Supras learn to change in changing world
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Supras learn to change in changing world


Multilateral development banks find themselves swept up in two parallel waves of change. As bond issuers, they are having to deftly navigate capital markets that are still emerging from the end of years of historically low rates, being forced to call upon all their experience and sophistication as they fund across multiple markets. At the same time, with the pressure on to fill the huge gap in global development finance, these institutions are being asked to work out how to better use or expand their balance sheets and lend more — all while maintaining their precious credit ratings. GlobalCapital gathered some of the leading supranational issuers at a roundtable in New York City in May to discuss how best to deal with the challenges of this changing world.


Sharing (windows) is caring

Oliver West, GlobalCapital: The World Bank issued $9.5bn in the first week of the year and has continued to issue at pace. Andrea, how have you responded to the changing patterns of demand in the primary market as well as competing supply in your core markets?

Andrea Dore, World Bank: While some things have changed, a lot has not. Despite the changing patterns of demand and competing supply the market remains robust. We had a fantastic start to this calendar year. You pointed to the fact that we raised $9bn in just a week, which is the largest amount we’ve ever done in such a short period since Covid, when we raised $15bn across 10 days.

So far this fiscal year [July to June] we have raised nearly $50bn; we issued $19bn in the first half of our fiscal year and $30bn in the first four months of this calendar year.

We continue to have the same global challenges, and now fewer issuance windows. Issuance programmes have increased across the board. And amid the volatility, investors are very focused on economic releases and certain data that wouldn’t have made a difference before. Now simple announcements can impact the market.

We have learnt to adapt to the changing environment. Change is constant in this market, so we need to live with it and be very focused and agile. This has meant a tremendous amount of work staying engaged with investors and being in tune so we can react quickly. The recent Sofr trade that we did came after a reverse enquiry, and we gathered over $2bn of interest.

Those windows are not there very long so you don’t have the luxury to say you’ll wait. If we see a good window, we can be sure that many of my peers are seeing the same thing.

There has been a lot of discussion around the rates cycle, which has driven a lot of changes in the enquiries we get. Just this week we issued an inflation-linked bond — our first for six years — and we’ve seen demand for different products. The market backdrop is challenging but we’ve got comfortable with the level of volatility and the changing investor demand provides an opportunity for us to continue to innovate.

GlobalCapital: Darren, does what Andrea is saying ring true? Do you have to be as nimble as ever?

Darren Stipe, AIIB: We do have to be nimble. It’s really hard to find a window. Andrea used the word comfortable; I guess we’ve got more comfortable as well, out of necessity, with the notion of competing supply. Often I find that waiting doesn’t resolve the issue.

Issuers have crowded their funding into the early part of the year, so there’s always someone in the market. It’s better, when you see your window, to go ahead and take it.

When I say more comfortable, I’d clarify that we’ve gone from exceptional anxiety over competing supply to now just regular anxiety over competing supply. We still would love to have a clear window for ourselves and that’s what we look for.

We have responded by pulling forward our funding programme like everybody else. But that’s less to do with supply: it’s our view that the overall backdrop and picture for the second half of the year is a lot cloudier than today’s. When markets are clearly supportive, we’d rather transact in the first half of the year than wait for conditions in the second half of the year that are not clear at all.

After our euro trade [priced on May 16, the day after the roundtable], we will be done with larger benchmark trades this year, and it’s because our confidence in the conditions in the second half of the year is murky.

GlobalCapital: Is that just about continued rates uncertainty, or the US election?

Stipe, AIIB: So many variables and factors are leading to our view.

Ignacio Bas, Santander: I’d add that we started 2024 with uncertainty over possible rate cuts by both the Fed and ECB, but as in any year there was front loading from issuers, and we know that up to 60% of funding is already done.

As Andrea said, uncertainty is still here and there have been changes in the timings of the ECB’s and the Fed’s moves. Now it looks like the ECB is going to cut next month but we don’t know for sure. It looks like the Fed will be late but there are US elections, which is a difficult combination.

At the beginning of the year, there was a clear pattern from investors trying to lock in yields. The next stage should be June when there’ll be a clearer view from the ECB and potentially the Fed; let’s see how the second half of the year is.

Ali Nauman, Santander: I genuinely believe that this summer will be busier than recent years. With the US elections coming, and though a lot of people don’t like to say it’s driving their thought process, something like 60% or 70% of the world’s population is going to be at the polls across various countries this year.

With that in mind, this summer we could see an uptick.

GlobalCapital: How do you advise your clients on navigating these shorter windows? Is increased sensitivity to data a permanent shift?

Bas, Santander: We have a very elaborate calendar! It shows all the data releases, which come every two days, central bank meetings, which are every two weeks, and then the EU in the market, which is every month.

Then we try to find execution windows in the US, sterling or euro market that are not impacted. But we are living in a world of uncertainty, which means a world of specific windows. And when you see a window, everyone sees the window. It’s about trying to manage the traffic and not being out at the same time as competing supply.

Yesterday we saw something that I wasn’t expecting: the European Union did a 30-year transaction on the same day Italy executed a 15-year. The results were okay but usually everyone tries to avoid the EU; Italy was brave in that sense.

Dore, World Bank: It’s interesting because although we’ve seen corporates issuing at the same time before, it’s new for SSAs to do it. Generally, the euro market had the depth to absorb multiple trades at the same time, but dollars did not. Now there’s been a change in that trend, with two or three SSA trades at the same time in dollars — and in size. Either the markets always had that depth and we had just assumed wrongly — or were afraid to approach the market in that way — or there’s just a lot more liquidity now and it can absorb those multiple trades.

