World Bank tests web distribution

Amount: $3 billion

Type of issue: Five-year global bond

Launched: Launched January 18 2000

Bookrunner: Goldman Sachs

Which borrower was the first to conduct a bond issue over the internet? Fannie Mae, Freddie Mac and Ford Motor Credit all used the internet on large bond deals last month. The EIB conducted an online auction last year. The World Bank's claim to the title is that its $3 billion five-year global, launched last month but announced at the start of the year, was the first bond issue where the entire syndicate could sell over the internet. "This was the first comprehensive online deal," says Gumersindo Oliveros, the World Bank's director of treasury finance. He says not only could investors buy and trade the bond electronically, the bookbuilding process could be followed in real time by the issuer.

But the deal may also be remembered for claiming the first casualties of the age of debt on the net. Lehman Brothers received a small dent to its pride when, let down by the technical capabilities of its joint-venture partner Fidelity, it was demoted from joint bookrunner to joint lead manager. Fidelity, which had hoped to be an underwriter, was not included.

The bond took six months to prepare and choosing this first e-syndicate took a long time. When the World Bank began to explore the idea of an electronic bond offering last summer, it found different levels of interest and technological readiness among the leading investment banks.

The criteria for banks were stringent. Syndicate members could not just use the internet to inform investors about the deal; orders had to be taken electronically. "Our internet-based order-taking system is more than simply a mechanism which generates an e-mail message," explains Paul McWilliam, syndicate manager at Goldman Sachs. "It is an extension to our proprietary Syndicate Allocation Management system - or SAMs - that we developed and rolled out last autumn to improve the efficiency of the new issue process internally. After viewing a page which includes information on the issue, a preliminary prospectus and other information links, investors can place an order directly into our SAMs system. From there we will accept, confirm, decline and allocate each client's order automatically."

Oliveros believes most banks are within weeks of being able to distribute bonds electronically, not the case when the syndicate began. "We included in the syndicate every major bond house which was able to distribute electronically," he says. The internet-ready few, as well as Goldman Sachs and Lehman, were ABN Amro, Barclays Capital, Charles Schwab, Credit Suisse First Boston, Morgan Stanley and PaineWebber.

But the World Bank didn't only want to use the internet for primary distribution. "We wanted a full front-to-back platform," says Oliveros. "Investors had to be able to trade the bond electronically in the aftermarket." Goldman's WebET system, for example, allows its clients to trade the bonds in the secondary market and other syndicate members are expected to add their own trading platforms in coming weeks. "Our clients log onto the system through the internet, watch the prices update automatically and hit or lift whenever they choose," explains McWilliam. "The prices are generated by a pricing engine which requires very little trader control." Oliveros claims that 13 trades came through on the system the day after the deal was sold. "Secondary trading online, like primary internet distribution, brings transparency and a whole host of efficiencies," he says.

An important objective for Oliveros was to broaden the World Bank's investor base. "Internet distribution allowed us to penetrate pockets of demand that we otherwise would not have had access to," he says. "We wanted to reach middle-market accounts in North America such as the smaller pension funds, insurance companies and corporate treasuries that tend not to be as well covered by the traditional underwriters as larger investors. PaineWebber's contribution was particularly useful since it has good access to those investors; the joint-leads also did an excellent job in reaching out. We also wanted greater access to retail. That was why we turned to online specialists, appointing Schwab as an underwriter on the deal. This was the first time that Schwab participated in a global bond issue as underwriter and they were very committed to the technological innovation in this product."

Schwab wrote some 480 tickets, which, according to Oliveros, included some large orders. The syndicate brought in $100 million of demand from retail investors says Oliveros, a small part of the total deal but a first step in accessing a group of investors who are not traditional buyers of such credits. "Schwab's participation in the deal was an important first," says McWilliam at Goldman Sachs, which has an informal joint venture with Schwab. "It is the first time the company, one which is best known for selling equity to small retail investors, has participated on a deal of this kind."

There were supposed to be two online specialist brokers. Lehman has a link-up with Fidelity similar to Goldman's with Schwab, and the World Bank had planned to bring Fidelity into the deal. But Fidelity's order-taking technology was not ready when the composition of the syndicate was announced. "We had worked with Fidelity on this project and very much wanted them to be part of it," says Oliveros. "At the time of the launch, Fidelity couldn't offer that capability, although I believe they will be able to do that soon."

Places on the syndicate were coveted as approval for a bank's internet distribution capabilities. But this would have been a prestigious deal even if it had not been a groundbreaking e-bond: it is nearly two years since the World Bank has issued a deal of a comparable size in dollars.

The relative scarcity of World Bank dollar debt was one reason that the issuer did not have to pay a premium to ensure successful take-up of this first web distributed deal. "Because of the level of participation, we were able to price at the tighter end of expectations," says McWilliam. "The deal was priced at a couple of basis points over the Freddie Mac agency benchmark. And in the secondary market it has maintained its differential over the Freddie Mac bond. It was priced at 48.5bp over and is now trading at 46bp or 45.5bp, a couple back from the Freddie Mac bond."

Oliveros says: "This experience has opened up many possibilities with the integration of internet technology in bond markets. In the future internet technology will have a profound impact on both distribution and trading. And it can only benefit issuers and investors."