Chinese lenders agree on daily SOFR

Chinese lenders to the independent power producers (IPPs) have refused to accept the Term "Secured Overnight Financing Rate" (SOFR) but have agreed on transitioning from the London Inter-bank Offered Rate (Libor) to daily SOFR.

The issue was taken up during suo motu proceedings on Thursday on the subject of shifting from Libor to SOFR for calculating the borrowing cost. The public hearing was informed that 22 IPPs had not yet submitted their response and they would give the reply sometime later. It was asked whether it would impact any decision of the National Electric Power Regulatory Authority (Nepra).

It was revealed that the Chinese lenders did not want to opt for Term SOFR in order to avoid the US Treasury benchmark for the IPPs set up under the China-Pakistan Economic Corridor (CPEC). However, they were willing to accept the daily SOFR.

During the hearing, it was suggested to carefully review the daily SOFR to examine its impact on the government and consumers. When asked about its impact, Power Division officials said there would not be any impact in the long run.

It was recalled that the Ministry of Energy (Power Division) had announced on February 16, 2024 that the Economic Coordination Committee (ECC) had approved the transition from Libor to SOFR. The decision came in the backdrop of a proposal submitted by the Power Division on January 23, 2024. According to the approved summary, all power projects with foreign financing were given two options for the transition.

First, the daily Simple SOFR plus the relevant International Swaps and Derivatives Association (ISDA)-recommended credit adjustment spread (0.26161% for three months and 0.42826% for six months). Second, the Term SOFR plus the relevant ISDA-recommended credit adjustment spread.

The Chinese lenders to the IPPs agreed on the daily SOFR. A total of 23 power projects requested the transition while five projects namely Metro, Gul Ahmed, Jhimpir, Hawa and Master asked Nepra to exercise its suo motu powers. Recently, the Pakistan Wind Energy Association and several development finance institutions (DFIs), through letters dated July 20 and July 30, 2024, respectively, urged Nepra to expedite the process by applying its suo motu powers.

All power projects with foreign lending linked to Libor, either wholly or partly, were directed to submit a written confirmation of the option selected by September 5, 2024.

The options included the daily Simple SOFR plus the relevant ISDA-recommended credit adjustment spread, and the Term SOFR plus the relevant ISDA-recommended credit adjustment spread.

The key issues for discussion in the proceedings for projects opting for daily Simple SOFR included determining a uniform look-back period for all relevant power projects and addressing any other concerns that may arise with approval of the authority. So far, 53 power projects have submitted their written confirmation. Some 11 projects have opted for daily SOFR and 37 projects have selected Term SOFR. Three project sponsors have requested both options for different loans.

Additionally, two IPPs – Uch-II Power and Laraib Energy – want to continue to use the synthetic Libor for the remaining term of their debt, which is set to expire in 1.5 years and one year, respectively. Several projects have yet to submit their confirmation.