CASE STUDY

Angola’s Interest Rate Fixings Generate USD 270
Million in Potential Savings
The World Bank Treasury supported Angola
to reduce interest rate risks on 98 percentof their IBRD outstanding debt amount andhelped create up to USD 270 million in
potential savings on the estimated interest
repayment. 1

BackgroundAs the interest rates started to increase globally in2021, the Angolan government was concerned about
financial risks associated with variable reference
rates. Angola had 80% of its external debt portfolio
tied to variable reference rates. The mitigation ofinterest rate risks became even more urgent with theimpending transition of the London Interbank
Offered Rate (LIBOR) to new reference rates by theend of 2021, and the uncertainty surrounding thetransition. The government wanted to build its
capacity on how to manage financial risks andrequested training from the World Bank on IBRD’s
financial solutions, as well as analyses of market
trends.

Financial Objectives•••

Reduce the interest-rate risk of Angola’s debt
portfolio
Eliminate uncertainty around LIBOR transition
Benefit from lower interest rates in 2021Luanda's waterfront Photo Credit Adobe Stock- JPMatias

In December 2021, after receiving training from theWorld Bank on financial risk management, andshortly before the LIBOR secession date 2, Angola
requested interest rate conversions for the majorityof its disbursed IBRD loans, benefitting from theembedded conversion option of the IFL.
The World Bank Treasury converted to fixed rate
Angola’s variable reference rates for 11 loans, for a
total amount of USD eq. 2 billion and a remaining
average repayment maturity of 13 years, before
December 31, 2021 (Figure 1).

Financial Solution and Outcomes

The IBRD Flexible Loan (IFL) includes options tomanage interest rate risks over the life of the loan.
These options are embedded into the loan
agreement and can be executed at any time at theborrower’s request.
Borrowers of IFL can fix the reference rate for all orpart of the disbursed amount for the whole or partial
maturity of the loan. They can also unfix or refix thereference rate at any time during the life of the loan 1.
1 There is a charge on interest rate conversions such as this one, and can befound under the IBRD Flexible Loan Conversion Options.
2In March 2021, LIBOR’s regulator confirmed the LIBOR cessation date byannouncing that all settings for the Swiss franc, euro, Pound sterling, andFigure 1. Transaction structure for interest rate conversion by IBRD
lJapanese yen, and two settings for U.S. dollar will either cease to be provided byany administrator or no longer be representative after December 2021, and theremaining LIBOR settings for U.S. dollar will cease after June 2023.

CASE STUDY
After the conversions, in line with market projections,interest rates continued to increase. By July 2022,
USD (variable-to-fixed) swap rates were up 155 basis
points for LIBOR and 140 basis points for the Secured
Overnight Financing Rate (SOFR) for a 12-year
maturity loan (vs. December 20, 2021) (Figure 2).
4%

32
1

Jul-22Jun-22

May-22

Apr-22Mar-22

Feb-22

Jan-22

Dec-21

Nov-21

Oct-21

Sep-21

Aug-21012-year USD swap vs Libor

12-year USD swap vs SOFR

Libor 6M

Daily SOFR

Figure 2. Interest rate developments in 2022

As a result, the government of Angola had a potential
saving of USD 270 million on the estimated interest to
be paid over the life of the loan (equivalent to 13.5
percent of the total amount converted - data basedon Bloomberg as of July 2022). The actual savings at
the end of the loans may be higher or lower
depending on the path of SOFR rate trajectory.
The interest rate conversions of the 11 loans,accounting for 98 percent of Angola’s outstanding
debt amount to IBRD, made their debt service
predictable and contributed to protecting the country
from increases in interest rates.

World Bank Treasury’s Role

The World Bank Treasury team worked with theAngolan government to:• Built capacity of the client on the use of financial
risk management instruments, by delivering
training sessions to the Ministry of Finance officials
from September to December 2021.
• Analyze market trends for inflation and otherfactors and shared the market consensus on
projected interest rates with Angola to support
them in their internal discussions.
• Provide alternative risk management tools
such as (i) full interest rate conversion; partial
interest rate conversion, short vs. long term
maturity, (cap and collar options to limit interest
rate variability. 3• Convert 11 loans with a total of USD 2 billion fromvariable reference rates to fixed reference rates atcompetitive financing terms, leveraging the WorldBank’s triple-A credit rating.
• Make the conversion administratively costeffective and straightforward for Angola as anembedded feature of the IFL agreement.
• Execute an interest rate swap with market
counterparties to match the fixing of the reference
rate with Angola and hedge IBRD’s interest rate risk
exposure (Figure 1).

The World Bank Treasury helps clientsmanage interest rate and currency risks intheir debt portfolios by sharing over 70
years of capital markets experience, using
the flexibility of the IBRD loans, andexecuting hedges on non-IBRD exposures.

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.

Caps set an upper limit on the variable interest rate of the loan. Collars set anupper limit (a cap) and a lower limit (a floor) on the interest rate of the loan, so3

that the borrower have the IBRD fix the loan, if the interest rates exceed the cap
and unfix the loan if the interest rates drop below the floor amounts.