Bas, Santander: Yes, there has been a shift from euros to dollars this year. The euro market this year has not been so deep for SSAs.

Eusebio Garre, IDB Invest: To Andrea’s point, when I joined the SSA sector 10 years ago, it seemed critical to find your own window, to issue when no other multilateral development bank was in the market. This year proved the dollar market has a lot of depth, and I have wondered whether we were all too risk-averse that we don’t want to have anyone issuing alongside us, while other sectors, like corporates or financials, regularly issue multiple multi-billion trades in parallel on the same day. Our investor base is different and there are reasons not to translate that dynamic to SSAs, but our market has clearly proven it has the depth for multiple issuers.

Our perspective at IDB Invest is obviously going to be different from the World Bank’s because having an annual funding programme of around $3bn means we can wait for a window we like.

For us it has been especially important, as for everyone here, to be nimble and to stay in touch with dealers and investors to find the right window.

We saw this in January. Like everyone else, we were ready to go from the beginning of the year on. We usually wait at least two weeks to let the “elephants” go first, to tread the path and observe carefully the spreads, new issue premiums, and subscription levels. Usually there’s a moment of respite after the big issuers are done, but this year the stream of new issues didn’t seem to stop. We were running against the lunar new year break, and eventually found a window just ahead of that to print a fantastic five-year benchmark. Being patient was critical for the success of that deal.

Nimble issuers, nimble investors

Yuri Kuroki, IFC: It’s also that investors are open to considering deals at times when we used to think they were in vacation mode. This was evident for our last dollar global. As we have a July to June calendar and a modest programme of $10bn-$14bn, we had the luxury of looking at the market ahead of issuance rush in January — even in November, after Thanksgiving, when everyone was advising us that the market was already closed and that investors were closing their books.

As we didn’t need jumbo size, we thought that if the market was conducive, there could be an opportunity. We went into the market with a dollar benchmark initially targeting just $1bn but were surprised to receive the IFC’s biggest order book of nearly $7bn and ended up upsizing to $1.5bn. We’d listened to investors and did have a sense some were still open. There may have been a shift on the investor side too to remain open longer and nimble to have more options.

GlobalCapital: David, would you agree that you have to take every day as a potential issuance day?

David Bai, Bank of China: I’m flexible. But I’m mostly driven by US regulation. The FDIC only accepts supranationals such as the IBRD, Asian Development Bank, IADB and African Development Bank, so whenever we have a bond mature, we look at the primary market, like last week, when we bought the World Bank’s $150m Sofr deal.

Compared to before the financial crisis, central banks’ balance sheets are not smaller today. The question is what will happen when those balance sheets fall in size, if they do
Eusebio Garre, IDB Invest

Nauman, Santander: Another thing that shows the depth and liquidity is that 75% of what has been issued this year is three to five years, yet every deal that comes is oversubscribed or breaking some record.

Garre, IDB Invest: Our job is to manage uncertainty. For several years issuers were spoilt because central banks flooded the system with liquidity, and we didn’t even know what interest rate risk was because rates were at zero and spreads went tighter and tighter for a very long time. Now central banks are reversing quantitative easing, and it feels like ‘oh my God, there’s a lot of uncertainty’, but there has always been uncertainty if you look back beyond the QE era.

That’s something we and investors are getting used to again — that you don’t know what’s going to happen tomorrow, and you cannot just assume that rates and spread are going to be fairly stable unless something big happens. Now every month there are multiple events that could trigger volatility, making windows shorter and less frequent. That’s the new reality, but there is nothing revolutionary about it: it’s just the normal course of markets. Previously we had rates and spreads that were too low for the risk for a very, very long time.

The liquidity is still there. Compared to before the financial crisis, central banks’ balance sheets are not really smaller today. The question is what will happen when those balance sheets fall in size, if they do.

There’s no such thing as a perfect window; we don’t have a choice but to utilise more efficiently all available potential windows
Andrea Dore, World Bank

Dore, World Bank: There is a lot of liquidity in the system. We did our first dollar trade of this calendar year at a time when some important key jurisdictions in Asia were closed. So, the traditional elements that define available issuance windows are changing. I can’t recall being able to do a $5bn trade while some key investors are out.

This shows the depth of liquidity in the market and the diversification of the investor base, and that there’s less reliance on a handful of investors. In the past it would have been unheard of to even think of doing the trade — and if you did, you would not come up with a $5bn to $10bn order book.

We’re seeing new investors coming in — not just to IDA, which is a relatively new issuer, but also for IBRD.

[Issuers and investors being more flexible] is interesting. It may have been risk aversion: we are very risk-averse, thinking we need all of the i’s dotted and t’s crossed and the perfect issuance window. But there’s no such thing as a perfect window; we don’t have a choice but to utilise more efficiently all available potential windows.

GlobalCapital: Where’s this new demand coming from and what’s driving it?

We’ve seen pockets of demand shoot up where they never existed. We’ve seen investors looking at SSAs and where the rates are, and making sense of it, bringing in new portfolio managers
Ali Nauman, Santander

Nauman, Santander: We’ve seen pockets of demand shoot up where they never existed. We’ve seen investors looking at SSAs and where the rates are, and making sense of it, bringing in new portfolio managers. Across sterling we’ve seen this a lot, and in dollars we’ve started to see it more too. We are speaking to so many more investors and are starting to see this happen globally, not just in the US. In euros, I don’t think there are that many new investors, though I could be wrong.

