the world bank demystifying supranationals - gioa bank... · international finance corporation...

Demystifying Supranationals GEORGE RICHARDSON Head of Capital Markets

The World Bank Treasury 1225 Connecticut Ave NW Washington, DC 20433 USA http://treasury.worldbank.org/capitalmarkets

THE WORLD BANK

DANIEL KIM Head of SSA, GSE, and Covered Bond Trading

Jefferies LLC 520 Madison Avenue New York, NY 10022 USA http://www.jefferies.com/

International Finance

Corporation (IFC)

Inter-American Development Bank (IADB)

European Bank for Reconstruction and

Development (EBRD)

European Investment Bank (EIB)

Nordic Investment Bank (NIB)

African Development Bank (AfDB)

Asian Development Bank (AsDB)

* Yellow outline highlights the AAA supranationals that have the US as a shareholder.

WHO ARE AAA SUPRANATIONALS?

International Bank for Reconstruction and Development

(IBRD)

2

3

The SSA Sector

Three (3) Issuer Categories AAA Supranationals • IBRD (World Bank) • AfDB • AsDB • EBRD • EIB • IADB • IFC • NIB

Full Government Guarantee* • EDC (Canada) • KfW (Germany) • OKB (Austria) • ICO (Spain) • JBIC (Japan)

Implied Guarantee or Government Ownership* • BNG • CADES • Eurofima • SEK

SOV / SUPRA / AGENCY

* Not all are triple-A

Does an investor in supranaitonal bonds take exposure to project risk?

Supranational Issuers

4

5

Asset Quality

Equity Capital

Risk Management

Government Ownership / Guarantee

GSE’s Covered Bonds USAID Guaranteed Bonds

KfW / EDC Supranationals

Supranational Issuers Key Drivers Behind the SSA Supranational’s AAA

Are supranationals good comparable investments alternatives to GSEs?


6

7

GSEs – Supra Issuers Some basic similarities

High quality credit Safe haven investments/flight

to quality performance Natural “home” bid

(central banks are also owners of supras)

Yield is in the same “ballpark” as GSE’s

Product similarities (e.g. plain vanilla benchmark, callables, etc.)

8

GSEs – Supra Issuers Some basic differences

US GSE Supranational Mission US Residential Property International, multi-sectoral economic

development and poverty reduction

Leverage N/A – Negative equity gap is bridged each quarter (when applicable) with investment from Treasury under the preferred stock purchase program

Capped by capital (in most cases to 1x leverage or less)

Sponsorship US Government Multi-government

Call on Capital US Treasury Member nations

Oversight Federal Housing Finance Agency – regulator (and conservator)

Resident board with representatives from all members who approve all loans and control other activities

How do supranational bonds compare to GSE’s in trading and liquidity?


9

Secondary Market Performance 2013 USD SSA Issues

(20)

(10)

