In October, the World Bank responded to market tensions by proving that highly creditworthy longer-tenor funding was possible with its five-year global bond. Writer Edward Russell-Walling.

 

Who says it’s selfless to set an example? Last month, by combining its own purposes with those of the greater good, the World Bank pulled off its cheapest global funding to date. In fact, it achieved the tightest spread for a five-year bond from any public issuer ever, in a market that was imploding.

In its guise as the International Bank for Reconstruction and Development, the World Bank visits the capital markets to borrow anything from $10bn to $20bn each year. As it likes to point out, it does this strategically and in response to investor demand rather than according to any planned schedule. In its last fiscal year, which ended in June 2008, it raised $19bn and it expects to do between $15bn and $20bn in the current fiscal year.

“Typically, we do one or more global bonds each fiscal year,” says the bank’s head of capital markets, Doris Herrera-Pol. “Recently, for obvious reasons, investor attention has been concentrated in the one-year to three-year segments. There was a lack of availability of highly creditworthy securities in longer maturities and we set out to change that.”

Stabilising moves

When it comes to issuance, the organisation considers it is part of its franchise to stiffen the market’s backbone in times of extreme stress, to stabilise sentiment and to remind players that business can actually be transacted. It offered liquid securities to a fragile market in 1998 during the Asian financial crisis, and it repeated the exercise in 2001, in the wake of the 9/11 terror attacks.

At the time of this latest issue, at the beginning of October, the markets were particularly weak. On the Monday, the US House of Representatives had voted down the Treasury’s $700bn Troubled Assets Relief Program.

  “Markets were very shaken, volatility was high and the confidence level was very low,” recalls George Richardson, World Bank head of funding. “People were even more defensive and risk-averse than they had been before. We decided to see if we could demonstrate that successful funding in a longer tenor was possible.”

Much of the bank’s funding is done via private placements, and initial five-year soundings had come from a number of banks on that basis. The World Bank sensed an opportunity, decided to consolidate these requests and went for a larger public deal. It mandated the enquiring banks – Goldman Sachs, JPMorgan and Morgan Stanley – as lead managers. “Our objective was to get the funding done, but also to launch a benchmark for others to replicate if they chose to,” says Mr Richardson.

Tuesday was dire in the capital markets but Wednesday (October 1) opened slightly calmer, with much of Asia closed for the end of Ramadan. The deal was launched that morning, with the issuer looking for $1bn. It offered a coupon of 3.5%, priced at mid-swaps less 35 basis points (bps). That represented the “most attractive Libor-equivalent funding level” for any of its public benchmarks to date, the organisation said. It was also the tightest ever five-year pricing in the sovereign/supranational/agency borrower (SSA) sector, beating Germany’s previous record by some 3bps.

Flight to quality

The books were closed less than seven hours later, even though the market remained relatively steady, it was thought vital to price as quickly as possible. By then, orders worth more than $1.8bn had been logged from some very classy accounts, as the flight to quality homed in on some rare investors indeed. While the organisation issues frequently in a variety of currencies, US dollar issues don’t happen too often and it had been 18 months since its last global dollar bond.

Among the eager takers were some who had never bought a World Bank bond before, thinking them too expensive compared with US agencies. Others had been avoiding AAA paper for similar reasons. “We had seen central banks take 80% to 90% of our previous global bond transactions,” says Ms Herrera-Pol. With much higher participation from other real money investors, central banks took only 63% of this one. Demand grew so rapidly and the quality was so high that the size was increased to $1.5bn, and the pricing stayed where it was. The bond tightened dramatically in the secondary market, to swaps less 42bps at one stage, as Asian and Swiss investors showed keen interest.

The issue might not have reopened the five-year market beyond its own achievement, at least not yet. But the European Investment Bank has since raised $4bn in three-year money with an eye-watering coupon of 2.625%. And five-year deals are once again being talked about between bankers and SSA names. “This will lead to others issuing,” Mr Richardson believes. “The paralysis has been broken.”

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