INTEREST RATE BENCHMARKING A TRANSFER PRICING GUIDE Table of Contents List of Abbreviations ........................................................................................................... 6 Section 1 Introduction ................................................................................................... 7 1.1 Scope ................................................................................................................... 8 1.2 Terminology.......................................................................................................... 8 Section 2 Overview of IRB Analysis ............................................................................. 9 2.1 Steps of IRB analysis ........................................................................................... 9 2.2 IRB approaches ................................................................................................. 10 Section 3 Terms of a Loan Transaction...................................................................... 12 3.1 Summary of intercompany loan agreement standard terms .............................. 12 3.2 Selection of the terms for an intercompany loan agreement ............................. 13 3.3 Terms of the loans and red flags........................................................................ 17 Section 4 Static Models of Interest Rates .................................................................. 19 4.1 Basic regression model ...................................................................................... 19 4.2 Nelson-Siedel model .......................................................................................... 21 4.3 Affine model ....................................................................................................... 21 4.4 Yield projections and forward rates .................................................................... 21 4.4.1 Forecasting yield rate term structure ................................................................... 21 4.4.2 Forward yield rates .............................................................................................. 22 Section 5 Dynamic Models of Interest Rates ............................................................. 23 Section 6 Bloomberg Market Yield Curves ................................................................ 24 6.1 Selected list of Bloomberg yield curves ............................................................. 24 6.2 Estimation of Bloomberg custom yield curves ................................................... 25 Section 7 Interest Rate Adjustments .......................................................................... 29 7.1 Comparable-specific adjustments ...................................................................... 29 7.1.1 Interest rate swap adjustments ............................................................................ 29 7.1.2 Issue price adjustments ....................................................................................... 30 7.1.3 Option adjustments .............................................................................................. 30 7.1.4 Curve-based adjustments .................................................................................... 30 7.2 Tested transaction-specific adjustments ............................................................ 31 7.2.1 Prepayment and pay-on-demand options. ........................................................... 31 7.2.2 Adjustment for amortization provision .................................................................. 31 7.2.3 Adjustment for interest deferral and PIK provision............................................... 31 7.2.4 Country and sector premium adjustment ............................................................. 33 7.2.5 Other considerations ........................................................................................... 33 7.3 Adjustment validation analysis ........................................................................... 34 Section 8 Summary of IRB analysis ........................................................................... 36 8.1 IRB analysis process .......................................................................................... 36 8.2 Transaction structure considerations ................................................................. 36 8.3 Pricing considerations ........................................................................................ 36 Appendix A OECD Guidelines......................................................................................... 37 A.1 Overview ............................................................................................................ 37 A.2 Excerpts from OECD Guidelines........................................................................ 37 A.2.1 Determination of a financial transaction ............................................................... 37 A.2.2 Loan pricing and refinancing ............................................................................... 40 A.2.3 Risk-free and risk-adjusted rates ......................................................................... 44 A.3 Comments to the guidelines ............................................................................... 44 A.3.1 Comments on debt capacity assessment ............................................................ 44 A.3.2 Comments on the terms of the loans and its business purpose .......................... 44 A.3.3 Comments to loan pricing and loan refinancing ................................................... 45 A.4 Safe harbour rates ............................................................................................. 46 A.4.1 US, applicable federal rate .................................................................................. 46 A.4.2 Canada, PLOI rate ............................................................................................... 46 Appendix B Terms in Third-Party Loan / Note Agreements .......................................... 48 B.1 Maturity term and loan format ............................................................................ 48 B.1.1 Term loans and acquisition financing .................................................................. 48 B.1.2 Revolving loan facility .......................................................................................... 49 B.2 Prepayment option ............................................................................................. 50 B.3 Pay-on-demand option ....................................................................................... 51 B.4 Security / collateral provisions ............................................................................ 51 B.5 Guarantees ......................................................................................................... 52 B.6 PIK Loans ........................................................................................................... 52 Appendix C Special Types of Debt Financing ............................................................... 54 C.1 Bridge loans ....................................................................................................... 54 C.2 Back-to-back loans ............................................................................................. 56 C.2.1 Back-to-back loan structure ................................................................................. 56 C.2.2 Back-to-back loans with variable interest rate schedule ...................................... 56 C.2.3 Back-to-back lender interest spread .................................................................... 57 C.2.4 Service (handling) fee .......................................................................................... 58 C.2.5 Equity at risk premium (Dutch analysis) .............................................................. 58 C.3 Flexible debt instruments ................................................................................... 59 C.3.1 Commercial paper ............................................................................................... 59 C.3.2 Medium term note (MTN) program ...................................................................... 60 C.3.3 Line of credit or revolving loans ........................................................................... 60 C.3.4 Benchmarking analysis ........................................................................................ 60 C.4 Mezzanine debt .................................................................................................. 61 C.4.1 Overview ............................................................................................................. 61 C.4.2 Shareholder loans ............................................................................................... 63 C.4.3 Interest benchmarking analysis based on mezzanine debt searches .................. 63 C.5 Gold/silver loans ................................................................................................. 64 C.5.1 Physical settlement .............................................................................................. 65 C.5.2 Single production period ...................................................................................... 65 C.5.3 Multiple production periods .................................................................................. 66 C.5.4 Cash settlement..................................................................................................