0

10

20

30

40

50

60

70

80

EIB

5yr

KfW

10y

r

KB

N 5

yr

Kom

mun

eKre

dit 5

yr

IAD

B 5

yr

DB

J 5y

r

BN

G 1

0yr

AD

B 7

yr

AfD

B 5

yr

CA

DE

S 5

yr

EB

RD

7yr

JFM

5yr

EIB

7yr

Que

bec

10yr

L B

ank

3yr

IBR

D 1

0yr

IBR

D 3

yr

Ont

ario

5yr

NIB

3yr

IFC

Gre

en B

ond

3yr

EIB

3yr

Sw

eden

5yr

KfW

3yr

CD

C 3

yr

CO

E 5

yr

BN

G 5

yr

AD

B 3

yr

FMS

3yr

EB

RD

5yr

NW

B 3

yr

Sw

eden

3yr

Ren

tenb

ank

5yr

SE

K 5

yr

KB

N 2

yr

IFC

5yr

EIB

5yr

CA

DE

S 7

yr

Mun

iFin

5yr

IAD

B 7

yr

Den

mar

k 3y

r

Kom

mun

ives

t 3yr

KfW

1yr

Net

wor

k R

ail 5

yr

EIB

3yr

NR

W B

ank

5yr

KB

N 5

yr

EB

RD

5yr

SE

K 3

yr

OK

B 5

yr

KfW

5yr

CO

E 5

yr

Bel

gium

5yr

KfW

2yr

Ont

ario

3yr

Kom

mun

eKre

dit 3

yr

EB

RD

5yr

IAD

B 3

yr

Sw

eden

3yr

IFC

5yr

SE

K 2

yr

EIB

3yr

AD

B 5

yr

BN

G 3

yr

Mun

ifin

3yr

JFM

5yr

Kom

mun

inve

st 2

yr

KfW

7yr

CA

DE

S 3

yr

FMS

3yr

Ont

ario

5yr

Finl

and

5yr

KB

N 3

yr

AfD

3yr

AfD

B 5

yr

ED

C 5

yr

IAD

B 1

0yr

KfW

3yr

Net

wor

k R

ail 3

yr

IBR

D 2

yr

IBR

D 7

yr

CD

C 3

yr

OK

B 3

yr

ED

C 3

yr

IAD

B 7

yr

IFC

Gre

en B

ond

3yr

JBIC

5yr

FMS

5yr

KB

N G

reen

Bon

d 3y

r

8-Jan

9-Jan

9-Jan

10-Jan

15-Jan

15-Jan

15-Jan

15-Jan

16-Jan

22-Jan

28-Jan

29-Jan

4-Feb

6-Feb

6-Feb

6-Feb

6-Feb

7-Feb

7-Feb

14-Feb

19-Feb

20-Feb

20-Feb

26-Feb

28-Feb

12-Mar

12-Mar

13-Mar

19-Mar

19-Mar

21-Mar

26-Mar

27-Mar

3-Apr

3-Apr

9-Apr

10-Apr

10-Apr

16-Apr

17-Apr

16-Apr

24-Apr

8-May

8-May

14-May

15-May

16-May

21-May

21-May

22-May

23-May

3-Jun

16-Jul

16-Jul

23-Jul

25-Jul

20-Aug

22-Aug

27-Aug

28-Aug

28-Aug

3-Sep

4-Sep

5-Sep

5-Sep

9-Sep

10-Sep

11-Sep

11-Sep

20-Sep

24-Sep

24-Sep

24-Sep

25-Sep

26-Sep

26-Sep

23-Oct

24-Oct

24-Oct

24-Oct

28-Oct

28-Oct

31-Oct

1-Nov

5-Nov

6-Nov

6-Nov

6-Nov

bps Launch Level vs MS Current Trading Level vs MS

Source: Bloomberg; Jefferies, as of COB March 20, 2014 10

Secondary Market Performance 2014 YTD USD SSA Issues

(25)

0

25

50

75

100

125

150

175

200

225

250

275

300

325

EIB

5yr

KBN

5.2

5yr

Kom

mun

eKre

dit 3

yr

IBR

D 5

.25y

r

Rom

ania

10y

r

Rom

ania

30y

r

KfW

5.4

yr

Pola

nd 1

0yr

Net

wor

k R

ail 5

yr

Turk

ey 1

0.3y

r

EIB

10yr

CA

DES

3yr

ADB

5.3y

r

Ont

ario

5yr

Slov

enia

10y

r

Slov

enia

5yr

BNG

3yr

Turk

ey 3

1yr

Ren

tenb

ank

5.4y

r

IBR

D 2

.4yr

IAD

B 1

0yr

KfW

3yr

EAA

3yr

Can

ada

5yr

EIB

3yr

JFM

5yr

OKB

5yr

CD

C 3

yr

AfD

B 3

yr

NW

B 5

yr

BOE

3yr

Den

mar

k 3y

r

L-B

ank

3yr

EIB

7yr

7-Jan

8-Jan

9-Jan

9-Jan

14-Jan

14-Jan

15-Jan

16-Jan

16-Jan

22-Jan

22-Jan

22-Jan

22-Jan

23-Jan

10-Feb

10-Feb

11-Feb

12-Feb

12-Feb

12-Feb

13-Feb

18-Feb

20-Feb

20-Feb

26-Feb

27-Feb

5-Mar

5-Mar

5-Mar

6-Mar

10-Mar

11-Mar

12-Mar

12-Mar

bps Launch level vs MS Current Trading Level vs MS

Source: Dealogic; Bloomberg; Euroweek, as of COB March 20, 2014 11

Secondary Market Performance 2013 USD AAA-Rated Supranational Issues

(15)

