ECC Directs Energy Ministry to Prepare Analysis of Transition of LIBOR to SOFR

The Economic Coordination Committee (ECC) of the Cabinet has directed the Ministry of Energy to prepare a detailed analysis of the financial implications of the transition of the London Inter-Bank Offer Rate (LIBOR) to Secured Overnight Financing Rate (SOFR).

The Caretaker Federal Minister for Finance, Revenue, & Economic Affairs Dr Shamshad Akhtar chaired the meeting of the ECC of the Cabinet today.

The Ministry of Energy presented the summary regarding the transition of LIBOR to SOFR. The ECC, after discussion, directed the Ministry of Energy to prepare a detailed analysis of the financial implications of this decision and present it to the next ECC meeting for discussion and approval.

Sources said that the Independent Power Producers (IPPs) and Independent Transmission Company (ITC) have obtained foreign financing from various international sources including development financial institutions such as ADB, IFC, IDB, and other commercial banks based on LIBOR as an applicable benchmark rate and accordingly the same benchmark has been reflected in the financing documents and other agreements such as power purchase agreements however due to manipulation of several financial institutions and weaknesses in governance oversight. The UK’s financial conduct authority announced that US$ LIBOR will cease to be applied as a benchmark for financial transactions after December 31, 2021, and will no longer be available for quoting after June 30, 2023. The Federal Reserve’s Alternative Committee has selected the SOFR which is a robust benchmark and risk-free rate to replace LIBOR for both legacy and new contracts to be entered in the future.

Accordingly, several IPPs together with their lenders approached PPIB for the transition from LIBOR to SOFR.

Sources said that the International Swaps and Derivatives Association recommended credit adjustment spread to equate the difference between LIBOR and SOFR for various tenors on legacy contracts including the methodology to calculate spread adjustments. Accordingly, the proposed CAS for a 6-month tenor is 42.826 bps, for a 3-month 26.161 bps and 1-month tenor 11.448 bps respectively.

The DFIs including ADB, IDB, and IFC were of the view that the term SOFR would be an appropriate alternate benchmark rate for transition from LIBOR to SOFR keeping in view the current power sector’s dynamics and indexation mechanism followed by NEPRA.

The Chinese sponsors including their lenders were of the view that due to various reasons including the registration process, they are only allowed to opt for daily simple SOFR and CAS over SOFR is not negotiable.

Meanwhile, a committee constituted by the power division in its recommendation stated that negotiating credit adjustment spread is not feasible keeping the cost and benefit and therefore, there is no sound basis for hiring a consultant to negotiate the CAS.

The Power Division had proposed that project lenders of IPPS/ ITC be allowed to adopt SOFR as a replacement for US LIBOR.

Meanwhile, NEPRA may finalize all the modalities related to the amendments in the tariff determination/indexation mechanism with regard to SOFR at the earliest whenever concluded the same shall be effective from July 1, 2023.

PPIB, AEBD, CPPA-G, and NTDC may also be authorized to execute appropriate amendments to the respective agreements to cater for change from UAD LIBOR to SOFR.

Meanwhile, the Ministry of Planning gave a briefing about the trends of major economic indicators and trends in the prices of important food items.

The ECC directed the Ministry of National Food Security and Research to prepare and submit regular reports on the availability of stocks, consumption, and pricing of all staple items especially Wheat and Sugar to the ECC in order to enable it to monitor the availability and pricing of these important commodities. The ECC also directed the Ministry of Planning to ensure control of undue profiteering and to maintain the gap between wholesale & retail prices of essential food items and consumer products through respective Chief Secretaries.


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