ADB offers the public sector different types of financial products, which includes loans, grants, technical assistance, guarantees, and debt management products.
These products are financed from ordinary capital resources (OCR) as well as special and trust funds, of which the Asian Development Fund (ADF) is the largest. Most of ADB's lending comes from OCR, a pool of funds offered at near-market terms to lower- to middle-income countries. ADF offers loans at very low interest rates and grants that help reduce poverty in ADB’s poorest borrowing countries.
LIBOR-based Loans (LBL)
Most of ADB's new lending from OCR have been London interbank offered rate (LIBOR)-based loans (LBL). LBL products give borrowers a high degree of flexibility through
- choice of currency and interest rate basis,
- a wide selection of repayment terms, and
- ability to change the original loan terms during the life of the loan
LBLs may be denominated in US dollars, euros, yen or other foreign currencies in which ADB can efficiently intermediate. Initially, LBLs carry a floating lending rate consisting of the 6-month LIBOR or another relevant floating rate benchmark, and an effective contractual spread and, where applicable, a maturity premium fixed over the life of the loan. However, the borrower has the option of changing the interest rate basis during the life of the loan.
The effective contractual spread is 40 basis points for loans negotiated from 1 July 2011 to 31 December 2013, and 50 basis points for loans negotiated on or after 1 January 2014.
On 14 December 2011, the Board of Directors approved the introduction of maturity-based pricing on new LBLs to sovereign borrowers or with sovereign guarantees, and local currency loans with sovereign guarantees, for which formal loan negotiations are completed on, or after, 1 April 2012.
Under the new pricing structure, loans with an average loan maturity of up to 13 years will not attract a maturity premium. Loans with an average loan maturity of greater than 13 years and up to 16 years will be charged a maturity premium of 10 basis points per annum. Loans with an average loan maturity of greater than 16 years and up to 19 years will be charged a maturity premium of 20 basis points per annum. The maturity premium will be added to the effective contractual spread of 50 basis points and will be applied for the life of the loan. The average loan maturity means the weighted average time to repay a loan and is subject to a limit of 19 years.
For nonsovereign loans, the lending spread is determined on a case-by-case basis so as to cover ADB’s risk exposure to specific borrowers and projects.
Local Currency Loan Product (LCL)
To continue meeting borrowers’ evolving financial needs, ADB introduced the local currency loan (LCL) product in August 2005. Private sector enterprises and certain public sector entities including local governments and public sector enterprises may avail themselves of LCLs.
LCLs aim to reduce currency mismatches in the developing member countries (DMCs). Under the LCL window, borrowers have the option of changing the interest rate basis of an LCL during the life of the loan by requesting an interest rate conversion to fix or unfix their interest rate, subject to regulatory approvals and relevant swap market opportunities available to ADB in the local market.
Through its technical assistance operations, ADB assists its developing member countries in:
- identifying, formulating, and implementing projects,
- improving the institutional capabilities of governments and executing agencies,
- formulating development strategies,
- promoting the transfer of technology, and
- fostering regional cooperation.
Debt Management Products
ADB offers debt management products to members and entities fully guaranteed by members in relation to their third-party liabilities. In offering debt management products for third-party liabilities, ADB is able to contribute to the economic development of its DMCs by allowing members or guaranteed entities to improve debt management, thereby potentially reducing economic volatility, reducing borrowing costs, improving access to capital markets, and freeing up scarce financial resources for economic development.
Debt management products offered by ADB include currency swaps, including local currency swaps, and interest rate swaps. While currency swaps include the possibility of members or guaranteed entities transforming a foreign currency liability into a local currency liability, the reverse transformation of a local currency liability into a foreign currency liability is not offered.
Multitranche Financing Facility (MFF)
An MFF is a financing modality that supports a client's medium- to long-term investment program or plan. ADB's Board of Directors approves a maximum amount for an MFF, and the conditions under which financing will be provided. On the basis of the Board's approval, and at the client's request, ADB Management converts portions of the facility amount into a series of tranches to finance eligible investments. A tranche can be a loan (other than program or a sector development program loans), grant, guarantee, or ADB-administered cofinancing. Financing terms and conditions can differ between tranches. The overall amount of the MFF is not recorded as a legally binding financial commitment on the part of either ADB or its clients; only the amounts converted (into loans, grants, guarantees or ADB-administered cofinancing) are recorded as committed, if and when approved.
Read ADB's Board Paper on Multitranche Financing Facility Annual Report for more information.