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Debut Mulan bond salutes China’s SDR effort, says IBRD

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By Paolo Danese
24 Aug 2016

The World Bank’s debut IMF special drawing rights (SDR) bond — dubbed a Mulan bond — is an acknowledgement of China’s success in reforming the renminbi, George Richardson, the organisation’s director and global head of capital markets, told GlobalRMB.

The International Bank for Reconstruction and Development (IBRD), concluded its roadshow in Beijing and Shanghai last week for the first SDR-denominated capital markets instrument in over 30 years and the first international SDR transaction large enough to be sold to more than one investor, according to IBRD.

"It is exciting and a privilege for us to do this," said Richardson. "The primary goal of the programme is to support the Chinese government, the third largest member of the World Bank, as they celebrate the long and hard work they have done internationalising the RMB."

The deal is set to price next week ahead of the G20 meetings starting on September 4 in China, but IBRD could not confirm the launch date. Media reports have suggested August 31 as a possible date.

The name Mulan, which comes from a legendary female warrior from China’s fifth century who enrolled in the army as a man, according to ancient Chinese literature, was chosen as the name for the issuance programme.

"We named it the Mulan bond market. This is because the currency is SDR and has a more restricted investor base than other programmes in China's bond market such as the Panda bonds," he said.

Richardson noted that the idea for an SDR bond programme was put forward by the People’s Bank of China just two months before its approval. With IBRD’s decision to go ahead, the World Bank has had to create the legal framework for the deal as well as entering discussions with the dealers to define how an SDR transaction could be sold.

Denominating the deal in SDR, while a novel concept, fits with the IBRD’s broader funding needs, as the IMF and the International Development Association (IDA) — whose funding IBRD manages — are denominated in SDR.

However, the bond will be settled in renminbi.

"This is highlighting the work done by China for the RMB to enter the SDR basket,” said Richardson. “It makes sense for the first SDR bond to be settled in RMB also to facilitate its purchase by Chinese investors. For us it is also about the diversification of our investor base, as we have not reached these Chinese investors before."

The transaction will be sold into the China interbank bond market (CIBM), which means it is able to be purchased by foreign central banks, official institutions, supranationals and multilateral development banks, which are eligible to buy following last year’s reforms by PBoC.

Building a curve

As for the terms of the deal, under the programme the IBRD is allowed to issue bonds with maturities up to 10 years. However, the bank is likely to start with a three year deal.

"We will try to target a maturity that is optimal for most investors, primarily banks and central banks, and they are more interested in a shorter term transaction. We haven't decided on the maturity yet, but a three year bond may be a decent place to start. We could start with something with a shorter maturity then move it out the curve with other issues."

While investors may be sceptical given the SDR denomination, Richardson said the deal would meet real investment needs.

"Many investors we met on the roadshow manage portfolios in the SDR currencies and have to deal with each foreign exchange component, as well as the costs of transacting in those foreign currencies. So this SDR bond is an efficient way for them to benefit from the diversified FX exposure without a lot of the transaction costs."

As for the secondary trading of the bond, the IBRD has come to an agreement with the Shanghai Clearing House to provide a daily quote for the issue.

And while the terms are not fixed, Richardson confirmed reports that the bond was likely to yield less than 1% but disputed that a low coupon would discourage interest.

"The coupon level is something that investors are grappling with in China as they are used to the RMB market, which has much higher yields, and not the SDR,” he said. “So while a less than 1% coupon may be surprising initially, after considering the various currencies, when blended with the proper SDR weightings, it makes more sense."

The quality of the issuer also needed to be taken into account when considering the likely coupon for the bond.

"Other markets in China like the Panda bond market have not seen a triple-A MDB issuer since 2009," he said. "So this is a different pricing level than most investors in China are used to.

“Most transactions in Panda bonds have been from lower-rated issuers, such as banks in Hong Kong, or from the likes of British Columbia, which is a great credit but pays a higher yield than the World Bank or Asian Development Bank, for example. So for Chinese investors this is the first time in a long time that they are seeing pricing levels that are typical for issuers like the World Bank."

IBRD priced a $5bn three year note with a coupon of 0.875% on July 6. The bond, listed on the Luxembourg Stock Exchange, was hovering around par, or a cash price of 99.98, on August 23.

CCB, CDB, HSBC and ICBC are joint bookrunners and joint lead managers for the SDR bond.

By Paolo Danese
24 Aug 2016