Bas, Santander: In euros, there are no new investors, but there are investors that were not buying this kind of product before. A good example is the increase of demand for SSAs in Spain. In the past, for different reasons, they would just buy domestic products — mainly Spain, the Spanish regions, and the domestic banks — but they’re starting to buy some new names, including World Bank, the EU, EIB, and KfW.

So there’s nothing new but there are pockets that were not taking a look at certain names and now, with all this liquidity, have a need to diversify on the issuer side.

GlobalCapital: Darren, are you finding a greater diversity of investor?

Stipe, AIIB: Once again, I identify with Andrea’s point about what can happen if certain segments of our investor base are off for whatever reason at any given point in time. We’ve deliberately started to pay a little bit more attention to smaller accounts who might place orders in the $10m area.

They’re meaningful to us because if I can develop a broad investor base among 10 Iberian accounts that can place $10m orders, for example, that offsets one large $100m order that might not be there for me. That’s starting to matter more and more as different parts of the world are on or off.

We completed an Iberian roadshow in early May, leveraging on the idea that was just mentioned, and are seeing more orders from that part of Europe — whether in dollars or euros.

GlobalCapital: There’s been this big shift in the dollar market, but has euros been equally as strong and deep this year?

Bas, Santander: The euro market is very strong. But it needs to accommodate the supras and agencies alongside the sovereigns because there is a full set of European sovereigns issuing super big sizes — more than €1tr of funding in euros per year just from Italy, Spain, Germany and France.

It takes us back to the first topic, that the euro market used to be deeper than the dollar market for supras but that has changed a bit. Something we mentioned last year but need to bring back to the table is that we have a new issuer in the EU, which is issuing €150bn in net supply per year, plus lower liquidity after the QE of the ECB.

There is a specific area of liquidity that is driven by sovereigns, and obviously if you are able to buy an SSA with a certain spread versus a sovereign, what are you going to buy as an investor? The most important thing for supras is that they’re offering the same liquidity at a better rating. You offer relative value.

Dollars is different because there aren’t many sovereigns issuing in dollars, so the only alternative for investors buying triple-A rated paper in dollars is the supras, which gives some arbitrage versus euros.

Spread the love

GlobalCapital: Are there any concerns about spreads, especially between larger and smaller issuers? Eusebio, are you happy with the spreads that the market is offering you and do you feel like the premium you pay versus bigger issuers is fair?

We feel that the spread we pay versus the larger more liquid names has been compressing, and we expect that to continue as our capital base and funding programme grow
Eusebio Garre, IDB Invest

Garre, IDB Invest: Any funding officer who is happy with what they’re paying is not worth their salt. You always want to pay less because in your view, your name is always better than what the market perceives. Joking aside, I see the spreads we pay above larger issuers as an opportunity. For us, the spread we pay shows investors that they can buy a high-quality asset with a portfolio behaviour that is very similar to sovereigns. It adds very little risk to their portfolio and essentially adds alpha without having to go crazy with complicated quantitative models. That’s the appeal, that’s why paying a spread makes sense.

We feel that the spread we pay versus the larger more liquid names has been compressing, and we expect that to continue as our capital base and funding programme grow. Also, our investor base keeps growing, which should support the tightening going forward.

Bas, Santander: Although funding officers obviously look at spreads because of secondaries and comparables, you really should be focused on your yield too. Ultimately this is your real cost of funding. In a relative value comparison, it is true that we are now at 4% or 5% having come from zero and every funding officer wants to pay zero, but we aren’t back to 10% or 12% like in the 90s. In the global relative value context of the cycle, the absolute yields and funding costs are not that bad.

In the global relative value context of the cycle, the absolute yields and funding costs [for issuers] are not that bad
Ignacio Bas, Santander

Garre, IDB Invest: As most banks do, we basically pass through the interest rate. If interest rates are high, then we pass that on to our clients and that’s accepted so it’s not a risk for us. It’s also true that as spreads widen for us, they tend to widen too for the corporates, which is our client base. We lend to private sector corporates and financial institutions etc. So as much as I love to fight over the right initial price thoughts for the next trade, we are very used to managing higher funding spreads by passing them on to clients. That’s not a concern, it’s the reality of our work.

Kuroki, IFC: It may be true that larger, liquid names tend to benefit from tighter spreads, but we still think rarity can play into trying to price tighter than our peers — or at least on par with them. Because of the smaller programme, we often focus on cost over size — though we do of course care about where secondary and the comps are, and we’re very conscious that investors are looking at that. We don’t want to just tighten for the sake of tightening; we care about the performance of the bond and making investors happy too. We try to be realistic and fair and find the right balance.

We still think rarity can play into trying to price tighter than our peers — or at least on par with them
Yuri Kuroki, IFC

Dore, World Bank: Inasmuch as we like to see tighter spreads, there is an equilibrium, a point at which you drop a significant number of investors because your pricing starts getting too tight — to just a few basis points over Treasuries. It’s about that balance of not wanting to be too wide but having spreads that are attractive enough that you don’t reduce the number of interested investors.

It also does matter where we are in the rates cycle. If rates are higher, investors tend to be less sensitive. We also have to factor in the characteristics of the different types of investors. Some investors are focused more on relative spreads while others may be focused more on absolute yield levels.

Nauman, Santander: You’re coming back to sterling frequently, too, and there’s potential to increase that because the bank treasury base is expanding there and has demand. Cross currency is very specific to each currency and issuer.

GlobalCapital: Darren, do you have any thoughts on spreads?

