Supras: all avenues open as risk-free rate debates rage

Supranational issuers have had a wide variety of options for funding this year. A strong dollar market has offered plenty of chances to fund in size, while some dollar funders have returned to euros thanks to a favourable basis swap. Bank treasuries shoring up on Sonia assets have helped push sterling issuance to record levels, while markets as diverse as the Norwegian krone and Turkish lira have also found homes for supranational paper. The Sofr market in dollars has also started to develop, although unlike its sterling risk-free rate cousin Sonia, standards on rate calculation are yet to be agreed. GlobalCapital brought together funding officials at some of the world’s highest rated borrowers to discuss these topics and more.

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Participants in the roundtable were:

Flora Chao, global head of funding, International Finance Corp

Henry Coyle, senior financial officer, World Bank Treasury,
representing the International Development Association

Andrew Cross, assistant chief financial officer,
Asian Infrastructure Investment Bank

Guy Hart, head of capital markets and subscriptions,
African Development Bank

Jens Hellerup,head of funding and investor relations,
Nordic Investment Bank

Akinchan Jain, senior financial officer, World Bank Treasury, representing the International Bank for Reconstruction and Development

Isabelle Laurent,deputy treasurer and head of funding, European Bank for Reconstruction and Development

Richard van Blerk, deputy head of benchmark funding, European Investment Bank

Burhan Khadbai and Craig McGlashan, moderators, GlobalCapital

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GlobalCapital: How have conditions in the dollar market been so far this year, in terms of new issue premiums and spread performance?

Flora Chao, IFC: Our fiscal year started in July 2018 and we did our dollar benchmark at the end of that month, which went quite well. We were able to tighten a couple of basis points and price with no new issue premium. But times have clearly changed since, so as we end our fiscal year it’s more a question of what the rest of the calendar year will bring as we plan our new fiscal year’s dollar benchmark.

Spreads to US Treasuries and swap spreads have both tightened. Are they going to widen? I don’t think any of us knows with certainty. As our funding programme is smaller than some of our peers, we’re just trying to assess when would be a good time for us to issue our one dollar benchmark this fiscal year. We want to make sure we get the timing right.

Jens Hellerup, NIB: I’m surprised by how strong the market is. Look at the spread to Treasuries on our five year benchmark a month ago. We went on screens and suddenly swap spreads went in one more basis point. But we still got a $2.3bn book, were able to tighten by 1bp and investors were still there. And able to price five years at 8bp over US Treasuries. Then it performed right after. It’s amazing. With swap spreads now even tighter it’s difficult to be at the same level. But all deals, short and long, are still flying off the shelf.

Akinchan Jain, IBRD: This fiscal year IBRD had a programme of about $50bn-$55bn and dollars funded the majority of that. Conditions have been quite volatile. As Flora said, there have been some big movements in rates, but demand is as strong as ever. We issued a $4bn three year dollar benchmark last month that came at the tightest spread to Treasuries we’ve ever seen, about 5bp over.

We continue to see strong interest from both the domestic base in the US and overseas.

Henry Coyle, IDA: We sold our inaugural bond last year, a dollar benchmark, and through this year we’ve been more focused on developing in the market, so the dollar hasn’t been the focus. But it is very true that every time everything gets tighter we say, ‘this is the tightest’, but then it goes tighter still.

Guy Hart, AfDB: We’re planning two $2bn benchmarks this year alongside the benchmark euro transaction we did in March. The market was more conducive to the euro earlier in the year and we had a great opportunity to do a deal, so took that path. We’re tracking when to enter the dollar market, where demand remains extremely strong.

Swap spreads are the big issue for everybody and are driven by lots of factors, but they really pivoted around May when the whole outlook for rates changed entirely. That perception swung for lots of technical reasons — for example, lots of mortgage books hedging negative convexity positions amongst other things. We’re actively tracking the swap spread market very closely to see how it will evolve in the second half of the year.

I believe this will be the largest ever year for redemptions at $181bn, and the third quarter is particularly a very large quarter, with about $58bn-$60bn, so it looks like it’ll still be a seller’s market in the third quarter. We’ll see what the absolute levels will be based on swap rates, but I expect the market to remain very strong.

Richard van Blerk, EIB: The magic word is redemptions. There is strong demand across all funding markets this year but in dollar SSA markets there is also an imbalance between supply and demand: this is why this year we’re seeing Treasury spreads that are so narrow. Aki mentioned that World Bank is still seeing a lot of demand from US investors — we’re seeing that, at current tight levels, many US investors have lost interest for SSA spread product.

The imbalance comes from sizeable redemptions, leading to negative net supply and a substantial boost of demand as in particular central banks have stepped up their activity in dollar SSA. We have done three dollar benchmarks year-to-date, with the first one, a five year, coming around 18.5bp over Treasuries while the third transaction, our second five year, was issued at 9.7bp over Treasuries. Since that transaction, however, market sentiment has changed: swap spreads are very low and are negative for most of the curve. With swaps spreads turning negative, the SSA sector has had a difficult time keeping up with swaps spreads so secondary levels have moved somewhat wider, both versus swaps and Treasuries.

