Kenneth Lay, deputy treasurer and
How have you tried to respond to investors during the extreme volatility of recent months?
We have stayed in the markets throughout this period, with both structured and plain vanilla issues. In August, for example, we priced a $1bn seven year global bond that appealed to central banks and money managers, and a Nkr1bn two year bond that has been very popular with European retail investors.
The reason these deals went well is that they met investors' preferences in respect of currency and terms, while providing them with a familiar, high grade credit.
The World Bank has effectively completed half of its funding in the global market, with the rest in smaller structured trades. Is that a matter of policy and can we expect a similar pattern in the 2002/2003 fiscal year?
Our primary objective is to fulfil the fiduciary responsibility we have to our shareholders, the 184 countries that own the World Bank, and to fund the institution at the lowest sustainable cost over the long run. When we can achieve this objective while developing the capital markets of our members, we try to do so.
Often countries have opened their markets first to the World Bank, in part because we pay a lot of attention to the details of capital market infrastructure when we do a first transaction. And, of course, we offer a high grade, internationally recognised product that can contribute to the credibility of a new market.
We try to ensure that domestic market infrastructure is consistent with international practice, which can facilitate offshore participation in the market and improve liquidity more rapidly than would otherwise occur.
The attractions of this approach for market participants are pretty clear - for international investors, World Bank bonds in emerging market currencies enable them to get the currency exposure without the credit exposure. For domestic investors, our bonds enable them to buy triple-A rated paper in their home currency, and often also extend their maturity profile.
But we are not alone in this. The International Financing Corp, European Investment Bank, and European Bank for Reconstruction & Development, to name but a few, have played this kind of role as well.
How does the World Bank balance its commitment to market development with cost effective funding?
At the end of the day, sustained liquidity depends on two key factors.
The first is having represented in the actual or potential investor universe a diverse array of investment strategies, to avoid the one-way market phenomenon that can undermine liquidity when everyone is trading on the same signals.
The second is to structure the technical details so as to minimise transaction costs for investors that want to use the paper to implement these strategies.
If an issue achieves these two things it will be liquid.
There are examples of huge issues sold into only one or two investment strategies that have quickly gone relatively illiquid, and there are examples of small issues that have enjoyed great liquidity for several years after launch.
Our strategy is to try to achieve these two characteristics in as much of our issuance as possible.
This drove the creation of the first global bond in 1989, and we think the underlying concepts are equally applicable in other contexts.
To reach a wide investor base, we offer a broad range of products in terms of currencies, maturities, and structures. When there is diversity in demand - geographically and in terms of investment strategy - our bonds will be more liquid. Also, we are using the global format for more of our bonds. Even if at the time of issuance the demand structure is not equally global - ie 33.3% each to Europe, Asia and US - over the lifetime of the bond, demand patterns change.
We offer bonds in the global format whenever feasible so that the US investor base can participate in the deals and contribute to providing liquidity over the lifetime of the bond. For structures where the market is more limited, we offer liquidity through a buyback facility.
One step that we are currently taking to minimise transaction costs is to ensure that investors can use the clearing system of their choice for our dollar bonds such as Fedwire or DTC in the US, or Euroclear or Clearstream in Europe, and to support electronic trading in our bonds.
Our goal is to offer investors greater liquidity over the life of the issue by ensuring that the bonds are eligible and convenient for purchase by the deepest possible pool of investors in each of the major fixed income markets.
We believe that if you pay attention to the factors that enhance liquidity for a number of years - ie issue in a certain size, diversify placement, and minimize transaction costs - you develop a reputation that supports liquidity in your products.
Have you experienced a diminished appetite for peripheral or emerging market currencies?
Yes. With the volatility and uncertainties surrounding some emerging markets, we have seen less demand for some emerging market currencies. But we see this more as a cyclical and idiosyncratic phenomenon. Looking forward, we expect that the demand for emerging market currencies will pick up, and that there will be opportunities for investors to purchase bonds in new currencies.
How does the World Bank select its dealers, and how does it monitor their performance?
The short answer is very carefully. We take a holistic approach and consider the relationship we have with a bank in different parts of the organisation. But a key factor is the extent to which, in our dialogue, it becomes evident that the firm understands and can advance the medium term value proposition that underlies our approach to the business. We try to be as explicit as possible in explaining it, and we try to draw for inspiration as much as possible on the expertise and franchise of the firms we use.
But our experience is that the firms with which we do the most business over a sustained period of time are those that fully understand and can help us advance the value proposition that drives our strategy. Of course, we also pay attention to other indicators of commitment, what business and services banks provided, how high the quality of the execution was, and whether there is continued support for our deals and the World Bank as an issuer.
Your $3bn global in January of this year surprised the market. In retrospect, was the pricing right, and how has the deal performed since?
We took the initiative to open the market early in January. Our bond was launched on January 3 and was priced in line with the secondary market price for World Bank bonds. Subsequently, given the favourable market conditions, other triple-A issuers also tapped the global dollar market, changing the demand and supply dynamics of the market.
The bond has performed very well since its launch. It has outperformed both comparable US agency bonds as well as other supranationals that issued bonds in the same period.