Stipe, AIIB: There’s probably a hypersensitivity in our industry on spreads because we’re all triple-A rated, super strong credits. We get backed up against Treasuries so there’s only so much room for manoeuvre. We look at even just a couple of basis points of difference, wondering whether the market is sending some sort of signal and interpretation of the credit.

We’ve been through a fascinating journey on spreads having enjoyed a few early years of being quite tight to peers, and then having a level of volatility that was higher than the peers through 2022/2023. Today we’re seeing spreads tighten back in.

It was hard to tell how much of the spread widening for us versus the peer set came from the fact that rates were higher, how much came from geopolitical events, and how much came from misinformation or a misinterpretation of who the AIIB is. All those factors played into it.

We’re encouraged by the fact that it’s a higher rates environment, the market has digested a lot of information about AIIB, and we have a much more established track record — both in terms of what the bank’s fundamental operations are and how we behave in markets. All that is adding clarity to the market’s view of where AIIB should be priced compared to the peer set. That’s part of why we’re seeing such a dramatic improvement this year — the market updating its view and what it means for AIIB to be a triple-A issuer.

GlobalCapital: Has it been an investor relations journey?

Stipe, AIIB: Absolutely. One element was educating investors on the nature of our credit: our exposures, our governance, our operating model, our track record. That information has got out there. It didn’t change things as fast as we would have liked but as we’re encouraged that there’s been a big improvement.

GlobalCapital: How has the readjustment of rate cut expectations affected your funding strategies, especially for you, Yuri and Andrea, as you’re soon going into a new financial year?

Kuroki, IFC: Reaching the expectation that we’re nearing terminal rates is a positive for fixed rate products, but at the same time, the fact that the World Bank has been able to do a floating rate note shows that there are different views on where the rate might go — some may have the higher for longer view, others that they will decrease. Following that trade, we did receive more enquiries whether we would be open to reopening our FRNs. It’s an interesting dynamic.

GlobalCapital: What was the answer?

Kuroki, IFC: If the level works and we have the capacity, we do reopen FRNs.

GlobalCapital: I know you’ve been active in FRNs, Andrea. Why is it attractive for you?

Dore, World Bank: The FRN market is attractive because it provides a cost effective and a very reliable source of funding for us. In recent years, the funding volumes we raised in the FRN market have increased significantly. We are the largest SSA issuer of FRNs. We have done $20bn plus of Sofr linked FRN since the start of the Sofr transition. We have taken a strategic approach to this market focusing more on benchmarks, liquid size transactions. Previously the FRN trade sizes were significantly smaller — it was challenging getting to a $500m trade size. More recently we have done several $1bn plus trades including a $1.5bn trade in May and a $2bn FRN dual tranche earlier this year.

We executed the first SSA Sofr trade about six years ago. That was a very short maturity — a two-year, working with just a handful of investors. The process took a long time because we had to get the systems in place, get sign-off from multiple teams, the conventions were new, and the markets were trying to figure things out.

The first bond we issued was placed primarily with US investors. Since then, we have seen an evolution of that product, with a broader investor base outside the US and we have been able to issue in size across the yield curve including our longest FRN trade of 15 years.

Now you’d assume that, with the expectation of lower rates, you’ll not see much demand for FRN products but that has not been the case, demand for FRN products continues unabated. It’s clear that investors have different views on the rate forecasts.

Garre, IDB Invest: You’re talking about Libor to Sofr? They are not ready to do Sofr?

Dore, World Bank: Exactly. It took some investors a long time to get systems in place to buy alternative reference rate products like Sofr linked bonds. As recently as on our last trade in May there was a big investor and some smaller ones buying Sofr linked bonds for the first time. You’re seeing that the distribution of our Sofr bonds change a lot over time. And every time we believe this will be our last large Sofr trade we’ve been wrong: we’re still seeing significant demand for the product.

As long as expectations are that rates are not going down, there will be investor interest and there are also some natural buyers of the product regardless of rate expectations.

GlobalCapital: David, do you find the floating rate attractive and why?

Bai, Bank of China: Yes, because our funding is a floating base. Two or three years ago I hesitated to buy floating rate because of the systems: the back office is a hurdle. But just last week, I bought a big chunk of floating rate. So our treasury liabilities are floating, so we’re locking the spread based on our funding spread.

GlobalCapital: Is it a liquid enough market for you?

Two or three years ago I hesitated to buy [FRNs] because of the systems: the back office was a hurdle. Just last week, I bought a big chunk of floating rate
David Bai, Bank of China (New York)

Bai, Bank of China: Yes.

Garre, IDB Invest: It is a very interesting example of these kinds of windows when the market shifts views and that creates additional demand. There is always a structural demand for floaters; some investors always need to have some floaters. But for us to go for a floater, we’d want to have an attractive funding level — otherwise you just do your benchmark.

But it’s in these windows where you see investors shift their views all of a sudden. In this case because everyone seems to agree that we are in a cycle of rates going lower, so it’s certainly not the market where you typically want to buy a floater. When that gets delayed, all of a sudden this window opens — until the market says ‘now I know that rates are really going down’. Maybe it’s a couple of months, maybe less, but that’s what creates the additional demand that makes it attractive for us — versus fixed rate — to go and hit the market.

Dore, World Bank: The key thing is trying to meet investor demand at a certain point in time and those needs continue to change. I mentioned the inflation-linked bond; initially we had demand when inflation was going up, then that demand disappeared. But this week we’ve been able to execute a significant size inflation linked trade though inflation is supposed to be going down. There is a view that rates will not come down as fast as was expected and inflation will remain sticky. And because of that stickiness, it made sense for investors buying inflation linked bonds.

