Getting the IDA

New debt issuers are a fairly common occurrence in the corporate world, but among sovereigns, supranationals and agencies, they tend to be much less frequent. To encounter a new, highly rated SSA issuer, backed by the World Bank Group with the promise of supporting the world’s poorest countries on a sustainable basis, is somewhat unprecedented.

Enter the International Development Association, established in 1960 with 173 shareholder nations but until recently largely unknown in debt capital markets. IDA’s first ever issue in April 2018 was a five-year bond that raised US$1.5bn on an order book of US$4.6bn. Five months later, it is still one of the landmark transactions of the year in the minds of many DCM bankers.

“Being a new borrower with a hugely compelling sustainability story and supported by the capital markets expertise of the World Bank, the IDA issue remains one of the stand-out trades of the year. To garner such a large and well-diversified order book for an inaugural outing was really impressive,” said Mark Yeomans, executive director for DCM in Europe, the Middle East and Africa at Nomura.

Nomura, Barclays, BNP Paribas and JP Morgan were the joint lead banks on the transaction. While it was the World Bank’s treasury team that led the investor relations prior to the deal, the banks recognised this to be a unique opportunity to be involved in the debut of a new but reliable entity with a solid balance sheet and strong potential.

The World Bank has historically been active in international capital markets through two subsidiaries – the International Finance Corporation and the International Bank for Reconstruction and Development. While the IBRD secured financing to support middle-income and creditworthy low-income countries, IDA’s mission focused on the world’s 75 poorest countries and had been funded solely through donations in the past. Its entry into the bond market came after nearly 60 years of operations and was supported by its strong track record and capital base.

“This was a unique proposition, in that IDA is a very well-established, well-known and well-capitalised entity with a large number of global shareholders, yet it was a debut deal for them. Most debut issuers have to pay an entry cost to attract investors and generate early traction, but IDA’s standing, mission and the backing of the World Bank team helped to reduce price friction to an absolute minimum,” said Lee Cumbes, head of public sector debt in EMEA at Barclays.

Exploring new avenues

In the past, IDA’s donors have typically met every three years to replenish its funding, with the most recent round in 2016 leading to a record US$75bn raised to finance projects up until mid-2020. It was also decided at that time that IDA should work towards its capital markets debut, leveraging its strong equity base to explore a new avenue of financing.

Adopting a hybrid financial model that combines donor contributions with debt financing was a big change for IDA, but it has said the move will allow it to increase funding for all eligible countries, double financing for countries affected by fragility and conflict to more than US$14bn and provide US$2bn for activities supporting refugees and their host communities.

“This was an opportunity to diversify and expand IDA’s funding programme and also to involve the private sector in the pursuit of the Sustainable Development Goals. Having historically been funded only by donations, IDA is very well capitalised and has a Triple A rating, which supported its entry into the capital markets,” said Heike Reichelt, head of investor relations and new products in the World Bank treasury team.

The subsequent challenge for the treasury team was a unique one. While IDA’s mission is clearly understood among its shareholders, it was a much lesser known entity in the capital markets, so they needed to actively pitch to explain to investors why they were bringing a new issuer to market despite its historical success in private fundraising.

Between December 2017 and April 2018, the team carried out a concerted campaign that reached more than 200 investors globally, through a combination of meetings, events and calls. The roadshow was effective, to the extent that when the deal was announced on April 16, the order book reached US$2.8bn by the end of the day and ultimately soared to US$4.6bn from 110 investors in 30 countries.

“The World Bank treasury team is very well known and respected in the market. They executed an intense, highly effective communication exercise around the world to explain their business. The only difference in final execution between this and other issues was a slightly longer period between the deal itself being announced and then marketed so as to give investors sufficient time to finish the necessary credit work,” said Cumbes.

Given the heavily oversubscribed order book, the transaction size was increased from an initial target of US$1bn to US$1.5bn, priced at 19.6bp over the five-year US Treasury. The investor base was very evenly distributed, with 34% in Asia, 34% in Europe, 23% in the Americas and 9% in the Middle East and Africa. While the largest proportion of investors – 43% – were central banks and official institutions, the deal also attracted a 25% chunk of pension funds and insurance companies; 24% banks and corporates; and 8% asset managers.

“We worked closely with investors ahead of the launch to make sure they understood that IDA is part of the World Bank but a separate legal entity to IBRD. It has a strong credit rating and very similar risk management policy, with a focus on the world’s poorest countries. Many investors are increasingly focused on the use of proceeds and IDA has an amazing impact, so it is no surprise that the transaction was oversubscribed,” said Reichelt.

Compelling story

During the course of the investor roadshow, Reichelt and her team found that while investors were primarily interested in IDA’s financials and the prospects for the deal, the opportunity to support the world’s poorest countries also attracted them to the story. From providing immunisations to children to training teachers and facilitating access to clean water, IDA’s work in advancing sustainability clearly struck a chord with market participants.

“Investors naturally look to fulfil their fiduciary duty first and ensure they receive an appropriate return, but buying a sustainable bond with a visible impact adds additional incentive,” said Jamie Stirling, global head of SSA DCM at BNP Paribas.

Some believe sustainability is becoming a key criterion when choosing investments. After years of negative publicity following the financial crisis, there is widespread feeling that the financial sector must restore its reputation and advance greater support for sustainability projects.

“As investors find they can achieve, or even consolidate, their fiduciary duty of delivering returns whilst also supporting a sustainable cause, it is increasingly becoming a differentiating factor. With the growth of the Green bond market and increased focus on environmental, social and governance criteria generally, issuers like IDA have a great role to play in the capital markets,” said Barclays’ Cumbes.

With its first successful issue complete, IDA has been clear that this was not a one-off outing into the capital markets and its funding will continue to draw on a combination of bond issuance and donations in the future. While the debut deal was denominated in US dollars, the World Bank has aspirations to move into other markets with IDA in due course. A further issue is expected to complete by mid-2019.

“We anticipate the IDA funding programme will grow over time, with the goal of raising a total US$3bn during our current fiscal year and getting beyond US$10bn over the next 10 years. The programme will always be smaller than that of the IBRD but we would like to diversify into other benchmark markets such as [sterling, Australian dollars and Canadian dollars],” said Andrea Dore, head of funding in the World Bank treasury team.

For the banks that were involved in the inaugural deal, the prospect of further issuance is an enticing one, given IDA’s track record. As the first new supranational issuer to come to market since the European Stability Mechanism in 2013, IDA has benefited not only from its compelling impact story but also from the strength of the treasury team that brought it to market.

For investors seeking long-term diversification, high credit quality and sustainability, IDA will be among the top SSA issuers to watch going forward. The debut deal was structured in such a way as to create broad-based appeal, but the move into other markets seems a natural progression from here.

“Given the US dollar remains the true global currency and the majority of FX reserves around the world are still invested in US dollars, it made sense for this first bond to be issued in dollars to align with peers in the supranational space, while a five-year term is regarded as the core benchmark maturity because it captures demand from the broadest range of investor types,” said Stirling at BNP Paribas.