The International Finance Corporation (IFC) kicked off its new financial year in July with a two-year South African rand issue, showing that there is still a lively investor interest in this volatile currency. The deal was one of two distinct types of emerging markets borrowing undertaken by the World Bank affiliate.
Led by TD Securities, the offshore ZAR500m ($65.4m) issue carried a coupon of 12.5%. That was sufficiently generous to attract international investors, notably from Japan, where interest rates are decidedly ungenerous. The IFC has been issuing in rand since the mid-1990s, when it was one of the first supranationals to do so. It has stepped up activity in the currency in recent years, taking advantage of the Japanese appetite.
“Japanese investors like the rand a lot,” explains IFC deputy treasurer John Borthwick. “They have invested in ZAR bonds for many years, and many are comfortable with rolling them over when they mature.”
Syndication deal
Yet, taste for the rand is not restricted to the east, and last year the IFC launched a JPMorgan-led global issue targeting US and European investors. First priced in December as an 18-month deal, it was reopened in May for ZAR500m, bringing the total up to ZAR2bn.
The more recent deal, in July, was put together on the back of pre-identified demand. Unusually, it involved a small syndicate at secondary level, led by JPMorgan, RBC and UBS, who have been selling the paper on to their retail investors. The final distribution was 78% to Japanese institutions, 16% to European institutions and 5% to the syndicate, which included co-managers Daiwa and HSBC.
“It went very well, and [the retail element] is close to fully sold,” reports Mr Borthwick. “For a retail deal, which normally sells gradually, that’s a very strong performance.”
The proceeds of this type of emerging market transaction are swapped into floating rate dollars and go into the IFC’s treasury pool of liquid assets. They are then lent on to clients, in line with the organisation’s mission to foster private sector investments in developing countries. Other currencies attractive to investors at the moment, and used by the IFC to issue offshore bonds, include the Turkish lira and the Brazilian real.
Another distinct type of deal is aimed more at helping the development of local capital markets. These transactions take place in the domestic market and tend to be placed domestically, and currencies have included the Moroccan dirham, the Peruvian sol and China’s renminbi.
“Most of these deals are $50m to $100m in size,” says Mr Borthwick. “But they are more complicated because they are issued within a domestic regulatory framework and some may take years to prepare.”
Amazonian bond
One of the more complicated was a 2006 issue in CFA francs. Launched in the West African zone, the XOF22bn ($54.59m) deal involved discussions with each of the eight member states. Last year, the IFC launched its first ‘Amazonian’ bond in the Brazilian domestic market. While the proceeds of the BRL200m ($125.5m) issue were used to support Brazilian businesses, the exercise served to add some local credit diversity and to encourage expansion of the fixed-rate domestic bond market – all in line with IFC strategy.
In the past financial year, which ended on June 30, the IFC’s total borrowings totalled $6bn. That included prefunding of $1bn for the 2009 financial year, once the $5bn target for 2008 had been reached. Since 2000, the organisation has issued one $1bn global bond each year, invariably oversubscribed and priced at the tight end of the supranational range.
Of the IFC’s 2008 borrowing on international markets, dollars made up 31% of the total, with a similar proportion in Australian dollars. The New Zealand dollar came next with 10%, followed by the South Africa rand and Canadian dollar at 9%. Other notable currencies were the yen (5%), Brazilian real (3%) and Turkish lira (2%).
The organisation would like to issue in the South African domestic market, if it can find a way that suits all parties. When it began issuing in rand, the South African government very specifically excluded any targeting of domestic investors. It feared that there could be a negative crowding-out effect on its own bond issuance. “But we are now looking at ways to issue within South Africa with a developmental focus and with marketing to local institutions,” says Mr Borthwick.