Bas, Santander: We need to bear in mind that the biggest inflation issuer of triple-A paper is not issuing any more: Germany. The inflation market is smaller than the fixed income one but this still creates a good flow of investors who naturally need to buy that paper, as there is a lack of it. Those investors are moving to France, Italy and Spain and to certain SSAs that are willing to print triple-A rated inflation-linked bonds.

Obviously SSAs are not printing $5bn of linkers, but there are certain pockets of money that really need to get paper linked to inflation.

GlobalCapital: Darren, are you seeing interest from investors for floating rate notes or inflation linkers?

Stipe, AIIB: Not inflation-linkers but that’s probably because we wouldn’t offer it. We do get regular queries on whether we’d be interested in issuing floaters, and we like to think of it as an important type of transaction to have in the toolkit.

We’ve only done two Sofr FRNs; a lot of that has to do with prioritisation. We feel like FRN is a trade that’s always there for us. As I say, it’s nice to have. For one reason, the transaction size can be smaller, and we’re only doing $9bn-$11bn per year. If we want to top up on dollars, but don’t want to do a $2bn transaction, an FRN can slot in very nicely.

But when I say prioritisation, one reason we haven’t done more FRNs is a general preference for improving liquidity in our lines, and our perception is that a new FRN would have less liquidity than an equivalent fixed rate issuance. That’s what we’re prioritising now because we think the AIIB brand we’re trying to establish is going to benefit from more liquidity in the secondary market.

GlobalCapital: While we’re still on the primary market, where are you seeing funding opportunities away from benchmarks in non-core currencies?

Kuroki, IFC: Our core currencies include Aussie dollars and sterling — those public markets are very good sources of funding at a favourable cost, offering liquidity and diversification. Typically 40% of our funding comes from US dollars, then 15%-25% in Aussies and 10%-20% in sterling more recently, so a significant portion comes from those markets.

We typically issue at least one benchmark per year but also keep reopening existing lines. In the uncertain market we do see a focus from investors on liquidity, so sometimes instead of mtn issuances there’s been demand for a tap of an existing public bond and we’ve benefited from that demand — alongside a favourable cross-currency environment. That’s why we’ve seen a lot of activity in Aussies and sterling.

On local currency, for us it’s not just about diversification of currency and investor base, but it is part of our mission to issue in local currency to provide to our clients — who are the private sector in emerging markets — with local currency financing options. And it’s also for capital markets development in local jurisdiction.

With our capital increase approved back in 2018, our shareholders expect us to do more in the frontier markets, so local currency financing is becoming more and more important. Given higher rates and a strong dollar, it’s even more important to provide the option of local currency loans to clients and protect them from that risk.

We issue in 20 to 25 currencies per year. We swap most of that back to US dollars, and only keep 1% to 2% of the proceeds onshore to on-lend to clients. That includes Kazakhstan tenge and Bangladesh taka, which are currencies we issued in this fiscal year.

GlobalCapital: Will that percentage of proceeds being kept onshore increase?

Kuroki, IFC: Eventually that’s what we hope to do. Bond issuance is not our only source of local currency but it is a good channel, so when it makes sense for us to use it over swaps for instance, then we want to open up that channel, which also contributes to capital market development locally. We can help to attract the attention of investors, be it offshore or onshore, and offer proof that it’s a market that other non-SSAs can tap.

GlobalCapital: Eusebio, you look at Australian dollars and you do local currency. How do you view your options?

Garre, IDB Invest: We issued our largest Australian dollar bond to date just yesterday, at A$600m. It was our third kangaroo bond. For most of 2023 the currency basis was not in our favour, so after having issued in 2021 and 2022 we skipped 2023, and now we are thrilled that we could offer a new bond to kangaroo investors in 2024. It was a green bond and started with an important lead order that was nicely complemented by a bunch of other investors.

Australia is on the other side of the world, so it is a very expensive market for investor relations. We have taken advantage of the digital possibilities that opened up during Covid time when it was the only way to meet issuers. That helped us a lot. We’ll certainly continue to approach Australian investors, as well as Asian investors who are an important part of that market.

In local currency we’ve seen the biggest opportunities so far in Mexican pesos, where we have been issuing consistently for eight years. In that market it pays to do the groundwork, to go there and meet investors to make them familiar with our issuer profile and our funding programme.

The other part of [tapping niche currencies] is being consistent. Investors want to see you in the market over and over again, so they perceive you as a high-quality recurring issuer. Even as an SSA, you need to earn that. It’s not a case of going to a local market and saying, ‘Hey I’m triple-A, I want to fund 100bp inside your government’. If you’re not consistent, they don’t care — they say, ‘My government is good enough for me, I don’t know who you are, I don’t know whether you’re going to come next year, so you have to pay a premium if you want me to buy your bond’.

In Mexico we’ve had a very good experience, and in the past six months Colombia has also become interesting. So far, the demand for our bonds in Colombian pesos has come from offshore investors, from emerging market oriented funds, but we see also opportunities for domestic issuances in the future as well.

When we issue in these currencies, we always do it for lending, so our local currency pricing is not driven by the after-swap rate versus dollars but primarily by the rate that allows me to lend and achieve our return on capital requirements.

GlobalCapital: How much are you swapping to dollars?

Garre, IDB Invest: Nothing. When we issue in a local currency of one of our member countries, we keep the money in the currency.