Looking forward, however, we expect the imbalance between supply and demand to continue to remain supportive for dollar SSA, especially as we are moving into a quieter summer period with less primary activity.

Isabelle Laurent, EBRD: Like IFC we’ve got a smaller programme, of €9bn this year. We’ve been very keen to do a dollar benchmark, but it’s been very hard to find the right moment. Part of that is trying to understand if spreads will consolidate at these levels.

Some factors pull in both ways. There was some corporate issuance that put pressure on spreads to come down. But equally there have been some changes in repo that were potentially pushing them up. That made it very hard to say, ‘this is the moment’.

Then we started seeing successful issuance with good demand, but as spreads came down many of these bonds widened. I was expecting that the bonds would widen if spreads went up. Therefore we didn’t want to put our one of two annual benchmarks into an environment where it could potentially go wider. That makes it very difficult to know when to come. It’s not as though there were big secondary flows with investor selling when the bonds widened. Indeed, there’s even ongoing demand.

That said, in the public dollar markets, we’ve raised almost $1bn this year with four transactions that were taps of three floaters. So we’ve been present, but for a new benchmark, we’ve been on the sidelines, hoping imminently to be able to do it.

Timing issuance seems much easier if you have a huge programme with several benchmarks a year, as investors are likely to be less focused on each deal, if some widen and others don’t.

SSABut if you’re bringing what’s potentially your only deal of the year, it makes it incredibly difficult if you print a deal then it widens. So like IFC we’re not sure where things are going. We’re longing to feel confident that levels are consolidating and we can do a benchmark, or if they’re going wider then we can sit and wait for the opportunity.

Andrew Cross, AIIB: We’re the new kid on the block — our inaugural bond came in May. The market appears to be in very rude health, because EIB came a day or two before us that week and despite that, AIIB’s transaction was vastly oversubscribed. 

We’re also building our investor base, whereas the other issuers round the table have very established investor bases. All their credit work has been done, the lines are in place, there is 20, 30, 40 even 50 years of knowledge among all the investors. AIIB is starting down that same traditional track of similar investors, but the numbers we have are relatively modest at this time. Despite that modest number, we still had a vastly oversubscribed transaction, priced from our perspective at a very attractive level. That argues that the market that week was really healthy.


GlobalCapitalAs a new issuer, how will you manage the timing challenges Flora and Isabelle mentioned?

Cross, AIIB: We have a prefunding programme for this calendar year of $5bn. We’ve done $2.5bn, so have a good four or five months to do the rest.

As a new issuer moving from one-off to a shelf, which introduces the process of quarterly accounts, you end up with issuance windows that are almost predefined for you. Regulatory, accounting and audit reasons limit the number of days you’re allowed. Not every week is available.

Then there are the factors everyone deals with. There might be very large redemptions, but there are other issuers coming into the market. As a community you’re trying to be respectful for what makes sense for the asset class as a whole. That’s particularly true for this asset class because we’re intergenerational and the decisions that we make can’t just be technical. They have to be thoughtful over a much longer period of time.

But as we’re new, we don’t have the same funding programme or demands as others. We don’t have a legacy of debt and redemptions. You could argue we have a bit more flexibility.

Hart, AfDB: The summer window is fairly well-defined in that it typically starts after the August bank holiday in the UK. As you don’t want to force yourself into a corner towards the end of the issuance year, which is about mid-November, that leaves 10 weeks or so; and, during that period there are Chinese holidays, for example, at the beginning of October. So some of these windows become semi-imposed on you.

And you have to be very sensitive of your peers’ timetables because nobody wants to crash two deals on the same day if they can avoid it, for the sake of the MDB community and of those specific transactions.


GlobalCapitalHas IDA been going through similar work to build its investor base, or has the World Bank name recognition made it a different process?


Coyle, IDA: We do have the infrastructure in place and investor connections that the World Bank Treasury has built over the years that we benefit from, but of course there was a lot of outreach to do and we still have more to do. To prepare the launch of our short CP programme recently, we introduced IDA to new investors, building the name recognition, and to open credit lines. It’s something we continuously do.

We’ll have trades to do this year, but we’ll most likely focus more on the smaller benchmarks and currencies. One differentiator for us, particularly from a World Bank perspective, is that IDA has an SDR balance sheet, not a US dollar balance sheet. So, we can look at it slightly differently and it’s important that we develop the breadth and scope across investor groups interested in those different currencies.

We’ll look at smaller trades in dollars too at some stage, but first we will build out the other markets in a more systematic manner.


GlobalCapitalWe’ve talked about the demand coming from dollar redemptions, but what about the supply side? Are funding targets different to last year?


