Which will be the first supranational to issue a bond in the Chinese renminbi market? Both the Asian Development Bank and the International Finance Corporation (as well as the Japan Bank for International Cooperation) have announced that they are keen to launch a bond. And while it's not quite a race – both multilaterals are waiting for technical issues to be resolved – there is clearly kudos in being the first.
The funding officials at both organizations, however, admit that there is still a way to go before they issue renminbi-denominated paper. Technical issues relating to accounting standards, ratings and taxation first need to be cleared up, says Juan Limandibrata at the ADB. He is hopeful that an early solution will be found and that the Bank can place a bond before the end of this year, though nothing is definite.
His counterpart at the IFC, John Borthwick, is also hopeful but agrees, "it is difficult to put a timeframe" on when things will kick in. He adds that, though the IFC has a certain tenor and size in mind, the specifics will be determined following consultation with the market. "We want to follow international best practices as much as possible," says Borthwick. "China is an important market for us. It has good potential."
One potential weakness is the lack of a swap market, which means that issuers will not be able to swap any renminbi proceeds into dollars. Although a drawback, it won't deter the ADB and IFC from tapping the market.
Observers have expected some development since the end of last year when the Chinese authorities finally gave the green light for certain supranationals to issue renminbi-denominated bonds. In December, the State Council granted authorization to the ADB, IFC and JBIC.
Then in February, the Chinese government published some guidelines concerning bond issuance by international development institutions. The authorities hope that placements by these entities would reduce the risk of fluctuating exchange rates faced by Chinese enterprises seeking loans from international banks.
For the ADB and IFC, a Chinese bond makes sense. The ADB is Asia's leading development institution. China is the third biggest shareholder within the bank. The IFC, meanwhile, also has close economic links with China through its parent, the World Bank. As important, though, is that both the ADB and IFC see a renminbi bond as part of their strategy to help develop local capital markets through a liquid benchmark transaction.
Last year in Asia, at least one of them, if not both, tapped the bond markets in India, Hong Kong, Singapore and Malaysia. And while other multilaterals, such as the European Investment Bank, are also active in the region, especially in Taiwan, the Manila and Washington institutions are paving the way in the local markets.
Indian first
In February 2004, the ADB issued its first bond in a developing member country, when it placed an offering in the Indian rupee market. (The Bank's previous local currency bonds in the region had been in countries that do not borrow from it.)
The Rs5 billion, 10-year transaction was the first by a foreign entity in India. It was also the first triple-A rated issue in the country. The money was raised so that the Bank could lend rupees to Indian private-sector borrowers that needed local currency. "Our loan portfolio in India is quite active so we kept the proceeds in rupees and on-lent them," says Limandibrata, who adds that the Bank makes about $1 billion in new loans to India each year.
So far, the bond's impact as a benchmark transaction has not been significant. But that's more because of adverse market conditions than any other reason, says Limandibrata. "The market turned negative shortly after we launched our deal. Investors, therefore, have been more focused on the short term." He is confident that when market conditions improve, the ADB's 10-year note will act as a reference point for other issuers.
Last year, the ADB also tapped the Hong Kong, Singapore and Malaysia markets. In June, the Bank simultaneously issued a HK$1 billion, three-year bond and a S$200 million note, also with a three-year tenor. The transaction was the biggest ever dual-tranche Hong Kong dollar and Singapore dollar issuance, and the first use by the ADB of the Singapore domestic capital market. The deals helped add liquidity, depth and diversity to the non-domestic AAA sector in both markets.
Ringgit bonds
The ADB then issued the first bond by a foreign entity in the Malaysian ringgit market, in November. The M$400 million, five-year note was more than six times oversubscribed. The transaction achieved broad distribution with institutional investors, such as insurance companies and pension funds as well as financial institutions participating.
One month later, the IFC followed suit with a M$500 million, three-year transaction. The big difference was that this was an Islamic bond – only the second ever by a multilateral, though the first by one in a domestic market. "We'd been interested in exploring this market for some time," says Borthwick. "Islamic finance is very developed in Malaysia."
The private-sector arm of the World Bank undertook a strong marketing campaign, including big investor presentations. "We did a very good job in introducing ourselves to investors who may not have known who we were," he adds. "About 30% of the bonds were placed outside Malaysia, so that was pleasing."
Looking ahead, both the IFC and ADB hope to return to the ringgit market soon, possibly later this year though there is no fixed timetable for either institution. "We are monitoring the market and are confident there will be cost-efficient funding opportunities some time this year," says Limandibrata.
Thai line
More immediately, expectations are growing that both will tap the Thai baht market. Certainly Limandibrata is hopeful of a transaction in the second quarter, although for both the ADB and IFC conditions in the Thai swap market are not favourable right now. "Market timing is the issue in Thailand," says Borthwick.
He adds that the market is quite deep with a number of mutual funds, pension funds and insurance companies active. In addition, the IFC has some experience of the Thai market through its partial credit guarantee facility that was launched in 2002. The multilateral provided partial credit guarantees of up to Bt3.375 billion for a TelecomAsia bond.
The ADB also plans to issue a Filipino peso this quarter. "It's designed to help funding for peso loans," says Limandibrata. Preparations, he adds, have gone well, and the Bank will look to raise up to Ps3 billion through a five-year bond.
The funding official says that investors should expect further local currency issuance by supranationals in the future. "Many countries in the region are developing their bond markets," he says. "If governments decide to open them up, then borrowers such as ourselves will benefit."
Key local currency transactions in 2004
ADB
Date Amount (bn) Currency Maturity
Feb 27 5.00 Indian rupee 10 years
Jun 1 1.00 Hong Kong dollar 3 years
Jun 1 0.20 Singapore dollar 3 years
Nov 5 0.40 Malaysian ringgit 5 years
IFC
Date Amount (bn) Currency Maturity
Dec 13 0.50 Malaysian ringgit 3 years
What to look out for:
ADB
Thai baht deal possibly in Q2
Philippine peso deal possibly in Q2
Malaysian ringgit deal possibly sometime in 2005
Chinese renminbi deal possibly this year but no definite timeframe
IFC
Malaysian ringgit deal possibly this fiscal year
Thai baht deal but no specific date
Chinese renminbi deal but no specific timeframe
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"We are monitoring the [ringgit] market and are confident there will be cost-efficient funding opportunities some time this year" – Juan Limandibrata