(10)

(5)

0

5

10

15

20

25

30

35

40

EIB5yr

IADB5yr

ADB7yr

AfDB5yr

EBRD7yr

EIB7yr

IBRD10yr

IBRD3yr

NIB3yr

IFCGreenBond3yr

EIB3yr

ADB3yr

EBRD5yr

IFC5yr

EIB5yr

IADB7yr

EIB3yr

EBRD5yr

EBRD5yr

IADB3yr

IFC5yr

EIB3yr

ADB5yr

AfDB5yr

IADB10yr

IBRD2yr

IBRD7yr

IADB7yr

IFCGreenBond3yr

8-Jan15-Jan

15-Jan

16-Jan

28-Jan

4-Feb6-Feb6-Feb7-Feb14-Feb

19-Feb

12-Mar

19-Mar

3-Apr9-Apr16-Apr

8-May16-May

25-Jul20-Aug

27-Aug

28-Aug

3-Sep25-Sep

26-Sep

24-Oct

24-Oct

1-Nov5-Nov


Source: Bloomberg; Jefferies, as of COB March 20, 2014 12

Secondary Market Performance 2013 USD AAA-Rated Supranational Issues

Source: Dealogic; Bloomberg; Euroweek, as of COB March 20, 2014

(10)

(5)

0

5

10

15

20

25

30

35

EIB 5yrIBRD 5.25yrEIB 10yrADB 5.3yrIBRD 2.4yrIADB 10yrEIB 3yrAfDB 3yrEIB 7yr

7-Jan9-Jan22-Jan22-Jan12-Feb13-Feb26-Feb5-Mar12-Mar


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By Geography By Investor Type

Active USD SSA Investor Base 2013-2014 YTD USD AAA-Rated Supra Benchmarks

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Central Banks 44.6%

AM/Ins/Pen 27.5%

Banks 25.8%

Other 2.1%

Americas 30.9%

EMEA 42.0%

Asia 26.3%

Other 0.8%

Source: Dealogic, Bloomberg, Euroweek

By Geography By Investor Type

Active USD SSA Investor Base 2013-2014 YTD USD SSA Benchmarks

15 Source: Dealogic, Bloomberg, Euroweek

Central Banks 52.5%

AM/Ins/Pen 18.2%

Banks 28.0%

Other 1.3%

Americas 24.1%

EMEA 38.4%

Asia 37.3%

Liquidity and Transparency Sources of Liquidity

In addition to an increase in both the number of market-making dealers as well as their allocation of resources (balance sheet usage and Sales, Trading, and Capital Markets professionals) to USD SSA bond trading, several Dealer-to-Client (D2C) electronic trading platforms now provide liquidity to clients directly by actively trade these issues

– MarketAxess® – TradeWeb® – Bloomberg BondTrader® (BBT) – Reuters – MTS Bondvision®

Dealers commitment to the USD SSA space has been augmented by the accessibility of liquidity from “active” inter-dealer broker (IDB) electronic trading platforms, as well as an increase in voice brokers

Source: MarketAxess®

Sources of Dealer Liquidity in USD SSA Issues Active IDB Electronic

Platforms Other Voice Brokers

GFI Tradition - NY Newedge ICAP Tradition - London Sigma BGC RP Martin Brains Tullet-Prebon Mint Eiger Securities Creditex Aurel - Paris (BGC-owned) Cambridge

Kepler Capital Markets - Paris RW Pressprich Finacor - Luxembourg Hilliard Farber

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Liquidity and Transparency MarketAxess® Statistics – Client and Trade Growth