GlobalCapital: That must make it easier to balance the need to be regular, as you don’t have to worry about the swap rate.

Garre, IDB Invest: Correct, though another thing we do is swap dollars to local currency. For instance, in Brazil, issuing bonds is too expensive in comparison, so we use currency swaps to fund our local currency loans in that country. But, like Yuri and the IFC, part of our mission is to support the development of the local markets and when we see an opportunity to issue bonds locally, we’re very keen to do so.

We also do that in sustainable formats. We can deliver value to those markets by showing that supranationals issue in their market to global standards, and helping that market be ambitious about green and social bonds. In Mexico, all our bonds since 2020 have been sustainability or social bonds, and in Colombia we did two sustainability bonds, so it’s something we are intent on promoting.

GlobalCapital: Darren, beyond the G3 currencies, what opportunities do you see?

Stipe, AIIB: Onshore CNY has been an opportunity. We’ve heard a lot more interest from people managing CNY, whether that be reserves or to put in their portfolios. We think we offer a terrific alternative to government bonds, which is where most people put their CNY resources.

We issue roughly 30bp over the government, so we offer the chance to get a triple-A issuer at a pick-up to the Chinese government. We think that’s a terrific opportunity.

The reason for that dynamic comes back to the domestic investor. For that onshore investor, similarly to what Eusebio described in Mexico, there is no natural reason for them to prioritise investment in a triple-A issuer, an international triple-A doesn’t mean anything to them. They’re more interested in liquidity. You really have to attract that onshore investor first by educating them on who you are, what is the institution, why should they buy the bonds, and then by offering them a wider spread than the government.

We’ve been in a process of discovering what that spread should be, and in our last transaction had a good response with about 24 investors; that’s a lot for a Panda issuance. Once you have that onshore base and there are conditions for a stable programme, then you take it offshore to attract investors who otherwise might be buying just the government bond. It’s a great opportunity for us.

On a funding level, when that swaps back to dollar it’s single digits over Sofr for a three-year, which is an amazing level. Also important was that we were funding CNY assets, similar to the IFC experience, and bringing a lot more clarity on whether CNY is a currency we can support on the loan side. It’s interesting that investors, because of the high US rate environment, are looking for currencies where they can borrow where they believe that the absolute interest rate is low and will remain low over a long horizon. People see CNY as maybe one of those currencies.

GlobalCapital: Do you think CNY is a big opportunity for other supras or does it work specifically just for you?

Stipe, AIIB: It’s a difficult currency for a couple of reasons. One is needing to have IFRS reporting; if you’re on GAAP standard for your accounting it is exceptionally difficult. Secondly, the translation of documentation and financial statements into Chinese. We have a competitive advantage in that sense, given the staff resources at AIIB.

GlobalCapital: We’re in New York, where the discourse on ESG is not as one-way as in Europe. How do you all see demand for ESG-labelled debt from supranationals evolving?

Bas, Santander: ESG is not as important in the US as in Europe. It’s getting better little by little but the ESG wave came from Europe, with the 2030 agenda from the Paris Agreement. US investors are much more material in terms of yield rather than labels.

Having said that, ESG has become a commodity already. Every issuer that is able to is issuing ESG bonds, especially SSAs, where the ESG format is natural. There’s no specific difference between issuing an ESG bond or not; if you’re the World Bank you are issuing in ESG format by default.

Dore, World Bank: That’s correct. All our bonds have a label since we see that this has value for investors. We label all our bonds as Sustainable Development Bonds to support green and social activities or Green Bonds focused on green. We have use of proceeds frameworks for both labels. The frameworks define how we use an equivalent amount of the funds and explain the ESG policies and approach we follow — all are aimed at achieving a positive development impact in our member countries. We also have an annual impact report that covers all our activities to promote transparency across the entire balance sheet.

Bas, Santander: This means that it’s a commodity in the sense that there’s no difference between issuing in one format or the other, as the market has naturally absorbed this thing.

It’s here to stay. We all are natural players in this world, except the EU which is a very different animal. There’s a problem because there was a formal commitment to issue 30% of the Next Generation funds in green assets and there are not enough green assets to issue that many bonds. In the case of the supras, it’s much easier.

But the concept of greenium, as we used to talk about two or three years ago, has disappeared. It’s not even a thing, on syndicate calls, to discuss whether you should issue 1bp higher or lower because below a bond is ESG or not — because all of your curve, your spread, your credit and the secondary market is already ESG.

GlobalCapital: Eusebio, do you think sustainable labels and credentials have value?

Garre, IDB Invest: One thing is the qualifier for a bond and another question is what we fund with those bonds. Because of our impact approach and our ESG policies, everything we do has always been sustainable. We still have different approaches to this among supranationals.

So far, we at IDB Invest have only issued use of proceeds bonds that are compliant with the green bond principles or the social principles. Others, like IBRD, IADB or AIIB, issue sustainable development bonds which have a wider definition. I can see both types of bonds converging and enhancing each other.

We still see that many investors prefer use of proceeds bonds over non use of proceeds bonds, and if you can comply with the green and social bond principles and have a second party opinion and have a stellar review for your annual report, that is appreciated by most investors. The appetite for sustainable issues of either colour is enough appetite and enough mandates that investors buy both, whatever they prefer.

In our case, an important reason for going with the use of proceeds framework — and the second party opinion and all the work that that entails for a small team like ours — is that part of our mission is also to promote the local capital markets, to provide an example for our clients. They are private companies, they don’t like to spend time and money on second party reviews and costly processes unless they have to, so it’s important to show them that we do it ourselves and it works.

