Søren Elbech, recently appointed treasurer of the Asian Infrastructure Investment Bank, is one of the best known faces in the public sector bond market, having worked in it since 1991.
He has held senior funding positions at the Nordic Investment Bank, Norway’s Eksportfinans and the Inter-American Development Bank, where he was treasurer. Since leaving the IADB in 2014 he has held positions at Vestas Wind Systems and Origin Markets, the capital market fintech firm, where he was an adviser.
It is still early days for the AIIB, which came into being on January 16 2016 as a multilateral development bank (MDB), focused on developing infrastructure and other sectors in Asia, including energy and power, transport and telecommunications, rural infrastructure and agricultural development, water supply and sanitation, environmental protection, urban development and logistics.
When the AIIB was unveiled, many saw it as a direct, Chinese rival to the Asian Development Bank and even the World Bank. But the AIIB’s staff, including its respected president Jin Liqun, have been at pains to convey the message that the AIIB compliments and co-operates with the existing MDBs to address Asia’s daunting infrastructure needs together.
Recently seven more countries have joined up. Bahrain, Cyprus and Samoa as regional prospective members and Bolivia, Chile, Greece and Romania as non-regional prospective members bring the total approved membership to 77.
The interview below was conducted by Toby Fildes at the Euromoney China DCM Conference in Beijing in March. It has been updated where necessary.
How are you finding life in Beijing? You’ve been here since December 2016, having previously been based in Washington, DC, as head of treasury at the Inter-American Development Bank, and then more recently at Vestas. So how does New York Avenue in Washington compare with Financial Street, Beijing?
It’s been a little less than six months I’ve been in Beijing and what a tremendous privilege. I come from a very small country called Denmark and my home town is Copenhagen. My last nine years I spent in Washington, DC, and now I’m in Beijing. I am pinching myself!
The timing of my relocation from Washington, DC to Beijing could not be better. It’s happening at the same time as the United States is embarking on maybe a different path than they have in the past and China has an opportunity to maybe assume some of the role.
Let’s establish what the AIIB is, what it has been set up to do and what it’s done so far.
The Asian Infrastructure Investment Bank started official operations at the beginning of 2016 in Beijing with the purpose of providing financing for infrastructure and connectivity for Asia, a region where the financing gap in infrastructure is daunting. It is in the trillions of dollars.
AIIB has been set up to facilitate more of this financing, not only through its own lending and co-financing with other institutions, but also by using its risk-bearing capacity to hopefully unlock private sector participation in infrastructure projects across the region.
There are 57 founding member countries and, as we speak, we are seeing more member countries joining the bank. The subscribed capital of the bank is $100bn, with $20bn of that paid in over a span of five years.
In the first year of operations, we approved nine operations in total and $1.7bn of loans. Most of them were co-financing with other esteemed MDBs. We have currently 90 staff, in Beijing, so it’s very early days as you can imagine.
And you were number 75?
I’m number 75 starting at the bank, yes! We expect to grow to approximately 1,000 staff by the end of the first 10 years of the bank, so by mid-next decade. It’s very early days still, but we’re here and we have already started disbursing, so we’re starting to make an impact.
You mentioned the infrastructure financing gap and then your capitalisation. Borrowing, of course, is going to be a key part of what the bank does to help finance or fill in that infrastructure gap. You’ve been going for a year so far. Do you know your funding requirement yet?
Per se we don’t have a funding requirement right now, because of the paid-in capital we are currently disbursing. But we will in the coming years have a real requirement in terms of filling the gap, once we have disbursed the capital. But in order to not shock the markets, I want to build up the presence of the bank in the market before it becomes a requirement. So you will start to see us borrowing in international capital markets as soon as we have attained international credit ratings and have established the fund documentation programme, hopefully before the end of this year.
You’re working with the rating agencies as we speak?
And you expect to have a rating by?
The end of this year.
On attaining the ratings, will you aim to do short term MTNs first, or will you go out there with a big bang and do a 10 year dollar? What sort of issuer will you be?
That’s an excellent question and I think it should be no surprise, given my past, that on my notepad I have a funding strategy mix of both very well established global benchmark transactions as well as more tailor-made, investor-driven, idiosyncratic MTNs. Of course, to get our name out in the market and get transparent pricing references for our name, we must and will establish, and look forward to establishing, a dollar global benchmark in these transactions.
