The past 18 months has produced a remarkable flurry of bond issues by supranational and agency borrowers in new currencies, such as the Thai baht and Botswanan pula. Some of these currencies have thriving domestic bond markets; in others, local issuance is much more limited. Some of the SSA bonds are sold to domestic investors; others stay offshore. But as Matthew Attwood discovers, all of these deals are in some way taking emerging bond markets forward — while raising efficient funding for the issuer.
Since the end of 2004, the smaller Eurocurrency bond markets have got a lot more interesting.
Supranational and agency borrowers have been opening up new currencies to international bond issuance — beginning with such currencies as the Malaysian ringgit and Indian rupee.
From late last year, several African currencies have come into the frame, with debut Eurobonds in Botswanan pulas, Egyptian pounds, Namibian dollars and Tanzanian shillings.
Last October, the Asian Development Bank and the International Finance Corp launched the first Panda bonds — issued by foreign borrowers in the domestic Chinese market.
Both sold 10 year transactions, the IFC for Rmb1.3bn ($140m) and the ADB for Rmb1bn ($123m).
Nina Shapiro, treasurer of the IFC in Washington, says its deal took four years to prepare, and was not structured or timed to give the IFC a favourable position in the new market.
"One of our core goals is to develop sustainable markets that do not require the constant presence of supranational borrowers in order to function," Shapiro says. "We spend significant time with regulators and other authorities as well as financial institutions and investors, laying the groundwork so varied issuers can follow us to local markets."
The IFC's emphasis on domestic markets sets it apart from other market-developing issuers, says John Borthwick, deputy treasurer for funding. "We avoid the offshore-centred trades brought recently in currencies like the Botswanan pula and Brazilian real and instead concentrate on investors within the economies we hope to develop.
"In markets like China, where we were the first non-state borrower, we see ourselves as the first stage in credit diversification."
Juan Limandibrata, the ADB's assistant treasurer and head of funding in Manila, told EuroWeek at the time of the deals that the ADB hoped to be back in the renminbi market before long, but no international issues have followed.
Borthwick believes supranational institutions should be circumspect about tapping new markets too enthusiastically, citing the example of Colombia, a market the IFC opened in 2002.
"We deliberately slowed the pace of our issuance because we felt overall market development would benefit from other borrowers entering the market," he says.
That policy paid off in Colombia, which began to attract wider offshore interest after three or four IFC deals, but the Panda segment may need more attention from supras before new borrowers get on board.
Frank Czichowski, treasurer of KfW in Frankfurt, says: "Discussions are under way for a KfW Panda bond, but a lot of questions must be answered first. As with all these markets, we are making headway but an issue may not materialise very soon."
The German development bank is alive to opportunities in Asia, as its first Malaysian ringgit bond in April attests. The deal was the first international issue in that market from a borrower other than a supranational.
The transaction was part of KfW's long term strategy for the region, says Czichowski, which began 50 years ago and is intended to stretch far into the future.
"Our involvement began with development aid and moved on to include export and project finance," he says. "The latest step is participation in local capital markets: our investment reflects the very substantial development of these economies."
For agencies like KfW, emerging markets like Malaysia present a challenge for their development remit, as well as long term funding opportunities.
"We would like to complement our IPEX-Bank division's financing activities by being able to refinance in local currencies and we pursue a policy of investor diversification," says Czichowski.
"There is a growing savings rate in markets like Malaysia and it is beneficial for large issuers such as KfW to be present in all large investor groups.
"We have issued the equivalent of $140m in Malaysia, which is a small proportion of our Eu50bn [annual] funding programme, but ours is a long term strategy, not a series of one-off events. We do not want to be the first and only European issuer in these markets, but the driver of a new era of international participation."
The ringgit deal was accompanied by expectation that KfW would bring a Thai baht issue soon. Czichowski confirms that the bank intends to be active in the Thai market, but stresses that timing, as well as careful preparation, are crucial.
"Debt capital markets are uncertain all over the world at the moment, but we hope to bring more debut issues soon," he says. "We have finalised documentation and structuring for a Thai baht deal and are speaking to investors, so we are ready to issue when the time is right."
The flurry of issuance in African currencies began in November, when the European Investment Bank became the first international borrower to launch a Eurobond in Botswanan pulas.
The P500m ($89m) five year bond, led by South Africa's Rand Merchant Bank and WestLB, was a synthetic issue, settlable in euros but offering investors exposure to the pula's performance. This was their first opportunity to buy an international bond denominated in a sub-Saharan currency other than the South African rand.
