What is the difference between the variable and fixed spreads for IBRD loans? Can borrowers switch from the variable spread to the fixed spread or vice versa?
The fixed spread depends on IBRD’s projected cost of funding the loan in the market and is fixed for the entire life of the loan. It includes IBRD’s contractual lending spread and a risk premium to protect the Bank against refinancing risk, i.e. the risk that the cost of funding the loan may increase while the spread remains fixed. For non-USD loans, a basis swap adjustment will also apply, reflecting the difference in IBRD’s funding cost for various currencies. The fixed spread is revised as needed, based on the Bank’s assessment of long-term funding costs, and may vary according to the loan’s average repayment maturity. The applicable fixed spread is that which is in effect at 12:01am, Washington, DC time, on the calendar day prior to loan signing. In the case of the Deferred Drawdown Option, the fixed spread is determined at the time of disbursement. The variable spread depends on IBRD’s average cost of funding relative to 6-month LIBOR and includes IBRD’s contractual lending spread