Hellerup, NIB: We have slightly smaller needs than last year. The main reason is because the lower yields have meant we’ve got collateral back from two-way CSAs. Another reason is we did a little more on the funding side last year. Normally we do about €6.5bn, but this year we’ll probably be €1bn smaller.

Van Blerk, EIB: The EIB’s funding programme is lower as well. Last year we had a programme of €60bn, while this year it is €50bn. Our funding programme has gone down as we are seeing less demand for EIB lending from the UK. Three years ago, we were lending annually some €7bn into the UK. A year later, that amount halved and this year, it is less than €1bn. With Brexit continuing to hang over the market, the uncertainty is simply keeping business investment sidelined, so while the EIB remains open for business in the UK as long as it is one of our major shareholders, there just aren’t many new projects around to co-finance.

Furthermore, after a few years of extended activity to help boost the European economy after the European sovereign debt crisis, our shareholders asked the EIB to moderate its pace of activity back to pre-crisis levels.

Besides lower SSA funding needs, however, SSA supply in dollars is mostly lower due to developments in the euro/dollar basis that has made dollar markets for many SSA issuers less interesting from a cost perspective. Historically, dollars has been always the cheapest source of funding for most SSA issuers but with quantitative easing in Europe squeezing secondary curves in and positive developments in the dollar/sterling basis, relative cost curves for SSA issuers in dollar, euro and sterling funding markets have now broadly converged. As a result, most SSA borrowers will not issue as much in dollars as they used to, with many having increased their presence in sterling and euro markets this year.

SSALaurent, EBRD: All the MDBs’ programmes increased to be countercyclical from 2009/10 onwards. Many of us have, or are reverting to, historical annual funding amounts, while some, like EBRD, are maintaining the levels. We’ve moved from doing €4bn-€4.5bn of new investments a year, with a borrowing programme that was relatively small at €2bn-€3bn a year, to lending €8bn-€10bn a year and then increasing the amount of issuance commensurately.

We’re doing €1bn more this year than last year because we’re maintaining the levels of investment. The original idea was to be countercyclical, invest more and then go back to the old levels, but actually we’re continuing to find a significant number of projects. And a lot of our shareholders in the G20 are saying the MDBs need to be doing more. That’s to fund all these infrastructure projects, sustainability projects and all the other areas that we would like to focus on.

Chao, IFC: At IFC we have a fairly new strategy of focusing on creating new markets in the poorest countries of the world and in fragile/conflict states. This strategy takes time to build and grow. We have to start upstream, work with regulators, and so our colleagues on the business side are focusing on developing these markets, and then the volumes will come.

With this upstream focus, loan disbursements have been lower than anticipated this fiscal year, so our funding programme has been lower as well. We had an authorisation of $14bn and with two weeks left of the fiscal year and no more public trades planned, we’ll have completed the year with a little over $11bn.

Jain, IBRD: Pre-crisis we had a $25bn-$30bn programme, then after 2008 it stabilised to $50bn-$60bn on average. We think that’s a sweet spot because it enables us to access different currencies but also different points within the curve for different currencies. It means we can offer different types of products to different investors throughout the year.

Hart, AfDB: Our programme is a shade smaller than last year, about $7.3bn, down from around about $8bn previously, so nothing material. But pre-crisis, our programme was considerably smaller, jumping in size from 2009 onwards.


GlobalCapital: Has the new level of the euro/dollar basis encouraged more dollar funders to print euros?


Jain, IBRD: The basis has supported more issuance in euros when traditionally we might have issued mostly in US dollars. In the last few months we’ve been able to access the euro market twice, with 10 year and 16 year bonds.

Hart, AfDB: We have an SDR balance sheet, and some euro disbursements, so we have natural needs for euros. Given the size of our programme we can choose to nuance timing a little bit.

SSAThe basis is relevant to us but it doesn’t typically drive our decisions as we expect to do two $2bn benchmarks and one €1bn benchmark, as well as some opportunistic issuance. That’s getting towards the bulk of the programme, given the amount of MTNs we use to subsidise our overall funding cost.

Chao, IFC: We’ve been monitoring the euro market, but have found that currencies like sterling and Aussie dollars worked a little better in terms of ultimate pricing earlier on in our fiscal year.

With the basis where it is now, maybe there will be more opportunities in our new fiscal year. The green aspect of European investors is something we are looking at as well.

Hellerup, NIB: We need euros on the lending side so the basis is important when we do our dollar funding. We’ve been doing dollar benchmarks since 2002. When you’ve been in a market and made your name, you need to come back. We will continue with dollar benchmarks and if it costs a little bit to keep our name recognition then we are happy to pay that. Of course, if it’s like 15bp difference then we need to rethink that strategy, but at the moment we are committed to at least one dollar benchmark a year and hopefully two.

Laurent, EBRD: This year we did our first issue of significant size in the euro market since the EBRD was founded, more or less. We’re structurally long euros and short dollars because although half our lending is in euros, a third in dollars and the remainder in local currency, the large reserves we’ve built up since the beginning of time covers more than the lending, especially when we take account of our treasury liquid assets, which are generally held in dollars, as you can get a much greater diversity of names through holding them in dollars.

