The World Bank launched a successful transaction in the South African market at the beginning of summer, driven by demand from Europe.
The R250 million, three-year bond was launched on May 6 – the Bank's first deal in the South African market since last October. That relative lack of supply was one of the reasons why investors wanted to see the AAA credit back in the market.
Another reason was that the yield differential between the South African currency and the euro at the time of the deal was slightly higher than usual, making a rand-denominated bond an attractive proposition for European investors. The spread differential against the three-year euro, on an interpolated basis, was 660bp on launch date. By mid-September that differential had tightened to 525bp.
A third reason why the transaction was appealing was because the rand had slightly weakened at the time. Given that the currency trades in a band, investors realized that the rand was likely to appreciate at some point.
Private banks and retail funds bought the issue. European investors took the entire transaction, with Germany accounting for half. The rest of the split was: the UK 20%, Switzerland 10%, Belgium 10% and others 10%. In total, 50 accounts participated, mostly buy-and-hold investors. The money raised by the World Bank will be swapped into US dollars and put in a pool to be used to help finance its projects around the world.
Because of the South African market's lack of depth, lead manager RBC Capital Markets recommended a R250 million offering. In addition, the three-year maturity was determined by foreign investors' interest in short-term tenors.
The World Bank first issued a rand-denominated bond in 1995 and their transactions have appealed to the same set of European investors ever since. “Since the mid-1990s, the rand has captured the attention of European retail investors. We have seen that German and Swiss investors, in particular, feel a sense of familiarity with South Africa and are attracted by the interest rate differential,” says Doris Herrera-Pol, head of capital markets at the World Bank.
The supranational, she adds, could issue another rand bond this year, though that will be determined by investor demand. The Bank also has a captive audience in Japan for its rand deals, which are known as Uridashi bonds. These are bonds typically issued by a foreign entity and sold through local securities firms to retail investors.
The R250 million is the second of three World Bank transactions in an emerging market currency this year. The others are a Ps535.6 billion inflation-linked bond issued in Colombia and a Ft12.5 million offer. The Colombian bond was the Bank's first in that market.
The World Bank issues as the International Bank for Reconstruction and Development. It is one of the most recognized and innovative borrowers in the international capital markets.
Issuer: International Bank for
Reconstruction and Development
Date of launch: May 6, 2004
Amount: R250 million
Maturity: Three years
Coupon: 9.5%
Credit ratings: AAA (Moody's); AAA (S&P)
Lead manager: RBC Capital Markets