At first glance, a Mexican peso bond issue under $50 million in size by the IDB would not appear to be too significant.Yet it's that and about $1 billion of other similarly small issues done by multilaterals that have smoothed the path for Latin borrowers to take advantage of this year's hottest trend in the international markets: investing in local emerging market bonds.
New frontier
With yields in the global dollar and euro markets at historic lows, 2005 has been dubbed the year of the local currency markets and the next frontier for international investors.
Just how strong that trend has become was best demonstrated late last year when Colombia issued its ground-breaking $375 million equivalent five-year peso global bond. Issues in Brazilian reais and Mexican pesos have followed, all of which have been snapped up by local and international investors.
Without the efforts of the multilaterals, however, deals like Colombia's offering would have been a longer time coming.
Removing blocks
"The overall financial benefits are marginal for us, but where we do make a difference is in removing impediments in the regulatory system," says Eloy Garcia, treasurer of the IDB.
The IDB issued the first Colombian peso-denominated Eurobond in June last year. While insignificant in size, at the equivalent of $44 million, the deal essentially cleared all the international regulatory and clearing-system hurdles that confronted a bond denominated in a non-convertible currency like Colombian pesos.
"It made it easier for the government of Colombia to do its peso global bond," says Garcia. "We have the patience and the ability to absorb the cost of doing it as part of the Bank's annual borrowing programme, and this benefits our member countries in the end."
The IDB treasury, like the World Bank, can issue in any currency, as long as they swap it back at costs comparable to their dollar funding levels. Lining up the swap, rather than demand for the bonds is what has limited the size and number of deals.
No place to go
The IDB, unlike the World Bank and the International Finance Corporation (IFC), however, doesn't have the mandate to issue bonds in the local Latin capital markets, where a surge in pension fund liquidity has left some countries with the ironic problem of having too much cash and nowhere to put it.
"There has been such a high growth of pension fund systems in some Latin countries that domestic alternatives of supply of paper have not kept pace with demand for investable assets," says Doris Herrera-Pol, treasurer of the World Bank.
World Bank first
The World Bank issued its first Latin local market deal last year, a Ps535 billion ($200 million) CPI-linked Colombian deal maturing in September 2010. The bond was inundated with orders from local investors desperate for some diversification.
The World Bank is keen to do more. "Look at where pension funds have been growing and that will tell you which countries" the World Bank is considering, says Herrera-Pol.
IFC daring
The IFC is the most daring multilateral. It began tapping local pension fund demand in 2002 with the first ever 'El Dorado' local Colombian bond issue – a five year with a 13.7% coupon that priced 50bp through the government yield curve. In December it reopened this 'El Dorado' for another $45 million equivalent, a deal which was six times oversubscribed and priced 170bp through the local curve.
Last year the IFC pioneered the 'Inca' market with a local $15 million equivalent offering in Peruvian Soles.
The benefits of the IFC's efforts are tangible. Once local investors are familiar with the value of the IFC credit quality, it can then do follow-up offerings with private-sector entities that use IFC partial credit guarantees and lines of credit to tap the local markets.
About eight such deals have been done by the IFC in Colombia, including the first ever securitization of non-performing loans in Latin America and offerings to help jump-start mortgage-backed securities markets in Colombia and Mexico.
Private sector IDB
The IDB's private-sector development division is also offering partial credit guarantees and lines of credit to banks and firms in Latin America and the Caribbean, all of which are aimed at expanding the local capital markets and providing more constructive ways for pension fund money to be invested.
"Many of the Latin countries now have big pools of domestic savings, and one of the big challenges is to take advantage of that," says Hans Schulz, head of capital markets and trade financing development in the IDB's private-sector department. "We want to get that money channelled into productive investments and not just bank deposits or government paper."
The IDB has approved a partial credit guarantee deal for a securitized mortgage bond in El Salvador and is working on a similar deal in Mexico. It is also developing a warehousing facility for a mortgage originator in Brazil, where the latter gets an IDB line of credit to on-lend as mortgage loans, which are then accumulated until a critical mass is reached for a mortgage-backed security.
Another objective is to promote a market for local 'MT-100' financial future flow securitizations that can be sold in the region as well as in the US.
Efforts are also being made to help local banks in Peru and Brazil to raise subordinated Tier Two capital securities domestically.
Landmark multilateral deals:
2002
March IFC: first ever 'El Dorado' local market Colombian peso (COP) bond. Col$225 billion ($100 million) 13.7% five-year bond priced at 50bp through government curve.
2004
World Bank: Col$535.6 billion ($200 million) Sep 2010 CPI-linked domestic bond.
April IDB: Mex$3 billion ($269 million) 6.59% three-year global bond listed in Mexico City and London; sold to locals.
May IDB: Brazilian reais deal, $188 million equivalent. Five-year, zero coupon.
June IFC: first 'Inca' bond in Peruvian soles. $15 million equivalent 7.33% three-year bond priced at 50bp through government curve.
June IFC: credit enhancement for Titularizadora Colombiana for first non-performing loan asset-backed deal in Latin America.
2005
March IDB: Mex$500 million ($50 million) 9.25% five-year Eurobond priced to yield 9.39% or 40bp through the Mexican government peso yield curve.