So we tend to swap funds into dollars, although we do some things in euros. That makes it very difficult to do benchmark euros. Also, as investors ideally would like euros that are €2bn-€3bn in size, it’s very hard to do so much of our €9bn programme in one go.

So we generally steer clear of euro benchmarks, but at the very beginning of the year when the market was barely awake we did our first green bond in euros. It was for €600m and we’ve since tapped it to around €915m, which we’re very pleased with. We’d been speaking for quite a long time to a lot of green investors in Europe who ideally wanted euros, so it was very nice to find the opportunity to go in and do it at levels that look good from a euro and dollar perspective, and service these investors.


GlobalCapital: As IDA explores new markets, are you finding a lot of interest in euros and other currencies?


Coyle, IDA: Yes, we’re seeing interest from all sides and for all currencies at the moment. But we are being very strategic in how we will roll out the funding programme. This will serve IDA and investors well in the long run.

But I do think that as Flora said, earlier in the year, sterling was a good currency for issuance for several different reasons. So, for issuers around the table it’s probably at double what it was in prior years. Is that going to continue? That’s also going to weigh on our decisions.

Demand is coming from all sectors and we’ll try and fill it at some point. But we must also factor in what makes economic sense now and in the long run.


GlobalCapital: Has sterling kept up that pace from earlier in the year?

Hellerup, NIB: The last couple of years have been hugely generous. In January last year we did a £500m deal, then in January this year we did another £500m. There are still some deals happening but it’s in January that there’s a big rush in the sterling market.

Laurent, EBRD: We’ve started to see some fixed rate issues and other transactions. At the beginning of this year there was a lot of focus on sterling floaters in Sonia. That’s partly because the regulators have been pretty robust in expressing their view that people needed to switch from Libor to Sonia. A lot of the UK banks and building societies have been responding to those calls. Demand has therefore been very strong for Sonia and still is. The only problem is that it tends to be almost exclusively to that investor base.

Since the global financial crisis the rating agencies have had much clearer methodologies. One area they’ve focused on was dependence on wholesale markets. Excluding EIB as it now has access to the ECB as a lender of resort, the rating agencies recognise that the rest of us with global shareholder bases are unregulated entities and no central bank is going to necessarily give us access to liquidity.

They’re therefore focusing significantly more on liquidity, which is not just about what assets you hold — can you liquidate them, when do they mature, what rating they are — but also about your access to funding from real money investors from a global investor base, so that you’re not disproportionately focused on any one market.

That leads to a much more interesting question about where your funding is overall. We’d always tried to ensure we had investors of different types in different geographies, but there wasn’t as clear a focus on this by us or the rating agencies.

It’s become much clearer in the methodology. Even if you could do everything via Sonia-linked floaters to the domestic bank investor base, which may be possible, especially when they’re switching their assets to risk-free rates, do you want to do everything that way? If you do, you may not be able to demonstrate you have access to a wide investor base.

Chao, IFC: We did a review of our investors for the fiscal year up until today. We have over 50 new investors and a big portion of those come from the UK, specifically bank treasuries, building societies and the like. There’s an element of investor diversification, but as Isabel said there is now a heightened focus internally and from the rating agencies on the types of investors in addition to just diversification. Is it a sticky investor? Is it fast money? We look at this when we’re doing allocations and on a static basis too. It’s good to have new investors, but you want to also make sure you have real money and central banks involved to the extent possible.

Van Blerk, EIB: EIB has been very active in sterling, in fixed and floating format, for many, many years to fund its sterling assets and because of the investor diversification it offers towards the rest of the funding programme — with roughly two-thirds of EIB’s sterling bonds selling into the UK domestic buyer base. This year, that number has actually increased to 75%-80%. We think the success of the Sonia product might be the reason for that growth. This year, EIB has funded around 10% of its total funding needs in sterling, so €3.5bn equivalent, and about half of that was in fixed rate format with the other half in Sonia.

Laurent, EBRD: It’s interesting that your traditional bonds went to mostly a UK investor base. When we did our sterling fixed rate bonds, the investor picture looked very much like for our dollar globals. A lot of central banks that came into the dollar deals would also come into the sterling. Although we weren’t as active in the sterling market.

Van Blerk, EIB: This is a very good point. Central bank demand for sterling is a function of whether sterling is in vogue as a reserve currency or its exchange rate. It is true that our placement into the domestic investor base in sterling this year went up, not only due to the rise of the Sonia floaters but perhaps also due to a decrease of central bank interest for sterling. Whilst traditionally we might see 10%-20% of our sterling bonds go into central banks, this year, demand from that side has been much lower.

Hellerup, NIB: We saw something different, because when we did our £500m bond in January, the investors were nearly 99% domestic. And that was a fixed rate.

