By Sudip Roy
On April 7, the Inter-American Development Bank issued a Ps3 billion ($270 million), three-year global bond in the local Mexican capital market ? the first international bond issue made available in the local market under the new financial regulatory framework adopted by Mexico last year. It was also the IDB's first global bond denominated in a Latin American currency.
For Mexico, the transaction represented a new asset for domestic and international investors seeking exposure to the Latin nation. For the IDB, the deal provided an opportunity for the multilateral to diversify its investor base.
?For the IDB, raising funds for the first time in the domestic capital market of a Latin American country represents a diversification and deepening of its investor base, at costs comparable to that of our international bond issuance,? said IDB president Enrique Iglesias at the time.
?For Mexican investors, there are advantages of diversification in having available a AAA-rated security denominated in local currency. Holding assets denominated in national currency avoids currency exposure for investors with liabilities mostly denominated in that currency,? he added.
A month later, the development bank for Latin America and the Caribbean issued a R$550 million ($190 million), five-year zero coupon bond in the Brazilian market. Then in June it launched a P$119.74 billion ($45 million), seven-year transaction in Colombia. All three local currency deals are part of the Bank's Global Debt Programme.
Supranational focus
Issuance by supranationals in emerging markets currencies is strong this year. The International Finance Corporation (IFC), the World Bank, the European Investment Bank (EIB), the Asian Development Bank (ADB) and the European Bank for Reconstruction (EBRD) have all been busy launching transactions in a number of exotic currencies. These include the Slovenian tolar, Peruvian sol, Indian rupee, South African rand, Polish zloty and Hungarian forint as well as the three Latin American currencies chosen by the IDB.
In February, for example, the ADB issued its first Indian rupee bond, a R5 billion, 10-year offering. Although that was a purely domestic bond, it, like the IDB's three global transactions, had three clear objectives: first, to raise money locally that will eventually be used to help finance these development banks' projects in their respective regions (although, depending on the institution, the funds raised are swapped into dollars first); second, to provide investors with longer-dated, top-quality paper; third, to diversify the issuers' borrowings and investor bases.
Pointing the way
These transactions also help add depth to the local markets. Quite often, the supranationals help pave the way in the local markets with liquid, highly-rated issues that can act as a benchmark for both domestic and foreign institutional and corporate borrowers.
In 2002, for example, the IFC issued two Colombian peso deals, ?then stayed back waiting for other issuers to tap the market?, according to John Borthwick, the institution's head of funding. That happened earlier this year with the IDB, World Bank and the Andean development bank, CAF, all launching bonds in the Colombian market before the IFC re-entered in June.
The IFC's early presence in Colombia allowed it to follow through with other products, such as providing partial guarantees to local borrowers. Since 2002, the institution has done $2.5 billion-worth of structured deals, mostly in local markets, according to Lee Meddin, chief structured finance officer at the corporation. ?We use structured finance as a tool to mobilize long-term local currency financing,? he says.
?We target clients that can't access the market on their own,? he adds, ?but become investment grade, in local market terms, through IFC credit enhancements. We structure our guarantees with an aim towards decreasing the probability of default and improving the recovery in the case of default. As a credit-enhancer, we always have exposure in the deals we participate in.?
The IFC spends a lot of time working on its local currency deals, says Borthwick. The organization (which is the public-sector arm of the World Bank), for example, first explored the possibility of a domestic
Peruvian soles bond two years ago, but it was only in June that it finally issued one. That S/.50 million ($15 million) deal was driven by the gradual growth of the local pension funds industry that was seeking investments in good quality assets.
The World Bank's P$535.6 billion inflation-linked bond was also two years in the making, although the serious preparation began six months before the deal's launch in March, according to Doris Herrera-Pol, head of capital markets at the World Bank. That preparation includes talking to the local authorities and getting their consent, ensuring that the legal and regulatory framework is sufficiently strong and marketing the deal.
As with the IFC's soles transaction, the World Bank's Colombian peso bond was triggered by the development of the local investment industry. ?We were responding to the needs of local investors in Colombia ? the assets of pension funds and other domestic institutional investors have grown exponentially,? says Herrera-Pol.
?Investors wanted AAA-rated paper beyond what the government could offer,? she adds. ?Only 50% of their portfolios are allowed in government bonds, therefore they were keen on diversification.?
In preparation
Looking ahead, the World Bank is planning to issue bonds in other local markets, in particular Mexico. ?We've been working closely with the Mexican authorities and market partners since November. We have completed all the preparations to register a programme and we've met investors to learn abut their needs and preferences, but the pricing is not yet in our favour,? says Herrera-Pol.
The Bank is also monitoring the situation in India and Malaysia and, together with the IFC and ADB, is close to launching a Thai baht deal. The three multilaterals have been working on the project since the middle of last year, and according to Borthwick, are in the final stage of preparation. The IFC, however, has permission to issue a domestic bond in Brazil and has mandated the lead arrangers for an Indian rupee offer. Neither transaction, though, has yet to materialize.
What this all shows is that emerging markets are becoming more important for these borrowers, although these currencies still represent a small proportion of supranationals' overall funding. For the IFC, for example, emerging markets' funding represents about 5% of the total. However, there is no denying the rapid development of these markets.
As the IDB said following its Mexican peso deal: ?This transaction is a sign of the important progress that the local Mexican markets have achieved in the past few years. The local currency yield curve has been considerably extended, and the liquidity in the market has broadened, both of which have contributed to the success of this transaction.?