The Asian Development Bank anticipates making its bond debut in Russian ruble and Swedish Krona as it pursues a strategy of more local currency issuance.
The Philippine-based body expects to raise US$14-16 billion this year and is actively seeking to diversify across markets as well as investor types and products.
“Over the last few years, we have expanded the number of currencies that we have issued in, more recently the Norwegian krone and Brazilian real,” said Maria Lomotan, assistant treasurer at the ADB, in an interview with Asiamoney PLUS.
“We have also issued new products, such as thematic bonds, and have been able to engage domestic investors through offerings in New Zealand dollar and sterling markets. Subject to conducive market conditions, potential new currencies may be the Russian ruble and Swedish krona,” she added. Thematic bonds are ones where the proceeds are allocated to specific sectors for example green bonds or climate bonds.
The ADB does not offer loans in either Russian rubles or Swedish krona but its strategy is to issue in currencies that will attract increased attention from international investors due to the yield pick-up over their home markets.
For example, Japanese investors tend to favour bonds in Brazilian real or Turkish lira because even with the exchange risk the return is better than it would be in yen.
The ADB predominantly lends in US dollars, as well as in Japanese yen, euros and Asian local currencies. As such, for the most part, it funds in dollars.
In 2012, it issued US$5.91 billion in US dollars, as well as funding in Australian dollars (US$2.8 billion), Turkish Lira (US$930 million), sterling (US$522 million) as well as smaller sums in Brazilian real, Norwegian krone, New Zealand dollars and South African rand, according to Dealogic.
"We are active issuers in other markets, but these are then swapped back almost entirely into US dollars,” said Lomotan.
However, tightening global regulations have had a negative impact on swap intermediation charges and therefore on the after-swap costs of funding, she said. This is a deterrent to issuing too much debt in currencies other than those the ADB uses for loans.
As such, the bank is encouraging borrowers to explore local currency denominated loans, in a variety of different currencies. The ADB would then match this on the liability side by issuing more local currency denominated bonds. This in turn would attract a broader investor base to the development bank, she said.
The percentage share of US dollar issuance versus local currency issuance by the ADB has declined since 2009, when dollar bonds accounted for an 81% share of the total. In 2011, the percentage of dollar bonds was 61.3%, last year it fell to 54.5%, according to Dealogic.
“Funding issuances are primarily driven by investor demand, strategic and cost-efficiency considerations. While there are no strict limitations to issuing in certain currencies, ADB does have a charter-mandated requirement to obtain approval from its member country before issuing in the currency of that member.”
“Our traditional investor base continues to be central banks and official institutions. However, [issuing] in various currencies, markets, formats and tenors [has] helped diversify ADB’s investor base to include real money accounts, global and domestic banks, insurance companies as well as pension funds,” she said.