Jain, IBRD: We’ve found that some of the local investors used to swap fixed rate issuances into Sonia. Being able to issue bonds linked to Sonia makes that more efficient, so we see more demand there. Some of the demand may also potentially originate from ring-fencing requirements for some banks. On aggregate, we think that increased the pie overall.

SSACoyle, IDA: What has also changed in sterling is that it was typically busy early in the year — typically only in January and early February. Whereas now, if you look through from the end of last year until two weeks ago, when the World Bank issued the dual tranche bond, it has been almost continuously open, despite what’s happening in the background. There’ve been maybe two, three days at a time where the issuance window closes. But that’s about it.

Laurent, EBRD: Sterling has been remarkably resilient to political ruptures. It’s rather amazing — it doesn’t close when you see news that you’d expect to be the trigger for it to sit on the sidelines.

I also want to pay tribute to EIB’s pioneering work on Sonia. It’s a remarkably difficult role to play, pioneering these transactions. It doesn’t mean everything’s perfect when you first do it, but it’s a very important role. It’s been fantastic — we’ve seen this market develop hugely.

EIB’s Sofr deal, that focused on compounding overnight, is also really important. We need to see more of those, and not just deals using the average, because the market has to converge with the swaps market.


GlobalCapitalDoes everyone agree that the compounding model is the way forward for Sofr?


Chao, IFC: Yes, along with the five-day lookback as it aligns with the Sonia calculation methodology.

Cross, AIIB: Yes.

Hart, AfDB: Consensus is definitely growing.

Laurent, EBRD: The Sofr swaps markets are compounded overnight, so it seems less likely we’ll end up with a bond market with a different convention. They’re going to have to converge.

Second, the average makes no sense because every quarter, you lose a few days. That’s important because the Sofr market is based on repo, so there are spikes at the end of every quarter. Potentially losing all those spikes in every single period cannot make any sense.

In the compounded overnight, you get the rates for those days, but in the next coupon period. Then you lose four days at the very end of the bond’s life. But that seems more functional than having none. With the day lag, you have to take account of being able to tap a deal, being able to trade in the secondary market and know what your accrued is. Can we narrow that? Maybe, but we need to think about all those things.

People are experimenting. We’ve seen some bank issuance that works differently and that has every day of the period but pays later. But again, how well that’s going to work with secondary trading, knowing the accrued, or tapping, remains to be seen.

We’ll have to see how all these issues pan out. Maybe we’re not at the perfect spot yet, but in terms of averaging versus compounding, the deficiencies of averaging make no sense, to my mind.

SSAVan Blerk, EIB: Maybe I can play devil’s advocate. The EIB did its first Sofr trade in November and as our funding needs are longer, we wanted to look at a three year Sofr. We thought bank treasuries would be the investor type most interested in that tenor and as they are already operating their day-to-day cash effectively on a compounded basis, using a compounding daily coupon seemed to make most sense.

Having said that, the Sofr market was seeing only much shorter tenors, up to one year, before our transaction. The US housing agencies were doing a number of three to six month transactions in billions of dollars. There seems to be sizeable demand for Sofr in these tenors and those trades have been quite successful. In fact, in terms of volumes, you might argue that, actually, the averaging method has been more popular.

We understand that the money market funds that were buying these short-dated Sofr floaters knew the averaging coupon well from Fed Fund floaters, so using averaging on Sofr meant that investors knew they would not have any issues around booking and valuations. Isabelle’s point about compounding being better aligned with the swaps market is absolutely spot-on but the short-end buyers are not typically active in these derivatives markets so they do not see any need to somehow align to those markets. I guess it is therefore not impossible that the averaging and compounding models will live side by side for quite some time to come.

Chao, IFC: Yes, you could have a bifurcation of the market, with averaging for shorter dated Sofr trades and compounding for longer dated Sofr issuances.

Jain, IBRD: The key driver when we issued our first Sofr bond in August was investor demand. It was about a week after Fannie Mae had done the very first issuance, which was on an averaging format and built on the Fed Fund rate format. A key consideration for us was to be able to settle on Fedwire, which is the preferred choice for many US investors.

Most of the issuance, if you include the banks as well, has been on an averaging basis. We’ve been watching to see how it evolves and if the market moves to compounding, and may consider issuing in that format next time.

Laurent, EBRD: But it’s a systems issue. They’re used to averaging, so it didn’t need a systems change. That’s an entirely different topic. I’m not saying everything is going to work one way or another way in the future. But I don’t think that the Sofr convention will ultimately, for bond issues, be an average because we’re going to have term floaters and the idea that you can simply miss out four days in every period is definitely sub-optimal.

For the funds you’ve talked about, that traditionally bought Fed Fund floaters and use averaging, of course it makes more sense just to supplant one with the other. But it’s not like the whole of the dollar floater market is going to be one year or a short market — it’s going to be everything that it used to be.

