The World Bank has always resisted setting up rigid issuance commitments, priding itself instead on speed and flexibility. “We try to keep as alert as possible to changing investor asset preferences,” says Kenneth Lay, deputy treasurer and head of capital markets. The bank’s precise funding requirements fluctuate with its lending but with a predicted need of between $15 billion and $20 billion this fiscal year it can afford to leave itself more room for manoeuvre than other supranationals and agencies.
Lay explains: “We’ve had the luxury of having a borrowing programme that has grown arithmetically when the rest of the market has grown exponentially, and this allows us to be very flexible in size and term.”
Alongside the dollar benchmark programme, small tailored deals to meet specifically local investor concerns are an important source of World Bank funding. “Over the years we’ve developed a very efficient middle and back office, which has driven down our transaction costs. You have to be somewhat fleet of foot, but structured deals have proved a very cost-effective and stable source of funding.”
These deals can be as small as $10 million or the equivalent, and Lay says the bank’s treasury team can turn them around in as little as an hour. He adds: “We have a vibrant business doing structured deals in Japan. Investors there are interested in yen assets with high coupons, which creates demand for structures linked to the forex market.”
And in between the two extremes of benchmarks and structured private placements, the bank also issues medium-size vanilla issues according to investor demand.
Lay emphasizes distribution of new issues. “Our focus is on liquidity but we don’t believe size is the only way to achieve this,” he says. “It’s important to ensure diversity of investment strategies, so that not all the investors in a bond trade on the same signals. Geographical diversification is one way of doing that but that has become less important with the propagation of modern portfolio theory through the asset management community.”
The days are long gone when it was sufficient to have lead managers split allocations between Europe, Asia and the US.
As well as imposing extra demands on the capabilities of lead managing banks, though, the buy side’s increasing sophistication creates opportunities for canny issuers to get cheaper funding. Lay says: “The spread of modern portfolio theory makes interesting changes to the marketing story. It used to be that you sold paper on a relative spread basis. That is still important, but relative value plays are now complemented by the appeal of diversification. Investors are more focused on risk-adjusted returns, so they are willing to buy a more expensive bond if you can demonstrate it will behave differently from the rest of their portfolio under certain circumstances.”
The World Bank’s lending and advisory relationships can be useful when marketing a deal. Lay says: “Central banks are a natural clientele for us. As affiliates of our member countries they are comfortable with our credit and understand our approach. In addition, because we have $60 billion of assets under management, about $50 billion of which are liquid reserves, we get a lot of interest from them in sharing our experience in reserve management. We see these people all the time, so without us even mentioning it we tend to find a friendly audience there for our bond issues.”