Exemplifying the increased growth, investor demand, and liquidity of the USD-denominated SSA market, the following data has been obtained from MarketAxess®:

– More than 300 buy-side clients are now actively trading USD SSA issues

– Over 75% of USD SSA activity comes from US-based clients

Dealers commitment to the USD SSA space has been augmented by the accessibility of liquidity from “active” inter-dealer broker (IDB) electronic trading platforms, as well as an increase in voice brokers

Source: MarketAxess®

Year Active Clients

Trade Inquiries

Executed Trades Hit Rate

2009 212 6,091 3,679 60.4% 2010 230 10,050 7,334 73.0% 2011 303 15,201 11,045 72.7% 2012 320 14,603 10,661 73.0% 2013 303 13,847 11,266 81.4%

2009 – 2013 Growth Rate 43% 127% 206%

60%

65%

70%

75%

80%

85%

90%

0

2,500

5,000

7,500

10,000

12,500

15,000

2009 2010 2011 2012 2013

MarketAxess® - USD SSA Trading Activity

Trade Inquiries (lhs) Executed Trades (lhs) Hit Rate (rhs)

17

Liquidity and Transparency MarketAxess® Statistics – Trade Volume Growth

These MarketAxess® trading statistics are even more impressive and illustrative of USD SSA product growth when viewed in terms of volume, as the average trade size has also increased substantially

Source: MarketAxess® 18

Year Trade Inquiries

YoY Growth (by Count)

YoY Growth (by Volume)

Executed Trades

YoY Growth (by Count)

YoY Growth (by Volume)

2009 6,091 3,679 2010 10,050 65.0% 64.6% 7,334 99.3% 92.7% 2011 15,201 51.3% 48.2% 11,045 50.6% 57.2% 2012 14,603 -3.9% -2.2% 10,661 -3.5% 0.4% 2013 13,847 -5.2% 29.7% 11,266 5.7% 21.3%

2009 – 2013 127% 209% 206% 269%

Can a US investor buy a USD global bond issued by a supranational if its listed on the Luxembourg Stock Exchange?

Supranational Bonds

19

20

Supranational USD Global bonds are always immediately available to U.S. investors regardless of where they are listed.

Supranational issuers who do not have the U.S. as a shareholder are permitted to issue into the U.S. market after filing a shelf registration statement pursuant to Schedule B to the Securities Act of 1933.* (Note to US investors: Can buy only Globals. Can buy Eurobonds only after they have seasoned.)

Supranationals issuers whose membership includes the U.S. are SEC exempt by the federal statutes that authorizes U.S. membership and participation. (Note to US investors: Can buy any.)

*Schedule B to the Securities Act of 1933 states the requirements for the registration of securities by foreign governments or political subdivisions thereof, updating the shelf by incorporating by reference the latest annual report.”

Supranational Bonds

Supranational Acts of Congress World Bank (IBRD) Bretton Woods Act 22 USC 286 et. Seq.

International Finance Corporation (IFC) International Finance Corporation Act 22 USC 282 et. Seq.

Inter-American Development Bank (IADB) Inter-American Development Act 22 USC 283 et. seq.

Asian Development Bank (ADB) Asian Development Bank Act 22 USC 285

European Bank for Reconstruction and Development (EBRD)

European Bank for Reconstruction and Development Act 22 USC 290l

African Development Bank (AfDB) African Development Bank Act 22 USC 290i et. Seq.

Under the provisions of Section 15(a) of the Bretton Woods Agreements Act, as amended, Notes are exempted securities within the meaning of Section 3(a)(2) of the U.S. Securities Act of 1933, as amended, and Section 3(a)(12) of the U.S. Securities Exchange Act of 1934, as amended.

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Supranational Bonds

Supranationals – in their respective articles of agreement – may be taken to court if they default on a payment to an investor.

The principle terms of the articles are incorporated into U.S. federal law and enforceable as any other federal statute.

