ADB's bold approach pay off as IDB struggles

5 min read
EMEA, Asia
Helene Durand

The Asian Development Bank was rewarded for taking a step into the unknown on Thursday, gathering over US$13.4bn of demand in untested tenors and drawing an investor response that contrasted sharply with that seen for the Inter-American Development Bank, which was following a trailblazing five-year transaction from the EIB.

The Manilla-headquartered supranational pulled in over US$8.5bn for a US$3.5bn three-year tranche and US$4.9bn for a US$2bn 10-year, allowing it to move the pricing levels by 3bp and 2bp, respectively, to 29bp and 60bp over mid-swaps. The interest dwarfed the US$2.2bn-plus (including US$100m of JLM demand) pulled together by the IDB for a US$2bn five-year issue via Barclays, Bank of America, HSBC and JP Morgan.

"We were confident enough but not overly zealous in our recommendation to ADB for a 10-year, but I think we've all been pleasantly surprised on the upside because duration in dollars hasn't been evident for quite some time," a lead said.

"It's not like these long-dated deals happen every week and it remains to be seen who will follow, but kudos to ADB. They took the chance and were rewarded with a very strong transaction."

Given the lack of recent supply, he was reluctant to say what sort of premium ADB had to pay to get the 10-year deal away, though one banker away said it was around 10bp.

"The bottom line is: at what level do investors want to buy duration? I think we got it right here," the lead said. "If we'd been more aggressive, I'm not sure we would have got the book we got."

The deal, via Citigroup, Nomura, RBC and TD, emerged on a busy day for SSA dollar supply as issuers jostle for position ahead of the Lunar New Year holiday at the end of the month.

"Issuers want to be out early, Chinese New Year is a bit earlier than usual, so the market is a bit congested," the lead said. "With these overlapping deals, you have to choose a strategy and see what works."

IDB gets stuck

IDB's seemingly safe strategy of following the EIB into a tested part of the curve did not quite pay off, however. At US$2.2bn, books were a far cry from the US$15.4bn gathered by the European supranational the day before, meaning the leads could not budge from the 41bp area IPT level.

This was in line with where EIB started marketing its transaction on Tuesday, but a senior syndicate banker said this was not quite enough spread given the outperformance that EIB and KfW had seen in the dollar market versus their Triple A peers.

"We've seen a greater divergence between tier one and tier two names, but also, within the tier one names, we've seen EIB and KfW outperform the rest of the Triple A supra peer group," he said. "There is a marked differential in secondary spreads, where they're trading 4bp–5bp back of EIB, KfW."

He said this was because KfW and EIB's net issuance in US dollars has been negative as the two issuers skewed their funding towards the cheaper single currency.

Still, EIB also had the advantage of having pre-sounded its trade while offering around 5bp–6bp of concession, with fair value seen around 34bp–35bp. IDB, on the other hand, only offered 1bp of concession versus its own curve, showing that issuers can not simply use the most recent primary trade as a reference point but also need to be mindful of their own curves. Furthermore, the senior syndicate banker added that, unlike the euro market, which had repriced dramatically since the end of last year, US dollar levels had not really moved.

"I think EIB had the first-mover advantage and their deals are highly pre-placed, whereas I don't think IDB was pre-placed," a senior DCM banker added. "Also, EIB had a clear slate yesterday. Today, investors have a lot of choice. It is a smaller market [than euros] at the end of the day and it can get very crowded."

The supranational was also competing against the World Bank, which was marketing a four-year sustainable development FRN at 37bp area over SOFR that offered around 2bp of concession. Books on that trade via BMO, Scotiabank and Wells Fargo Securities had passed US$1.65bn at the last update.