Supranational and agency borrowers have long been opening up new currency markets to international bond issuance. But recently they have come up with some increasingly daring transactions, often away from European shores and in the promising African and Asian markets.
In the last two years, international bond investors have welcomed the arrival of the Moroccan dirham, Nigerian naira and Mauritian rupee markets, to name but a few.
In December, the International Finance Corp became the first f oreign issuer to launch a bond denominated in West African CFA francs.
After three years of hard work with, among other entities, the finance ministries of all eight countries in the CFA franc zone, the private sector arm of the World Bank launched a CFAfr22bn ($45m) five year issue, lead managed by BICI Bourse, BNP Paribass West African subsidiary.
By doing so, it opened the kola market for foreign issues in the currency, named after the locally grown kola nut traditionally used to barter with.
"Tapping and opening domestic niche markets are not just for funding purposes, although the pricing needs to be right for all parties, including IFC," says Nina Shapiro, vice-president of finance and treasury at the IFC in Washington.
Development organisations like the supranational banks have a mission to foster capital markets in developing countries, and they are gradually opening more and more new markets.
"Being oriented to the private sector, IFC has a natural motivation to help create for our clients deeper, more diverse markets, and greater access to local currency funding and investment," Shapiro says.
The corporation like other development banks when they engage in similar deals works with local investors, intermediaries and regulatory authorities to help introduce international practices to local currency markets.
However, as Shapiro points out, the deals would not be possible without more general economic progress in the countries of the currencies involved. "These bonds need to make sense in the broader development context," she says, "so that the constant presence of sovereign, supranationals and agencies does not become necessary to sustain the market."
It can take a long time for a bond market to grow from infancy to be able to stand on its own feet, and there are many stages involved. But the supranational and agency issuers can often play a pathfinding role or in the case of markets where there is a large, but closed domestic market that of a key, opening the door to the outside world.
Just such a case is China, where in November last year, the IFC launched its second Panda bond a Chinese domestic note by a foreign issuer. The Panda market had begun two years earlier, in October 2005, when the Asian Development Bank and IFC launched deals almost simultaneously.
The IFCs latest Rmb870m ($110m) seven year transaction, priced at 3.2% by China International Capital Corp and Citic Securities, was followed in March by a strong signal from the Chinese government that it might let foreign private issuers tap the market. Senior officials at the National Development and Reform Commission, Chinas economic planning agency, said doing so would help reduce capital inflows and ease upward pressure on the currency.
Creativity and persistence
The main difficulty faced by borrowers when opening new markets is the lack of liquidity and means to organise a swap market.
This issue was at centre stage in January, when the African Development Bank became the first supranational institution to launch a bond in Nigerian naira.
Led by Standard Bank, the N12.78bn ($104m) one year bond was the first naira issue with an African-based lead manager and the AfDBs largest African currency deal so far.
"The deal represents part of AfDBs market initiative to develop the African currency market and achieved a broad-based investor distribution," said John Oshilaja, senior vice-president at Standard Bank, at the time of the deal.
The transaction employed the first ever interest rate and currency swap in Nigerian naira. The AfDB recruited Standard Bank of Nigeria and First Bank of Nigeria as counterparties, which paid fixed naira to match the deals coupon payments.
Assembling swap transactions in highly illiquid and underdeveloped currencies is far from easy.
In spite of the challenges, there are financial rewards for sovereigns, supranationals and agencies issuing in these new markets.
"Whatever we issue, we swap back into floating euros," says Stefan Goebel, vice-president and co-head of assets and funding at Landwirtschaftliche Rentenbank in Frankfurt. "We issue in foreign currencies for diversification and because it provides us with cost-effective funding. However, while doing that we contribute to local markets growth by taking the credit risk out of the investors equation."
Foreign investors usually begin dipping their toes in a new currency by buying triple-A bonds issued by developed world public sector bodies. Slowly, their appetite will broaden to include deals with more credit risk, including issues by local borrowers.
The Botswanan pula market is at the very beginning of this trajectory. Issuance began in January 2006 with deals by the AfDB and KfW; both were one year transactions that matured in January this year.
It was not until April that investors mostly European emerging market funds and Botswanan accounts had a chance to take exposure again. "These issuers did not want to renew their expired transactions but we realised there was still a strong base of [European] investors keen to invest in Botswanan pula, so we got in touch with the EIB," said a syndicate banker at WestLB in Johannesburg.
The result was a P320m (Eu39.5m) one year Botswanan pula bond in April.
Although Botswana enjoys Africas best credit rating, A2/A, its bond market lacks depth and can only sporadically welcome this type of transaction. However, with coupons close to 10%, they carry a good yield for investors.
Botswanas healthy economic climate and strict monetary policy could help develop a strong market, but regular bond issuance is still some way off.
At the other end of the spectrum is the South African rand, which boasts an active domestic market and has been a currency of Eurobond issuance for many years.
But even here, there is room for the sovereigns, supranationals and agencies to help stretch the scope of the market.
In April, KfW launched a R2bn ($283m) three year global bond that brought new features to the South African rand market: it was the first global deal, barring a tiny issue in 2000 and a clutch of zero coupon bonds in 1997 and 1998. The deal opened the gates for US investors to enter the rand market, and offered them the promise of liquidity with the presence of two lead managers: ABN Amro and UBS.
Germanys KfW meets 10% of its funding costs with transactions in currencies other than dollars and euros. "Since we have a natural need only for euros and dollars, we swap the proceeds into these currencies and thereby dispose of any currency risk," says Petra Wehlert, co-head of funding at KfW in Frankfurt. "Diversification is important but in the non-core currency markets for Eurobonds, you have to go with international investor demand."
Fortunately for the SSA issuers, and for supporters of emergent currency markets, investors appetite has for the last few years been both voracious and adventurous.
Mauritian rupee debuts
In March they took a fancy to the Mauritian rupee, when the EIB launched the first Eurobond in the currency.
WestLB and State Bank of Mauritius underwrote the MauR1tr ($23m) three year bond, priced with a coupon of 11.4%.
Seeing the investors appetite for the deal, the EIB could have "comfortably doubled the size of the issue", said a banker at WestLB at the time of the deal.
Still, hedging the transaction proved difficult. The EIB had been looking at the Mauritian rupee market for over six monhs, but could only issue when the currency stabilised and rates dropped in March, after a volatile period since the middle of 2006.
"The niche currency markets are narrow markets that can be affected by many things including political stability," says Zeina Bignier, head of sovereign debt capital markets origination at Société Générale in Paris. "This is a factor that will affect rates and can create market volatility."
In Europe, where most of the niche currency markets enjoy relative stability compared with those in Africa, the Icelandic króna and Turkish lira remain the strong favourites with the top issuers.
Early in May, the World Bank launched a TL500m ($375m) 10 year bond, the first ever Turkish lira benchmark in global format (see box).
Yet a deal like that, in a now well-established market like Turkish lira, is unlikely to have been driven in any way by altruistic considerations. "SSA issuers often have large borrowing programmes and when a lead offers them a currency where they see a potential arbitrage opportunity, they will go for it," says Bignier.
She adds that, beyond the Nordic currencies and Turkish lira, it is hard to find good arbitrage on the European continent. She explains: "The Czech koruna, for instance, has almost achieved convergence with the euro, so it might lose some of its swap appeal."
Fortunately, as some currencies have disappeared from the scene, issuers, investors and local players such as regulators and securities firms have been willing to open new frontiers.
"The non-core currency market has known an explosive growth," says Paul Eustace, head of syndicate at TD Securities in London, "and many more currencies and structures remain to be explored to develop new markets and provide cost-effective funding as well as healthy development."