Inter-American Development Bank (IADB) Articles of Agreement Article XI, Section 3. “Judicial Proceedings” Asian Development Bank (ADB) Articles of Agreement Article 50.1 International Finance Corporation (IFC) Articles of Agreement Article VI, Section 3. “Position of the Corporation with Regard to Judicial Process”

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Articles of Agreement

(As amended effective June 27, 2012) SECTION 3. POSITION OF THE BANK WITH REGARD TO JUDICIAL PROCESS

Actions may be brought against the Bank only in a court of competent jurisdiction in the territories of a member in which the Bank has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities. No actions shall, however, be brought by members or persons acting for or deriving claims from members. The property and assets of the Bank shall, wheresoever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

Can supranationals be regarded as “instrumentalities” of the U.S. with respect to state investment codes and allowable “instrumentalities” as investments?


22

UNITED STATES Shareholding in Supranationals

“Our leadership as the foremost shareholder of the world’s MDBs guarantees that their sizable investments will continue to secure America’s interests and safeguard our national security.” Marisa Lago Assistant Secretary for International Markets & Development U.S. Department of Treasury

Supranational MDB % U.S. Shareholding

U.S. is X Largest Shareholder

Location of Headquarters

Year Established

International Bank for Reconstruction and Development (World Bank) 16% 1st Washington, DC, USA 1944

International Finance Corporation (IFC) 24% 1st Washington, DC, USA 1956

Inter-American Development Bank (IDB) 30% 1st Washington, DC, USA 1959

African Development Bank (AfDB) 7% 2nd Abidjan, Ivory Coast 1963

Asian Development Bank (ADB) 16% 1st (co-largest with Japan) Manila, Philippines 1966

European Bank of Reconstruction and Development (EBRD) 10% 1st London, UK 1991

The World Bank was established by an international treaty known as its Articles of Agreement (“the Articles”).

The Articles was incorporated into US federal law by the Bretton Woods Agreements Act – a federal statute (22 USC 286 et seq. that

— authorized the United States’ membership and participation in the World Bank

— recognizes its immunities and privileges World Bank securities are exempted from the

registration requirements of Section 1(a)(2) of the Securities Act of 1933 and Section 3(a)(12) of the Securities Exchange Act of 1934.

The US Secretary of the Treasury sits on the World Bank’s Board of Governors, the World Bank’s highest governing body.

WORLD BANK Instrumentality of the United States

24

The extent of U.S. government engagement in policy making towards supranationals can be found in this Congressional Research Service report Multilateral Development Banks: How the United States Makes and Implements Policy (http://www.fas.org/sgp/crs/misc/R41537.pdf).

http://www.fas.org/sgp/crs/misc/R41537.pdf

http://www.fas.org/sgp/crs/misc/R41537.pdf


25

16 state have explicit investment codes allowing state and/or local treasurers to buy supranationals through defined lists.

Approximately 40 states through local/state investment codes include “agency” and/or “instrumentality” obligations as permissible investments.

Many restrict eligible investment lists by defining agencies, but in no case we have seen yet is instrumentality defined.

“Instrumentality” is not defined in investment codes for local and state treasurers.


26

An agency is managed directly by the federal government and is subject to federal appointment of its senior officers (often requiring Senate confirmation), civil service and procurement rules as well as the federal budget process.

An instrumentality is not subject to these laws except to the extent described in the federal statute under which it was established. The immunities and privileges of an instrumentality are also set out in the federal statute that created it.

• An instrumentality generally is managed by senior officers and a board of directors that are not subject to civil service rules and do not require Senate confirmation.

The relationship between the U.S. government and the World Bank is therefore most similar to that between the government and an instrumentality. Like the creation of the GSE's (who are commonly considered to be “instrumentalities”, the United States' participation in the World Bank was authorized by a federal statute -- Bretton Woods Agreements Act – that also defines the status and immunities of the World Bank under U.S. law.

In fact, prior to the conservatorship of Fannie Mae and Freddie Mac, the degree of U.S. government control over the World Bank was in some ways greater than that over the GSE's.

“Instrumentality” is not defined in many investment codes for local and state treasurers.

What is the difference between the International Bank for Reconstruction and Development (IBRD) or “World Bank” bonds and those issued by the International Finance Corporation (IFC)?