Forty per cent of the paper went to international investors, but most demand came from within Botswana, which has only two government bonds, maturing in 2008 and 2013.
At A2/A, the country enjoys Africa's best credit rating, thanks to a stable democracy and mineral wealth.
A new landmark was reached a fortnight later, when the African Development Bank brought the first pula Eurobond fully clearable in the currency.
The P300m ($54.9m) one year bond, led by TD Securities, was increased from P250m after an enthusiastic response from investors.
For the AfDB's treasurer in Tunis, Arunma Oteh, it was a priority to capture the attention of international investors, as well as tapping domestic demand.
"We had been looking to structure a pula issue for some time, but made the strategic decision early on not to bring another synthetic issue, as we want to make the market visible to international issuers," she said at the time.
"This is not a one-off: our policy as a development bank is to be present in this and other markets and not concentrate on opportunistic gains."
The AfDB issue was a definitive riposte to the pessimism of many onlookers after the EIB's bond, who predicted a short run of interest in the currency.
Issuance continued early this year, with a P300m one year bond from KfW. A spokesman for lead manager TD Securities said the deal was not a hard sell to the UK and European accounts that drove it.
"This is a global deal, and we are thrilled to have brought a good cross-section of European borrowers to the market," he said. "We have an attentive investor base, keen to seize new opportunities to diversify their portfolios. But it is not just a case of selling: our detailed conversation with customers helps lead us to new markets."
Debuts follow discussions
The spate of activity in African currencies continued in February, with another landmark deal from the EIB — the second Eurobond denominated in Egyptian pounds, following a small self-led transaction by Barclays Capital.
The E£500m ($88m) transaction, increased from E£300m, was led by Barclays and Banca Profilo, and aimed at international investors. Domestic buyers would have been put off by the bond's yield, which was lower than the Egyptian government benchmark.
David Clark, head of the funding group for Europe (excluding euros) and Africa at the EIB in Luxembourg, described the bond as "a precursor to an eventual issue in the Egyptian domestic market."
"We have been in detailed discussions with the Egyptian government about using international triple-A paper to develop liquidity in the domestic market, and this is an opportunity for us to publicise Egypt to banks and investors alike," he said in February.
"It is essential to have a range of background factors in place for a market to develop, not least a mature derivatives component. This synthetic trade will be swapped back to euros, and should stimulate the development of derivatives pricing and trading mechanisms."
KfW followed at the end of March, with a competitively priced E£100m 18 month deal, led by Deutsche Bank. Asset managers, emerging market funds and mutual funds picked up paper, but the market is still waiting for an international deal directed at domestic investors.
February's other local currency market debut was the AfDB's synthetic Tanzanian shilling deal, the first transaction in the market by a supranational borrower.
The Tsh11.8bn ($10m) one year bond, led by Barclays Capital, was sold to one institutional investor in Europe, and came less than a month before the shilling became clearable by Euroclear and Clearstream.
Other African currencies, including the Egyptian pound, Zambian kwacha and Moroccan dirham, were scheduled to attain denomination listing with the clearing houses at the same time. Officials at the AfDB said the move signalled the effects of economic reform in those countries, and the possibility of more inaugural bond issues.
One such currency, the Namibian dollar, was first used for an international bond issue in March, when the EIB sold a N$250m ($40m) five year synthetic issue.
Foreign exchange controls precluded domestic participation, said David Clark, but he claimed the deal was "an important step in adding liquidity to the local market", and hoped it would encourage issuance from other borrowers.
"It is probable there will be more to follow," said a syndicate official at lead manager WestLB. "There are deals to be done in Africa. There is potential for other currencies."
Austria looks east
Sovereign issuers have been quiet in cross-border emerging market currency issuance in recent months, except for the Republic of Austria, which brought the first fully clearable Romanian leu Eurobond in April, a Lei100m ($35m) transaction.
Coming a year after it became legal for foreign investors to trade lei, the arbitrage-driven trade was spurred by lead orders from Switzerland and Germany, said lead manager TD Securities.
Paul Eustace, the bank's head of syndicate in London, pointed out that, although many borrowers have an explicit remit to develop markets, there is another instinct behind such deals. "We monitor local currency markets such as this for opportunities to profit from arbitrage," he said, "and when they coincide with investor demand, we bring them."