Jain, IBRD: It’s not perfect, but one of the ways the GSEs have tackled that problem is by having much shorter lockout periods, just a day or two.

Laurent, EBRD: It’s still sub-optimal.

Coyle, IDA: Even with all these committees discussing and preparing it, such as the ARRC, it’s still a very open discussion. But there are definitely two trains of thought — one for the short end onshore market and the other for some of the international borrowers.

Hart, AfDB: It’s quite natural at the early stage of a market’s evolution that investors will be the main drivers. We did the first green Sofr-linked transaction, which was driven by the City of Chicago, who had promoted the idea while on a roadshow. They wanted to promote their SRI investment initiatives, but said they’d also like to do it Sofr-linked and their preference was to use the averaging method, so that was what we went with. It wasn’t benchmark size, but it has been tapped since, and we are getting repeated requests to tap it further. So yes this will be driven ultimately by the derivatives and swaps market and, of course, the investor base.

Laurent, EBRD: One of the difficulties with compounded overnight is it’s actually quite difficult to find what the rate is. Having just paid out the first coupons on our Sonia-linked bonds, we realised that the paying agent, the swap counterparty, Bloomberg and our own systems — which are not homemade, they’re used by lots of people — all produced different amounts, from which you have to back out the rate.

The reason there were different amounts was because of the way the formula works in the swaps market, which is also used in the bond market. You compound each day and you only round at the very end. But the systems were taking rates every day, then doing some rounding inherent in the systems. They might round to five decimal places, or four, or eight, or 12, so that’s why they all produced slightly different results.

For compounding to take off, we need the official institutions to start quoting the absolute rates for one month, three month, six month and so on. Then people can apply a rate, rather than trying to back out a rate from an amount. That will help investors that have been sitting on the sidelines because their systems can’t work out the rate. It will also help for us all to agree what the correct rate is before we scale up hugely.

SSAChao, IFC: Which rate did you end up with?

Laurent, EBRD: None of them — none were correct. We had to do it on an Excel spreadsheet, putting in the rates then rounding only at the end. That gives you the correct answer. Some banks already have products that will help people use the rate. But that’s not the way it’ll work going forward, with people referencing X, Y or Z bank’s screen. It’ll need to be on an official page.

Cross, AIIB: Did you then have to make manual changes to the various systems? From a controls perspective, was there some sort of reconciliation you had to do internally?

Laurent, EBRD: No, we agreed what the payment should be beforehand with the paying agent and swap counterparty and then that was what was paid. We then put that correct rate into our systems. We’re not talking about vast differences between the rates, but these differences are important and we need to have the mechanisms for doing it. Not everybody can change their systems quickly.

Van Blerk, EIB: I couldn’t agree more. For EIB’s first Sonia-linker, the funding team did a test trade of £1m that two of the prospective leads for the actual Sonia transaction bought. We then waited for the actual coupon payments to see if there would be any complications. Unfortunately, we encountered some of the same issues as Isabelle describes where swap counterparty, calculation agent, our own payment team and the booking systems used were not immediately seeing the same amounts.

One of the larger investors in the first Sofr bond contacted us directly as well to reconcile the short first coupon of that bond in advance.

Laurent, EBRD: Yes, the systems are not designed to operate in a way that they just wait until the very end of the period, take the numbers as though they existed in abstract, and then do the rounding. So there is no other way of doing it.

Coyle, IDA: At the moment we’re talking about one or two transactions for each issuer, but if you try to scale this up, automation will be key. Using spreadsheets to manually change the rate will not be feasible anymore.

Laurent, EBRD: That’s why we need the official sector to publish the rates, at least until people can make system changes throughout the market. And if you take account of all the regulatory changes they’ve got to change their systems for, including regulatory changes, Brexit, and other things, people aren’t necessarily going to be able to make the investment to change them quickly.

Jain, IBRD: We had similar challenges with our Sofr bond, even though we used an averaging methodology. In the Fed Fund universe, you apply Friday’s rate over the weekend. But with Sofr, to capture the repo rates for the weekend, we had to use Monday’s rate for the weekend, because that was more representative of the repo market.

Chao, IFC: Did EIB do a test trade for Sofr as well as Sonia?

Van Blerk, EIB: No, for the Sofr we used broadly the same method we had used before on the Sonia so we did not see the need. Having said that, some coupon reconciliations were also required on the dollar transaction.

I would not consider these sort of reconciliations a control problem. In the documentation of these transactions, the formula used to calculate coupons was present and has remained uncontested — the reconciliations were about the actual payment amount that practically represents the formula, so it is more about rounding, using the correct number of days and so on.


GlobalCapital: What have been the best areas to fund in the MTN and niche currency markets this year?


Hart, AfDB: As part of our mandate, we’re very keen to promote as much issuance linked to African currencies as we can, but we naturally get demand for other currencies.