27

28

IBRD – IFC What is the difference? IBRD and IFC are separate organizations that only share top management. Each has its own risk profile, capital, and development mandate for bond proceeds.

IBRD est. 1944


Issuer of IBRD “World Bank”

Bonds

Lends to governments of middle-income and

creditworthy low-income countries.

IFC est.1956

International

Finance Corporation

Issuer of IFC Bonds

Promotes development by financing private sector enterprises in developing countries.

MIGA est. 1988

Multilateral Investment

Guarantee Agency

Promotes foreign direct investment into

developing countries by offering political risk

insurance (guarantees) to investors and lenders.

ICSID est. 1966

International Centre for the Settlement of Investment Disputes

Provides international facilities for conciliation

and arbitration of investment disputes.

IDA est. 1960

International Development Association

Provides interest-free loans —called credits—

and grants to governments of the poorest countries

Funds raised from donors

29

IBRD and IFC are separate entities with no cross support between them IBRD lends to sovereigns, IFC lends to private sector


(IBRD)

International Finance Corporation (IFC)

Development purpose Global source of funding to member governments

Global source of finance for private enterprise in developing countries.

Membership Global – 188 members Global – 184 members

Year established 1944 1956

Largest shareholder United States – 16% United States – 24%

Balance Sheet USD 324 billion USD 77.5 billion

Annual Funding Program USD 25-35 billion USD 12-14 billion

SEC exemption* Yes Yes

Act of Congress Authorizing US membership Bretton Woods Act 22 USC 286 et. Seq.

International Finance Corporation Act 22 USC 282 et. Seq.

Type of Lending Preferred Creditor Status (PCS) Lending to Sovereigns or Sovereign guaranteed only

Lending to or equity investment in Emerging Market private sector entities

* Exemptions refer to the Securities Act of 1933 and Securities Exchange Act of 1934.

Supranational Issuers IBRD – IFC Comparison

FOR MORE INFORMATION CONTACT US

Internet treasury.worldbank.org Phone: +1 202 477 2880 Fax: +1 202 477 8355 Email: [email protected] Mailing Address

1818 H Street, NW MSN # C7-710 Washington, DC 20433, USA

Physical Address:

1225 Connecticut Avenue, NW Washington, DC 20433, USA

Pricing Sources Bloomberg IBRD <Govt> <Go> or IBRD <Go>; Discount Notes WBDN <Go>

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Acknowledgements and Disclaimers

All photos, graphics and content © World Bank This presentation has been prepared by the World Bank (International Bank for Reconstruction and Development,

IBRD) for information purposes only, and the IBRD makes no representation, warranty or assurance of any kind, express or implied, as to the accuracy or completeness of any of the information contained herein.

No Offer or Solicitation Regarding Securities. This presentation may include information relating to certain IBRD securities. Any such information is provided only for general informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy any IBRD securities. All information relating to securities should be read in conjunction with the appropriate prospectus and any applicable supplement and Final Terms thereto, including the description of the risks with respect to an investment in such securities, which may be substantial and include the loss of principal. The securities mentioned herein may not be eligible for sale in certain jurisdictions or to certain persons.

Consult with Advisors. Investors considering purchasing an IBRD security should consult their own financial and legal advisors for information about such security, the risks and investment considerations arising from an investment in such security, the appropriate tools to analyze such investment, and the suitability of such investment to each investor's particular circumstances.

No Guarantee as to Financial Results. IBRD does not warrant, guarantee or make any representation or warranties whatsoever, express or implied, or assumes any liability to investors regarding the financial results of the IBRD securities described herein.

Each recipient of this presentation is deemed to acknowledge that this presentation is a proprietary document of IBRD and by receipt hereof agrees to treat it as confidential and not disclose it, or permit disclosure of it, to third parties without the prior written consent of the IBRD. All content (including, without limitation, the graphics, icons, and overall appearance of the presentation and its content) are the property of the IBRD. The IBRD does not waive any of its proprietary rights therein including, but not limited to, copyrights, trademarks and other intellectual property rights.

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