Is there value? I think there is. Is it a differentiator or do we see a greenium? I don’t think there is a long-term case for a greenium for institutions like ours, where all our lending and investing is green and/or social. Temporarily there are moments where you issue a green bond at time when there is a shortage of them, and you get a better price at that moment than you would for a conventional bond, but to me that’s the exception, not the rule.

That can be different for a company without a strong commitment to ESG, or for a company in a ‘dirty’ sector issuing a clean bond for a very specific project. That’s a dilemma for the investors. How “dirty” is the company, how green is the bond? Can I really subscribe to this?

But in the case of the institutions at this table, I don’t think that putting a label on it makes the impact of that bond that different from bonds without the label.

GlobalCapital: David do you care about the sustainable labels or do you just see the asset class as inherently ESG friendly?

Bai, Bank of China: I don’t care. At this point, under US regulation, ESG investment exposure is voluntary disclosure. But I need a balance in terms of income, yield and ESG, because ESG is a key measure for us. I need to draw a good balance.

GlobalCapital: And the labels do matter?

Bai, Bank of China: Yes.

Nauman, Santander: Until there is some sort of set regulation, like a number to hit in your portfolios, I don’t think this ever comes into play. Investors are there for yield and that’s why they look at it. There is definitely more awareness nowadays, and people we’ve met across the world are tracking ESG and have an idea of how much of their portfolio is ESG. They bring into conversations that their numbers are increasing. But there is no requirement from local governments or regulatory authorities to have a certain amount, so they don’t chase after it?

Everyone has a feeling that might happen in the future, which is why it’s tracked, but it’s more an awareness thing for now.

Kuroki, IFC: One exception would be Swedish investors. They only buy green bonds. In our issuance we still have a greenium for ESG labelled bonds. With use of proceeds bonds, it works well when investors have a specific interest in, for example, biodiversity, oceans or water. We’ve seen an increased interest and demand for those and we incorporate then under our green bond framework.

Dore, World Bank: To the World Bank, everything is sustainable. The focus is on impact; every project that we finance goes through an ESG lens. It’s in our DNA, so there is no reason to separate the balance sheet into pieces. That’s why we take a holistic approach and try to provide as much information as possible in our impact report.

Powering up the MDBs

GlobalCapital: Obviously the Capital Adequacy Framework report has got the dialogue moving on getting more bang for the buck of MDBs’ balance sheets. This year we’ve seen the first public hybrid from the African Development Bank. Andrea, what’s been the response at the World Bank?

Dore, World Bank: The World Bank Group has implemented a series of reforms and introduced or expanded the use of innovative financial instruments as part of the Capital Adequacy Framework review.

During our recent Spring meetings, we announced some of the financial innovations that we’ve been working on to increase the World Bank’s balance sheet financial capacity to be able to maximize financing to support the Bank’s development mandate.

Some of the new financial instruments include: Hybrid capital for shareholders and development partners; a Portfolio Guarantee Platform and a Livable Planet Fund. We’ve been able to add up to $70bn balance sheet capacity over a 10-year period by implementing these innovative products and balance sheet optimization tools, including the lowering of our minimum Equity to Loans ratio from 20% to 19%.

As for market hybrid, it’s one of the products we have approval for and have announced plans to do a pilot. A market hybrid, relative to the shareholder hybrid, obviously has a higher cost.

GlobalCapital: Have you talked to investors about this?

Dore, World Bank: We have been doing some work on it. We have all seen the African Development Bank transaction and have had feedback. We’ve also done a lot of work with credit rating agencies, trying to ensure that the product is correctly rated. If you buy a World Bank hybrid bond, you are basically still taking triple-A risk, it’s not like a corporate hybrid bond.

We know there is the issue of extension risk, and that has a cost. The question is how much is that cost? So, we are gathering investor feedback and trying to come up with the most efficient structure that works for us and investors.

GlobalCapital: Staying on the market hybrid for a moment, does it ultimately come down to cost over the senior debt and is it feasible for that spread to compress? Is there optimism that the AfDB is going to become replicable?

Nauman, Santander: It’s a discussion we have had with a lot of people. Issuers are interested in it from a theoretical point of view. The investor base is very different to the regular SSA investor base, and the way it was priced was very different to an SSA.

I think there are a couple of names where this can be replicated and could work, but I just don’t see it becoming a market standard in the foreseeable future. It’s an interesting concept, but the pricing seems still very debateable.

It’s one to keep a close eye on, and we are having conversations with issuers on this. We will continue to pursue those and see how things evolve, but I don’t see this becoming a commoditised product for example. And I don’t see spread tightening.

GlobalCapital: Darren, what are your thoughts on hybrids and other ways to leverage your balance sheet better?

I don’t think it’s a single product or even set of products that really gets to the type of capital deployment that the G20 is going after. That comes with structural changes to the industry
Darren Stipe, Asian Infrastructure Investment Bank (AIIB)

Stipe, AIIB: We are monitoring it. AIIB is of course at a different stage; we’re not capital constrained by any means. Part of our role is to be there as a co-lender, to support peers in their efforts to maximise impact.

We’re around 10 years away from facing any type of capital constraint, so it will be interesting to monitor how these products evolve. I don’t think it’s a single product or even set of products that really gets to the type of deployment of capital that the G20 is going after. That comes with more structural changes to the industry. We still need to hammer out what those should be and what our role will be in that regard.

Another question is: what is AIIB’s role as an investor in hybrid products. It is in the interests of our shareholders to be supportive of those. That may be something we will look at in the future.