The Turkish lira has been a source of great demand for us — it almost doesn’t seem to be niche any longer. It has been constantly in demand since the move in Turkish rates last year, and has been a source for a lot of our issuance. We’ve also seen a lot of Indian rupee. They’re the driving two for us this year, although we have a bulk of others in smaller volumes.

Van Blerk, EIB: I would highlight the Norwegian krone. For quite a few years now, we have tended to issue a number of krone deals per year out of reverse enquiries but this year we have already issued Nkr14bn, or €1.4bn equivalent, a sizeable amount. About half goes into the domestic investor base, while the other half seems to go to European investors with an interest in the currency.

SSAHellerup, NIB: I would agree that the Norwegian krone has been good, and also the Swedish krona. That’s good for us because we don’t need to swap them as we have natural needs. Most of our Norwegian issuance has gone to domestic borrowers, but of course there’s also been some international demand. Surprisingly the Hong Kong dollar market has also worked quite well for us, where we have seen good demand from local investors.

Chao, IFC: For us it has been the frontier markets. The newer ones we’ve issued in were the Kazakh tenge and Uzbek so’m. Some of those proceeds went to projects onshore and some of it was swapped.

We’ve also issued green bonds in Indonesian rupiah and Philippine peso. The combination of being able to issue in a more niche currency and having it in green format was quite important for us.

Cross, AIIB: We’ve only issued in dollars so far. But if I look around the table at this family of organisations, our funding path is going to be very, very similar to theirs. There will be Uridashi, MTNs, Kangaroos, Kauri, Maple — as those markets make sense, develop and grow, we’ll look at them. We’ll also look at sterling and euros, which will be driven by swaps. I don’t think we’ll be doing anything particularly unique that differentiates us from a well-developed funding programme.

One aspect that will be a real focus is local currency. Not so much for arbitrage funding, but local currency for funding our investments in the region and investments that have a connection to the region. It’s very clear from the board and from our colleagues on the investment side that the ability to provide local currency is a real need.

We have the same sort of funding advantages in dollars and hard currency that everybody round the table does, but our assets are all going to be infrastructure. Many of those will have a very, very significant local currency component, and if they’re cross-border, it’s still cross-border into other very significant local currencies.

Our business model is going to be about making, hopefully, a constructive contribution to local currency in the way that EBRD and IFC, for instance, have led.

Jain, IBRD: It’s the same for us. Part of it is to meet investor needs, but also to develop local capital markets in our member countries. In any given year, we issue in more than 20 currencies. The main ones this year have been Indonesian rupiah, the Indian rupee has been quite popular, and also Brazilian reais.

Laurent, EBRD: We’re the same — we’ve done a lot in the Indian rupee, Indonesian rupiah and Turkish lira. For green investors it’s been the Norwegian krone and Swedish krona. We’ve also done a lot of local currency for on-lending, very significantly in the Kazakh tenge, but also in many other currencies.

Our frontier investor market has grown and sometimes they take bonds denominated in the local currency, but often that’s not a currency that is acceptable as a denomination currency in the international clearing systems. In those cases it may be a synthetic trade payable in dollars, say, that can still be used in on-lending. That’s very, very important for those of us that are trying to mobilise in some of the most difficult currencies.

We see Azeri manat, Uzbek so’m and Tajik somoni, so lots of really good demand. Maybe that’s the benefit of low dollar rates. Counter to all the drama of trying to work out when we can do our dollar benchmark, the good news is that it really has driven greater demand for frontier currencies that are very important for our on-lending.

Chao, IFC: That’s a good point. We did a Cambodian riel-linked bond recently — that was a first for us. It was one example where the investor preferred to have the denomination in dollars. But we were still able to bring it into the country and provide the lending.


GlobalCapital:AfDB brought the first ever social bond in the Norwegian market this year — will that format attract more interest?


SSAHart, AfDB: That deal was driven by an investor enquiry for our name and we built it around that. It went to multiple investors, but about 30% went to that initial investor. We did it at the same time as a green bond in Swedish kronor.

It was mainly domestic demand for the Norwegian part. The lead manager has told me that since that transaction, they’ve had a lot of enquiries in that format for other names from our peer group.

Hellerup, NIB: Sweden started its green market 10 years ago, but there’s no doubt that the other Nordic countries are getting into this also. They’re a little bit behind Sweden, but you see more and more interest in Denmark, you see it in Norway, you see it in Finland. These investors are getting much more into the green, social and blue bond markets.

Hart, AfDB: There are many, many new investors, particularly specialist investors. That’s particularly so in the northwest Europe and Scandinavian region. We get many new investor names in all our transactions in that format, as I’m sure everyone else does.

Jain, IBRD: We are the treasury manager for another entity called IFFIm, the International Finance Facility for Immunisation. IFFIm recently has had a pledge from the Norwegian government and so we were recently in a roadshow in the region to see if we could issue a bond that fully matches the inflows IFFIm’s going to get from the government. The reception there was quite positive. There’s a lot of interest in ESG overall, and the AfDB’s deal was very well received.


