Issuer: World Bank
Amount: $30 billion
Launched: April 15 1994
The World Bank seems intent on living up to its title. Gone are the days when the name was synonymous with monolithic global bonds, conservatively structured in mainstream currencies. The bank's borrowing is now global in the true sense of the word. Sixteen different currencies have already been issued off its global multicurrency note programme this year.
As Andrew Dell, assistant director of emerging market syndicate and head of MTNs at ING Barings observes: "Over the last 18 months there has been a huge shift in the bank's funding policy. The emphasis is now on flexibility and diversity, in currencies, structures and size of issues."
The World Bank's reliance on global bond issues has declined significantly over recent years. In 1995, more than $6 billion of the $8 billion the bank borrowed in international bond markets came from globals. Last year it was $2 billion from a total of $14 billion. This year to date it is only $500 million out of $11.5 billion.
The new-look World Bank has moved much closer to the kind of arbitrage-driven, opportunistic use of its programme that, in the past, the market has associated with other supranational borrowers such as the International Finance Corporation (IFC). Having issued over 70 deals off its programme already this year, compared with just 13 for the IFC, the bank has stolen the limelight.
It also displays the characteristics that MTN dealers like to see in an issuer: speedy response, flexibility and regular borrowing. Its strategy bears testament to the market's increasing maturity, thinks Jane Guttridge at Morgan Stanley Dean Witter: "The World Bank's increasing use of MTNs is a measure of the growth and strength of the market, as well as their skill in harnessing its best attributes."
But if the growing use of the programme results from a new approach to the market, Gumersindo Oliveros, senior manager of the World Bank's capital-market operations, is playing it down. "It is largely because we have found good funding opportunities compared to other years," is his deadpan explanation for the increasing level of activity.
The programme was set up in 1994 with the primary intention of providing a platform from which to issue structured notes. But Oliveros agrees that: "In reality it has become much more than that." The bulk of the bank's medium- and long-term transactions are conducted through the programme, be they structured or plain-vanilla trades. Stand-alone bond issues are now the exception.
The rise of the World Bank's programme has coincided with the growth of the retail market in MTNs and, according to Dell at ING Barings: "There is a degree of magic about the World Bank name for a certain band of retail investors." Given the effective zero credit risk attached to World Bank paper, this is hardly surprising. In the current low-yield environment investors are being forced to take extra risk in order to realize decent returns. A common response has been to turn to emerging currencies, such as the South African rand and the Czech koruna, which still provide healthy double-digit coupons. If investors are taking currency risk they want minimal credit exposure. The World Bank is therefore the ideal issuer for these new sectors.
So whereas the bank used to focus on dollar, yen and Deutschmarks, the currency mix is now far more cosmopolitan. In a market that is aggressively swap-driven, this strategy makes perfect sense. "In pure dollar Libor terms, doing smaller deals in a variety of currencies gives the World Bank much better Libor levels than doing large, global issues in three major currencies," says Dell.
This year the bank has been at the forefront of development in the Philippine peso, Slovak koruna and Polish zloty markets, and has played a major role in consolidating the growing market in South African rand and Czech koruna.
It is a role that dealers appreciate. "The World Bank has always made clear its desire to enter new markets, but never at the expense of doing a totally professional transaction that works for them, works for investors, and that works for the dealers," says Guttridge at Morgan Stanley Dean Witter. However, this doesn't preclude the occasional misadventure. For instance, a Slovak koruna deal issued in May antagonized dealers, who complained it was seriously overpriced.
But in the vast majority of cases the bank's issuance in emerging-market currencies speeds the evolution of a market. Its debut in South African rand in July 1996 showed that the bank was not afraid to enter a currency sector at a time when other borrowers were wary. "The World Bank did its first rand issue during a period when the currency was volatile and very few issues were being done," says Greg Nottle, director at Hambros Bank, which led the transaction. "It was the right deal to bring to a subdued market, and effectively kept the market alive."
This year, the bank has been instrumental in bringing the Philippine peso to the international bond market. The Ps4 billion ($151 million) deal it issued in April was a great success, despite being narrowly beaten into the market by the IFC's Ps2.6 billion trade.
Dealers suggest that there is competition between the two supranationals, but Oliveros doesn't rise to the bait. "Opening a new market is a very important and delicate operation, and one wants to make sure that the transaction is well prepared, flawlessly executed and sets the right precedent for the market to develop," he says. "In our view, these considerations are much more important than who comes first to the market."
One characteristic that distinguishes the bank from other issuers is the depth of its market knowledge, says Dell. "Over a period of time they like to understand the market that they're issuing in, and work out the rationale behind it." Nowhere is this more evident than in the Italian lira market. Now the third-largest sector of the Euro-MTN market behind the US dollar and yen, it has clearly benefited from the bank's long-standing patronage.