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p. 2 of 8 BACK | NEXT I. Introduction II. Borrower's Demand for New Loan Products III. Proposed New Libor-Based Loan Products IV. Withdrawal and Conversion of Pool-Based Loans V. Funding Risk Management Strategy VI. Implementation and Resource Requirements VII. Conclusion and Recommendations Appendixes

Review of Asian Development Bank's Financial Loan Products

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II. Borrower's Demand for New Loan Products

3. In the last quarter of 1999 and first quarter of 2000, ADB surveyed its major OCR borrowers on practices, objectives, and concerns in debt management as well as their preferences for loan products. The borrowers’ responses clearly reflected one important point—the heightened awareness of ADB’s OCR borrowers regarding the importance of developing a strategy for managing the financial costs and risks of their external debt. While they have recognized the need to match the financial terms of a loan with the project risk profile, they have also emphasized the need to go beyond individual project risk considerations and focus in addition on the over-all debt portfolio requirements in an asset-liability management framework. At least five factors or “triggers” influenced the current high level of borrowers’ awareness for the need to have sound external debt management practices.

4. The first trigger was the lesson learned from the Asian financial crisis: that the central issue in the crisis was imprudent financial management, which translated into national balance sheet vulnerability. The core problem was the mismatch of maturities and of currency denominations, issues that have long been central to asset-liability management in commercial financial institutions. The Asian crisis had a clear impact on borrowers’ present perception toward debt management—unhedged foreign currency debt can significantly expose borrowers to exogenous shocks. Thus, the crisis has triggered increased interest in developing strategies for risk management, which was reflected in the borrowers’ increasing use of strategic benchmarks such as specific targets for currency mix, share of fixed-rate versus floating rate debt, as well as some targets for amortization and maturity profiles for debt.

5. The second trigger was the awareness gained from the numerous global and regional workshops sponsored by the International Monetary Fund (IMF) and International Bank for Reconstruction and Development (IBRD) on sovereign debt management, led by some of the world’s leading experts on external debt management. About 30 workshops have been organized since 1996, with four held in Asia. The main objective of sovereign debt management is to manage the risks inherent in the debt portfolio taking due account of the trade-offs between cost and risk. The workshops address the structure and composition of the sovereign debt portfolio, including the desired mix in terms of currency, interest rate, and amortization profile.

6. The third trigger was the extensive outreach program delivered by IBRD to its clients about its new loan products introduced in 1999 and related external debt management issues. All ADB’s major borrowers and some of its small, active borrowers have already participated in this outreach program. The fourth trigger was borrowers’ own initiative to seek technical advice from commercial financial houses on external debt management issues. The fifth trigger was the phenomenal growth of the over-the-counter derivatives market over the last decade. Derivatives have now become the standard building block of risk management by corporates and governments. This market is limited only to participants with a relatively high credit standing, i.e., at least investment grade. Currently, many borrowers do not have access to this market.

7. This was the context for borrowers’ demand for new loan products. The survey clearly revealed that the borrowers as a group were not satisfied with ADB’s existing product menu for new loans. ADB’s present loan menu consists of three loan products: (i) pool-based multicurrency loans (PMCLs), which are predominantly in Japanese yen; (ii) pool-based single currency loans (PSCL) in US dollars; and (iii) market-based loans (MBLs), which are essentially LIBOR-based loans (LBLs) restricted to private sector borrowers and financial intermediary public sector borrowers.

8. Borrowers have strongly requested that ADB offer new loan products that they can tailor to meet individual project needs or can assist them in their evolving debt management strategies. They want ADB to respond to what IBRD is doing as soon as possible. The borrowers have requested the following improvements in ADB’s loan product menu:

1. LIBOR-based floating rate and fixed-rate loans;
2. risk management products such as currency swaps, interest rate swaps, interest rate caps and collars, and commodity swaps;
3. flexibility in the choice of grace period, final maturity, and amortization structure of loans; and
4. facility to convert pool-based loans into LBLs.

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