GlobalCapital:Some borrowers have been printing thematic SRI bonds, such as World Bank’s recent bond to raise awareness for SDGs 6 and 14 (clean water and sanitation, and life under water). Are such issues likely to grow in popularity? What other developments have there been in the SRI market?

Hellerup, NIB: In January we issued the first Nordic-Baltic blue bond, as some Swedish investors would like to see some impact from their investment. They are related to the Baltic Sea. A five year bond of Skr2bn ($214.9m) was issued. The more than 20 investors participating are conscious of the challenges affecting the Baltic Sea area, which verifies the interest and acknowledges NIB’s work within water and environmental protection.

The general green bonds will be the main driver of the market, but within the NIB environmental bond framework we have the opportunity for specific themes, which we are happy to issue under if we can find the assets and there is a special need.

In the SRI market there has been significant development during the last 12 months, the latest being the EU taxonomy and EU Green Bond Standard. Also, the Green Bond Principles have introduced a guidance handbook, a handbook on a harmonised framework for impact reporting and an advisory council. 

Van Blerk, EIB: The key objective of green bonds is to focus attention on the underlying projects financed, thereby providing a robust and replicable prototype for the channelling of financial market flows towards the fight against climate change. The clarity as to what qualifies as green or sustainable, as well as the measurement and reporting of the impact of the associated investments, are the key pillars underlying use-of-proceeds bonds. It is the substance behind the label rather than the label itself that counts.

We have two products — Climate Awareness Bonds (CABs) and Sustainability Awareness Bonds (SABs). While CABs have a focus on climate change mitigation, SABs cover a range of environmental (beyond climate) and social objectives, set in line with the emerging EU regulation in this area. This approach permits the EIB to capture a wide range of activities under a single umbrella — the SABs in particular — as long as these activities can be proven to have a substantial impact. The scalability of the approach on one hand, combined with the rigour of our administration and reliable reporting on the other, has been appreciated by the investors. And the initial focus of our SAB has been water projects — so quite blue too.

Cross, AIIB: Sustainability is at the core of who AIIB is as an institution. The use of proceeds language in our prospectus mentions that the net proceeds from the sale of the notes will be used in the general operations of AIIB, which are to foster sustainable economic development, create wealth and improve infrastructure connectivity in Asia by investing in infrastructure and other productive sectors. Such investments are subject to AIIB’s operational and financial policies, including policies addressing environmental and social sustainability, as documented in AIIB’s Environmental and Social Framework.

This framework consists of an environmental and social policy, environmental and social standards as well as an environmental and social exclusion list. It requires stringent screening and due diligence to take place before approval, resulting in the design of risk mitigation techniques to minimise environmental and social impact. AIIB is in the unique position where this framework was put in place at the very beginnings of the organisation and it is therefore in AIIB’s DNA.

Laurent, EBRD: There is a marked difference between a ‘blue bond’, which is essentially a green bond that is focused on water projects, and is issued in accordance with the GBPs, and SRI bonds, which may not conform to all core principles of the GBPs. As MDBs can be said to be ‘impact investors’ by definition, and to have processes that ensure integration of ESG considerations in their investment decisions, everything they do could come under an SRI bond. Having said that, and especially with new regulatory pressures, it is clear that investors are looking for greater reporting by issuers on environmental and social risks as well as the benefits of their investments, and this will likely bring both types of issuance closer together.

Hart, AfDB: From the perspective of theme bonds, the AfDB is very fortunate that our operational priorities are clearly defined by our ‘High 5s’ initiative: ‘Feed Africa’, ‘Light up and power Africa’, ‘Integrate Africa’, ‘Industrialise Africa’ and ‘Improve the quality of life for the people of Africa’. We have continuous demand for these themes with a large majority of this coming from the Japanese investor base but also from many other regions, notably Scandinavia.

Among these we have issued in Indian rupees, Australian dollars, Canadian dollars and Swedish kronor. Thematic SRI bonds have always been a great instrument for investors who wanted to be able to communicate SRI strategies to their end investors. The interest and themes are growing exponentially, in part helped by the wider use of the Sustainable Development Goals as a way to report on impact.

As these thematic SRI bonds grow, the sophistication from the investors who demand them also grows, and we have already started to see investors requesting an alignment of these instruments with the Green and Social Bond Principles, to make sure that there is a direct transparent link between the money raised and the impact reported on specific projects funded by each of these bonds. If this trend continues, it is likely that these thematic SRI bonds will no longer be a niche product and will instead become part of the mainstream.

Chao, IFC: The breadth of issuers looking to issue green will continue. EM issuers in both the financial sector and the real sector will issue more in green format. IFC is encouraging this, having invested in two funds focused on emerging market issuers — the Planet EGO fund managed by Amundi and focusing on financial institutions, and the REGIO fund managed by HSBC Global Asset Management focusing on the real sector.

Transition bonds are also a hot topic of discussion as recently seen at the ICMA Green Bond Principles AGM.