After years of cheap funding, fast execution and diversification are the watchwords for supranational borrowers in the face of higher rates. By David Rothnie.
For Triple A rated supranationals, the upward progression of interest rates over the past 18 months has presented an unfamiliar problem. Long used to tapping the US dollar market at will, issuers such as the World Bank, International Finance Corporation and Inter-American Development Bank have been forced to adopt a more nimble approach to funding and seek fresh pockets of demand and liquidity in less familiar currencies and tenors.
“In the past year, there have been fewer attractive issuance windows, so if you are looking to do something you have to act quickly and issue into the market,” said Laura Fan, head of funding at IDB.
Over the past two years, the supranational has seen a marked shift in its currency mix. In 2021, US dollars accounted for 86% of its total bond issuance, falling to 80% in 2022 and 76% so far this year, while printing 20% in its three strategic currencies – sterling and Australian and Canadian dollars.
“The catalyst for this shift is to further diversify our currencies and investor base, and we’ve issued more frequently in non-US dollar currencies and for larger volume than in the past. But this is also driven by investor demand. Given the different rate expectations in various markets, investors may find other markets more attractive relative to US dollars,” said Fan.
“From a funding perspective, we are indifferent to the absolute level of fixed rates because we swap our bond issuances into floating-rate US dollars. We also primarily lend in floating-rate US dollars, hence both sides of the balance sheet are matched. So, a rise in absolute rates doesn’t necessarily affect our funding per se. However, it does impact investors and the higher-rate environment could lead to stronger investor interest in certain markets.”
IDB has completed 84% of its total funding target of US$17bn for 2023, including four US dollar Globals, the most recent on September 6, when it issued a US$2bn 10-year on an order book of US$3.3bn.
IFC has also hit the ground running as it adapted to a new funding environment. “We’ve got off to a great start for fiscal 2024,” said Flora Chao, head of funding. Since opening its programme in July, the World Bank Group member has raised more than US$5bn of its US$10–$12bn target. It had additional liquidity needs over the last 12 months due to increased disbursements on client loans but the increased supply was well absorbed by investors.
“There was a lot of uncertainty in the market around rates and there was a general view amongst the team that spreads would widen, so we front-loaded and took advantage of positive windows in US dollars, sterling, Canadian dollars and Aussie dollars,” said Chao.
IFC kicked off its fiscal 2024 funding with a benchmark US dollar bond, before hitting the Canadian market a month later. Market volatility and uncertainty about the peak of the interest cycle in the US has led Chao and her team to diversify in greater size and speed than in previous years.
“At a high level, we put more emphasis on market and investor diversification. The fundamentals of our Triple A rating are based on our funding sources and investor diversification, so we’ve been even more focused on that in volatile markets.
“In the past, we have been more concerned about being inside our [US] dollar pricing levels when issuing in other currencies. Now, because we want to maintain our presence in other markets and also to hedge against widening spreads in the dollar market, we are sometimes a little more forgiving on price. If we’re at or a bit higher than the dollar level we might still go ahead, whereas historically we would be more singularly price-focused.”
For example, in the past, IFC would be unwilling to tap the Canadian dollar market if the cost of funding was in line with what it could achieve in US dollars. “Now, we would be more flexible because we can get access to the domestic investors,” explained Chao.
This was evident in August, when IFC priced its biggest Canadian dollar trade, with participation from Canadian domestic investors as well as the usual central bank and bank treasury buyers. “There was some movement in the dollar swap spread, so Canadian dollar pricing ended up at par or just a wee bit wider than dollars. It was the biggest Canadian dollar trade we’d ever done and we achieved tighter pricing and size.”
The C$1bn (US$738m) three-year was launched with a 4.5% coupon, attracting orders totalling over C$1.5bn and exceeding expectations, with the issuer initially targeting around C$500m. The timing also enabled it to take advantage of a less crowded window. “We know that a lot of our peers are quieter in the summer and come back with a vengeance in late August, so that’s another reason we went early,” said Chao.
Tactical switch
The IFC has also made a tactical switch in its approach. On August 15, it raised A$550m (US$353m) from a long three-year Kangaroo social bond. Two days later, it added A$50m to its now A$250m 3.635% August 26 2033 line based on a reverse enquiry to gain a pricing advantage.
“Previously when we reopened an Aussie line, we’d make it a large reopening. But last fiscal year we focused more on reverse enquiries when tapping these public lines, and that allowed us to get a great cost of funding as well as to diversify from US dollars,” said Chao.
It has also worked hard to attract new pockets of investment. As well as tapping into Canadian domestic investors, the IFC has also developed its municipal investor base in the US.
“In the last year or two, we’ve done a lot of investor work in the US in attracting municipal investors because we’ve found that they are sticky, they buy and hold and they buy in size,” said Chao.
It is also exploring the possibility of rebranding its entire bond issuance programme as sustainable. IFC has been running its green bond programme since 2010, which invests in climate-friendly projects including renewable energy, energy efficiency and green banking, and also has a social bond programme that was established in 2017.
“When investors look at green and social bonds, they tend to look more at an issuer level when assessing sustainability. Also, when we issue a green or social bond we target a couple of basis points tighter, so there’s a potential price advantage to branding our entire programme as sustainable,” said Chao.
The World Bank has also lent more heavily on non-dollar currencies relative to previous years, as well as tapping less common tenors. In July, the Washington supranational printed a seven-year deal, with bankers saying it did so after peers such as Germany’s KfW and the IFC had beaten it to the punch with more popular five and 10-year trades. "The World Bank is used to a clear issuance runway and smooth execution but in a higher-rate environment it has to be more flexible and nimble,” said one banker.
But the issuer refuted this idea, saying that it had picked the seven-year tenor because it had been undersupplied. “Secondly, from an investor perspective, the curve between seven and 10-year is relatively flat for asset swap buyers and for outright yield buyers the lower inversion point on the curve, so it was the most investor-friendly point on the curve,” Andrea Dore, head of funding at the World Bank, told IFR at the time of the transaction.
US dollars accounted for 65% of its total issuance in 2023, and this deal kicked off its funding for fiscal year 2024. After attracting an order book of US$4.25bn, the sustainable development bond raised US$3bn to support the bank’s sustainable development activities, including efforts to tackle intertwined challenges of jobs, climate, fragility, and pandemics.
“The execution window allowed the IBRD team to capitalise on the recent improvement in macro tone and bring this transaction ahead of upcoming central bank policy meetings,” said Adrien de Naurois, head of SSA & EMEA IG syndicate at Bank of America.
But there is necessity to diversify in the hunt for liquidity and tight pricing, and on the evidence of recent deals, the World bank is embracing the new world order, adjusting its currency mix and accessing less familiar parts of the curve.
The supranational will raise between US$45bn and US$55bn in fiscal 2024, and while the bulk of the funding will still come from US dollar market, it has shown a taste for diversification with three trades in a week in three different currencies. On September 5, the World Bank jumped into the market following the Labor Day holiday with a €2.5bn 15-year bond that attracted more than 100 orders and an order book of €4.8bn.
The following day, the supranational returned to the sterling market with its first trade since January 2021, printing a £850m seven-year trade. Then, on September 7, it rounded off its diversification flurry with its first Canadian dollar trade in more than two years, printing a C$1bn seven-year bond. The Canadian SSA market is dominated by three to five-year issuance, so this seven-year, which was the World Bank’s largest in that tenor in the currency and the first by any SSA issuer since July 2021, effectively reopened that part of the curve.
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