CASE STUDY

Helping Colombia reduce the risk of interest rateincreases in their IBRD debt portfolio by 99 percent
The World Bank helped Colombia protect
USD 10.7 billion against interest rateincreases by using the conversion featureof the IBRD Flexible Loan (IFL).
During 2019-2021, Colombia implemented 34 interest-rate
conversions that reduced the floating rate exposure of
their IBRD portfolio by 99.4 percent. The conversions
contributed to Colombia’s overall threefold interest raterisk reduction (from 12.2 percent in 2018 to 3.6 percent inApril 2021) in their total debt portfolio and immunized thebudget against potential reference rate hikes. Conversions
were very cost-effective by fixing rates in historically low
levels and avoiding costly derivative contracts with market
counterparts.

Background
Debt financing is an essential tool for Colombia to fundcritical development objectives, such as quality education,clean energy, and infrastructure. The central government
has a total of USD 178 billion in debt, about 67 percent of
GDP (April 2021).
A sophisticated borrower in the financial markets,
Colombia put a stronger focus on financial risk
management over the last decade.
To mitigate risk in their debt portfolio, the Colombian
government developed a debt management strategy. The
government defines its cost-risk preferences in thestrategy, and a high-level Treasury Committee (chaired by
the Minister of Finance, with vice ministers and directorsgeneral also in attendance) approves financial risk
management operations. Both mechanisms – the strategy
and the committee – ensure a robust governance process
to manage the debt portfolio.
As a regular World Bank borrower, with IBRD loans totalingUSD 11.7 billion (April 2021), Colombia wanted to benefit
from the historically low-interest-rate environment. In linewith the cost-risk benchmarks prescribed in their debt
management strategy, they wanted to decrease theexposure to floating rate debt on its IBRD loans and fixed
rates cost-effectively.
Additionally, Colombia wanted to increase its fiscal
resilience against any uncertainty the global transition

Photo Credit: AndreyPopov/iStockPhotoaway from LIBOR (the London Interbank Offered Rate - themost commonly used benchmark reference rate in theglobal financial markets) might bring about.

Debt Management Objectives• Reduce interest-rate risk of the debt portfolio.
• Eliminate uncertainty around the LIBOR transition.
• Benefit from the historically low-interest-rateenvironment.

IBRD Financial Solution
The IBRD Flexible Loan (IFL) includes options to manageinterest rate risks over the life of the loan. These options
are embedded in the loan agreement and can be executed
at a borrower’s request at any time. Provisions in the loanagreement allow the borrower to fix the reference interest
rate of all or part of the disbursed and outstanding balanceof an IBRD loan. Borrowers can establish a pre-specified
schedule of rate fixings (e.g., on each interest payment
date, annually, or some other frequency) at loan
negotiation or request conversions on an ad-hoc basis
anytime during the life of the loan. They can also unfix or
refix the rate on disbursed amounts at any time during thelife of the loan.
In the case of Colombia, the client requested a series of 34
ad-hoc conversions, totaling USD 10.7 billion, to fix theinterest rate on their IBRD loans (2019 - April 2021).

CASE STUDYTransaction Structure[Grab your reader’s attention with a great
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box anywhere on the page, just drag it.]World Bank Treasury’s Role
• From 2019 to April 2021, the IBRD converted 34 loans
with a total of USD 10.7 billion from variable reference
to fixed interest rate.
• Leveraging its triple-A credit rating, the IBRD provided
Colombia with improved market access andcompetitive financing terms.
• The IBRD made the conversion administratively costeffective and straightforward for Colombia as anembedded feature of the IFL agreement.
• IBRD’s conversions also avoided Colombia’s exposure
to counterparty risk and did not require collateral orcharge additional fees in lieu of collateral.

every one percent unexpected increase in the LIBOR.
Unforeseen increases in interest rates would immediately
impact the budget and force the government to cut otherpriority expenditures.

Historical 6M LIBOR (1985 – 2021)

OutcomeOver 28 months, Colombia’s floating rate IBRD loans
decreased from USD 7.7 billion (2018) to 5 million (April2021). It contributed to a significant reduction in the
floating rate share of the country’s debt portfolio (from 12.2
percent in 2018 to 3.6 percent in April 2021), as Colombia
also fixed its loan portfolio with other multilateral financialinstitutions.
Although interest rates have been low over the last fiveyears, historically, they are quite volatile. Colombia
insulated itself from this volatility by using the interest rate
conversion feature of the IFL. They benefitted from USD
10.7 billion financial protection, which could translate intoaround USD 100 million in potential savings per year from

Other risk management solutions from IBRD
Interest rate conversions are among the many ways theWorld Bank Group helps member countries become
more resilient to economic shocks. IBRD provides
multiple Financial Risk Management solutions to helpclients.
IBRD’s triple-A credit rating, market presence, andconvening power allow the World Bank Treasury team
to develop innovative new products to help clientsmaximize financing and mitigate risk.

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.