Will you model yourself on a particular supranational institution?
AIIB is unique, as are our formidable peers among the multilateral financial institutions, so of course, there should be no doubt that we want to be established among that peer group, both in terms of being name recognised as well as the pricing. What it all comes down to, of course, is that it’s not only the rating of the institution, but also the way we present ourselves to the market and our ability to attract a globally diversified investment base.
I presume a triple-A rating will be essential?
A tough question. I’m not going to forego whatever the rating agencies are going to analyse us with. We will certainly queue for the highest possible rating they have.
You are, of course, essentially a new issuer in a world of very established supranational and agency issuers. What does that mean in terms of investor relations, getting up and running with them? Talk us through that process.
This is actually one of the more exciting parts of my job coming here. When I was first introduced to the possibility of joining the bank, which was back in October, my boss Thierry de Longuemar, the CFO of the bank, told me that the bank was at ground zero minus one. When I then joined the bank in December I could immediately see that was the case. We did not have a clearing bank agreement, we did not have Swift, we did not have a custodian. We are at the foot of the mountain. We have to get over all these obstacles and humps before we can actually establish a presence in the market.
So I have had to go back into my toolbox of a banker for things I haven’t done in many, many years. Once we have these things behind us and then get international credit ratings, get our two-way CSAs set up and a global debt facility in place, we are then getting ready to actually start marketing the bank and embracing the markets.
Have you already done some soft sounding with key investors?
As we’re not yet in a position to issue bonds, I wouldn’t say we are meeting investors on a continuous basis, but we do have a dialogue with a few.
You mentioned pricing debt a little bit earlier. As an issuer will you be passing on the interest rate you get from the market to the end client?
The pricing policy the bank has for sovereign bank lending is as a spread, a fixed spread to Libor. Depending on the maturity of the loan, that spread can vary. The spread comprises not only a maturity premium and a risk premium, but actually also a projected spread, borrowing spread to Libor. For the time being it is Libor plus the spread, depending on the maturity of the loan. For non-sovereign debt lending it’s market pricing as usual.
And will you be offering a buyback option for investors, a bit like the World Bank?
I’d say along the lines of our peers. We will expect that the arrangers of our bond issues will, of course, assume the role of providing secondary market liquidity for the bond issues and, of course, we will always be willing to put a price on our own debt, that goes without saying.
Will you have a funding programme with pre-agreed disbursements or will you also be selling bonds to finance specific projects?
That is a key question but it also might be a chicken and egg, or cart before the horse kind of question. At this stage, of course, we have to see how the markets develop. As we get into the market, I expect that the bank will be traditionally pursuing regular bond issuance and then through the treasury mechanism, providing that financing for our lending operations.
But we do take great note of the European Investment Bank’s activities in project bonds and I will certainly learn from what is happening elsewhere to see if that is also the right thing to do for the bank’s clients.
Are you hinting that there might be non-recourse project finance bonds?
I’m not ruling it out but I think we have to learn from what has already happened in producing the project bond streams in the EU before we can fully embrace that.
And you’re right, there might be reasons why we can or can’t do certain things. If it benefits the bank’s clients, it’s of course something I will and must look into.
You previously worked for the IADB, a development bank that wasn’t just about infrastructure. Its mandate is very broad, including big social issues, trade, education, helping to alleviate poverty, for example. With the AIIB, the mandate is very much more focused. How does this affect your approach to markets and investors?
We want to be recognised within this peer group of very formidable issuers, all of which have varying mandates. You’re right that the AIIB’s mandate will be infrastructure, so I think there’s really no doubt as to what the purpose of the bank is.
And of course, that drives the way we will be approaching our partners, our peers and our investors, in terms of making sure that it is fully understood what the mission of the bank is, so that when investors get approached to buy our bond issues, they know what they’re getting exposure to. That goes without saying. Investors will fully understand what they’re buying if they buy AIIB or they buy one of the other MDBs.
Will your aim be for the AIIB to be a truly global issuer, selling your debt to the global investor base, or will you typically sell a large proportion of your funding programme to Asian markets and in Asian currencies, since the bank is based in China and has an Asian mandate?
