loan Agreement may provide that premia payable in respect of Interest Rate Caps and Interest Rate Collars will be paid out of the proceeds of the Loan in the applicable Loan Currency (which may be an Approved Currency for amounts withdrawn and outstanding to which a Conversion applies), up to a specified amount. In such case, ADB will deduct any amounts in respect of premia from the Loan Account on the Execution Date of such Conversion, provided that the unwithdrawn amount available for that purpose is sufficient to cover the cost of the premium in full. If the amount allocated for said purpose only partially covers the amount of the premium payable, the Borrower will be required to pay the balance of the premium out of its own resources not later than 60 days after the Execution Date. 4.31 Payment out of Borrower’s Own Resources: If the Borrower elects to pay any premium in respect of an Interest Rate Cap or Interest Rate Collar out of its own resources, such premium will be payable not later than 60 days after the Execution Date for such Conversion. Premia in respect of Interest Rate Caps and Interest Rate Collars will be paid in the applicable Loan Currency (which may be an Approved Currency for amounts withdrawn and outstanding to which a Conversion applies).
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