Dore, World Bank: It’s fair to say that this will never be a big part of SSA balance sheets, simply because of costs. We are cost pass-through institutions. This mean we pass on our funding cost to our borrowers, so our goal is to achieve the lowest funding cost.

That’s why we think shareholder hybrids are an excellent product because they are issued at the cost of senior level debt and you are able to get the leveraging effect.

Bas, Santander: From the outside, when you are a triple-A institution, issuing at very low levels, why is it in your interest to issue product with a lower rating at higher cost? If you get a capital increase from your shareholders, you leverage your lending capacity by funding yourselves cheaper in the future.

It’s fair to say that [hybrids] will never be a big part of SSA balance sheets, simply because of costs. We are cost pass-through institutions
Andrea Dore, World Bank

Dore, World Bank: The key thing is the leveraging component. There are huge strains on capital, so how can we do more with our balance sheet? We have to look at a suite of products. We must be creative. For example, callable capital — can that be more useable?

We do have to evaluate the cost of this market hybrid but if you issue a contained amount, the cost may then be manageable if it is spread over a large loan portfolio. We would have to bring down the cost of issuing market hybrids significantly to be able to issue this product on a sustainable basis. Why should you pay that much for a hybrid product when the risk to investors is so low? Even the way the rating agencies are looking at SSA hybrids, the number of notches lower does not reflect the risk that investors are taking.

Bas, Santander: Correct.

Dore, World Bank: That’s the key thing. It’s a different investor base. We need to educate them that the risk level is different to other corporate hybrids. The risk of your coupon being cancelled is very low.

Bas, Santander: That investor base that you’re referring to is not the natural SSA investor base.

Nauman, Santander: If you look at the splits, the amount of fast money was extortionately high. Who is buying this, where the credit rating is, and whether a triple-A issuance entity needs to do this, all combined makes it very difficult.

Dore, World Bank: If you design a product, that can be sold to the natural hybrid investor base or our traditional SSA investor base that will help performance and the sustainability of the product. But where it is now, that’s not the case.

GlobalCapital: David do you ever see a world where you’re buying a hybrid from the World Bank?

Bai, Bank of China: Not really.

Garre, IDB Invest: We have yet to find the investor base for this product at a cost that works for both sides. Many of the usual SSA investors cannot to even look at hybrids, period. You’d have to get to all those investors and convince them that perpetuals are not that bad, and they should buy them because they have a very high rating. That’s a big challenge, because their reticence is not only driven by their views about the risk, but also by the laws and regulations they are subject to.

The usual hybrid buyers on the other side just have totally different yield targets and couldn’t care less about the triple-A rating because they want the return and are willing to take risk. The question is, can the MDB community find an investor base that from a return perspective is in the ballpark of what we can afford or want to spend on this instrument?

Can we identify and educate that investor base to open up to SSAs, to the extent they are not already involved? This could be maybe known investors but a different portfolio or it could be someone who has never looked at SSAs.

That’s the big challenge and no one has cracked it. That’s why shareholder hybrids have appeal, because shareholders are willing to not put a market price on the risk based on their strong conviction of the quality of the issuer and their commitment to its mission as shareholders.

We sometimes reduce the capital adequacy conversation to hybrids. But when you look at the G20 recommendations, there are five areas that they expect the multilaterals to work on and be more impactful — including adjusting their risk appetite, adjusting their own internal capital adequacy policies, and working with rating agencies to deliver better data that conveys the low risk of their portfolios, and thus get a more efficient use of their capital.

Of course, new capital instruments are part of the conversation. But hybrids are not the only way to get more out of the MDB’s current capital base.

The way we went about it was to engage with our shareholders to ask how we respond to this catalogue of requirements. We put a new business model in front of them and said we would change the way we work. We put a business model in place with two key components.

One is an originate-to-share model where we change the way we design products so it’s easier to crowd in external capital, where there’s a lot of work to be done. The other part is to adjust our risk appetite and be willing to take more risk on our balance sheet, offering more impactful products to clients. That includes more credit risk, more equity risk, more currency risk — doing things we didn’t do before to have more impact.

Our shareholders loved the idea, but we told them it doesn’t come for free. We have $2.7bn of capital — to do this at scale we need significantly more. They liked the idea and gave us $3.5bn of additional capital, but they also gave as the requirement to keep our rating at leat at the current AA+ level. They were in on the idea — from the G20 report — of being more willing to entertain risks. But they also want us, as a multilateral, to be able to play an anti-cyclical role in a crisis, for which a very strong credit rating is key.

That’s the way we went about it. Now we are more than doubling our capital over the next seven years, so hybrid bonds are not our priority. We’ll focus on how we can mobilise more, and how can we get more risk off our balance sheet — crowding in capital.

GlobalCapital: IFC is not a capital constrained institution either. Beyond hybrid capital, do you see other alternatives for increasing mobilisation of resources?

Kuroki, IFC: For us it’s about mobilising private capital. One initiative IFC is working on is the warehouse enabled securitization programme (WESP), a new cash structure of an emerging markets collateralised loan obligation — emerging market CLOs. The programme follows the originate-to-distribute model, so we securitise IFC-originated loans in EM, create a securitisation product, and invite private sector investors to participate.

Initially our focus is for IFC assets to be included, but once it’s more established, and investors and rating agencies become familiar, the intention is to replicate this with MDBs communities to broaden EM CLOs. This really complements a mobilisation platform that we already have which focuses more on the private credit market, but this one is to mobilise the public market.

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