The ambition clearly is to be a truly global issuer but as I said before, one doesn’t exclude the other, not only in terms of global versus MTNs but also global versus regional. And we should not forget local currencies. Given the proximity we have to markets, not only Chinese but, of course, also other Asian markets, the bank will be looking to access these markets, not only because we’re here, but also because there will be demand to provide local currency financing.
Many of the development banks around the world have, as part of their mandates, responsibility to develop local currency bond markets. Is that a mandate for the AIIB?
If it makes sense to fulfil the mission, if it makes sense for the borrowers of the bank, certainly we will do so.
In March I had the tremendous pleasure of signing the bank’s first ISDA/CSA agreement with the International Finance Corp. Andrew Cross of the IFC and I were both quoted in the press release as saying that this was a way to unlock and provide more financing to infrastructure financing across the globe by collaborating with other institutions and utilising our joint expertise and access to markets. If local currency makes sense, we will of course do that.
You mentioned credit support annexes — regarding swaps, what are your thoughts about one-way versus two-way CSAs?
I have always been a big proponent of reducing structural risks in the market, so I was an early supporter of looking into two-way CSAs for supranationals.
With the AIIB at the beginning of its journey, we have the opportunity to start with two-way CSAs. I will, of course, caveat that by saying that we will only do it if it makes sense. I think it does make sense, but of course we have to review the case and then decide later this year.
Of course, I have taken note of the fact that several of our peers have ventured from one-way to two-way CSAs, I believe with positive results. So, with that in mind, I would not be surprised if AIIB also goes down that path.
To what extent will you be involved in the One Belt and One Road Project?
We certainly will be involved, although it’s important to say that the bank was not set up exclusively for that, of course. As I said at the beginning, we are there to help finance infrastructure projects and connectivity across the region.
That intersects with OBOR, so when that happens, of course, we will be involved. Remember, the AIIB is not going to be the only financier of OBOR. So there will be co-financings, there will be projects where we will be the lead financier, so there certainly will be OBOR projects in our portfolio, I’m quite certain.
And where will the push to lend come from? Will it come from the Chinese government, being such a large shareholder?
It will come from a variety of different governments that will be involved in the project. We have already done some OBOR-related financing, but they were not driven by the Chinese government.
You left the IADB three years ago. How much have markets changed in the interim?
Some well known underwriters have, of course, either left the market or significantly scaled down, which means other entrants have come in and established themselves. It’s been quite interesting for me to suddenly see some of the names I was used to talking to no longer picking up the phone, and then seeing some entrants that I just had never thought were going to be there. So I have had to adjust to that reality.
We talked about the two-way CSAs before. I think that been mainstreamed by the likes of, for instance, the IFC and Nordic Investment Bank, and I think that’s very much welcomed. It’s certainly not as contentious a topic as it was five years ago.
You mentioned fintech earlier and no doubt it is becoming extremely important. I do put a lot of emphasis on that. I’m an early adopter of a lot of technologies, so I’m pleased to see there are several initiatives in world bond markets to make them more automated, more transparent, more direct. I can only hope that that continues to bring down the distance between investors and issuers, but also to reduce transaction costs, which improves efficiency.
The last thing is, of course, the Market Abuse Regulations, for instance, in the European market, which is only going to increase the way the communication around bond issues is different from how it was three years ago.
But you’ll still want to talk to a syndicate bank or an origination banker. You won’t want them to be replaced by robots, will you?
No, but I’ve always said that when I did e-funding at Eksportfinans, 10 years ago, instead of having the same conversation with bankers about something as trivial as the price for a deal, it actually allowed you to speak much more about the value-add that both the bank and issuer were giving to the transaction, which investors you were going to be reaching, what was the next thing you should be focussing on.
So, for the same amount of time you allocated to a conversation with your bankers, it freed up time to speak more about the value-add instead of the value extraction.
Do you think markets are harder to approach now than three years ago? Do you approach the markets with some trepidation?
No. I love interacting with the market. I love interacting with peers, with bankers, with investors, with press like yourself, to understand what’s going on with the market, what we’re hearing, what are they seeing, to express my opinions and my convictions and then get responses, to learn more about what we should be doing next or what they are doing next to be able to adjust to the perceived reality.
So, no, I have never approached markets with trepidation. I don’t think I would be starting now either!