DOF exercises proactive debt management, converts $11.13-B outstanding World Bank loans to fixed rate

The Department of Finance (DOF), through the Bureau of the Treasury (BTr), has exercised proactive debt management by successfully converting the reference rate from floating to fixed on US$ 11.13 billion (about PHP 619.74 billion) of its outstanding loans with the World Bank – International Bank for Reconstruction and Development (WB-IBRD).

A floating reference rate means the setting of interest on loans periodically adjusts based on economic or financial conditions. On the other hand, a fixed reference rate means the benchmark rate is unchanged throughout the entire term of the loan.

The exercise may generate foreign interest payment savings of as much as US$ 125.1 million (about PHP 6.88 billion) for the government next year and will permanently lessen the exposure of government debt service to further escalation in global interest rates.

The sustained elevated level of the Secured Overnight Refinancing Rate (SOFR)—the primary reference rate used in USD-denominated floating rate loan contracts—prompted the DOF to engage the Bank in the fixing exercise.

The SOFR rose markedly from 0.05 percent at the beginning of 2022 to 5.35 percent at the end of October 2023, contributing largely to the 20 percent year-on-year (YoY) growth in the government’s interest payments for the first 10 months of 2023.

Converting to a fixed reference rate allowed the DOF to take advantage of the inversion in the interest rate swap market to lower its borrowing cost.

The transaction, which was executed between the 14th to the 21st of November 2023, achieved an average fixed reference rate of 4.19 percent for the 40 IBRD loans converted, which is substantially lower than the prevailing SOFR.

With the conversions, around 91 percent of the US$ 12.24 billion (about PHP 681.66 billion) WB-IBRD loan portfolio of the National Government (NG) is now on fixed reference rates, eliminating the risk of absorbing an additional US$ 111 million (about PHP 6.12 billion) in foreign interest payments for every 1 percentage point (ppt) increase in the SOFR.

“This development is a testament to the DOF’s strong commitment to continue exercising sustainable and prudent strategy in all of our borrowings to ensure