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Derivatives

Bigger funding requirement means flexibility for IFC

Bond market participants used to be able to set their watches by the International Finance Corporation’s issuance calendar when it came to benchmark funding. But with a larger funding need and in markets less certain, Ralph Sinclair discovers that the IFC has had to change its tactics.

Long gone are the days when the International Finance Corporation (IFC) would issue one or two five year global format benchmark deals each year to the sort of metronomic schedule that would make a Swiss railway controller jealous.

The IFC is now a lean, mean borrowing machine willing and able to exploit temporary pockets of demand and bring new innovations to the market, such as this year’s pioneering benchmark sized green bond in February — the first deal of its kind.

“It’s about keeping the flexibility,” says Ben Powell, the IFC’s senior financial officer. “If you see demand, you want to be able to tap into it. The change in market sentiment has lead to a shift in how we approach deals.

“We cannot sit back and wait for deals to come to us. We have to be more nimble.”

The Washington-based supranational has raised its funding target this year and so flexibility will be key to it achieving is goals. At the start of July, the IFC announced a target for its fiscal year of $14bn-$16bn, up from last year’s figures of $12bn-$14bn.

Investors and dealers can expect the IFC to reach for the upper end of that range.

“Our programme is growing, so even if we get to the total quickly,” says Powell, “we can still look at pre-funding.”

Powell also has a strategy for getting to that total. In keeping with the IFC’s flexible approach, it will look to exploit recent trends in demand. “We’ll be more active in the dollar floating rate note market,” he says, “as well as doing more in the benchmark market. We have extra tools that we will employ.”

The IFC saw that plan through in late August, issuing a $3.5bn global deal — its largest ever in the format.

Changing landscape

The response in using dollar markets comes as another market withers for the IFC — that of non-core currencies. The IFC blames emerging market outflows for the decline in investor interest in these markets.

The IFC has put in place extra staff to allow it to have access to more diverse pools of capital, which will allow it to be a more flexible borrower. Last year the supranational hired an investor relations team to increase its visibility in the markets.

But the IFC is also maintaining keen focus on certain markets. The first of these is Japan, from which the borrower estimates it raises 40% of its borrowing programme.

The IFC sells benchmark bonds to Japanese asset managers, official sector accounts and bank treasuries. Life insurers and other asset managers show up for the borrower’s Australian dollar bond deals. Meanwhile, the supranational has a large retail investors following in the Uridashi market.

The IFC has taken on someone in Tokyo — a secondee from the Japan Bank for International Cooperation — to both build an investor relations presence as well as build stronger relationships with dealers.

Although the IFC has been a longstanding borrower in Japanese markets across a number of asset classes, it wants to broaden its access to smaller securities houses there.

To do that, it has also added to its product range aimed at Japanese investors. Whereas the volume of foreign exchange-linked deals that the IFC sells into Japan has dropped off following a spell of exchange rate volatility, it has added equity-linked deals to its menu of funding options to compensate.

The borrower has issued bonds linked to the Nikkei 225, the S&P 500 among other equity-linked structures already. It can now issue a number of index and single stock-linked structures. It will also look to sell more emerging market currency bonds into Japan, it says.

SRI commitment

Another new feature of the IFC’s funding programme this year was the world’s first benchmark-sized green bond. The deal came in response to US-based socially responsible investment (SRI) funds demanding a liquid instrument in which to invest. Traditionally, SRI bonds had been printed in smaller size, as club deals or private placements, or targeted at the Japanese retail market.

The borrower’s $1bn deal in February marked a new era for the SRI bond market. The IFC brought the trade during Asian holidays in an attempt to give SRI funds the best chance of being allocated bonds against the IFC’s core investor base of central banks.

The trade came flat to the IFC’s benchmark curve so, although the IFC had enough orders to allocate the bond in full to SRI accounts, Asian central banks still left orders, which it had to fill for relationship reasons.

That has not put the IFC off of its commitment to this market, however. “Investors were requesting liquidity, so we answered that request,” says Powell. “We aim to do one of these trades each year, depending on demand and our disbursements.”  

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