International Bond Markets – Insights of External Bond

Issuance

Andrea Dore Lead Financial Officer

World Bank Capital Markets Department

Future Economic Policies and Non-Traditional Sources of Finance

Maputo, March 22-25, 2010Maputo, Mozambique

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I. Strategic Objectives of International Capital Markets Issuance

II. Bond Markets for International Issuers

III. Issuing / Price Setting Mechanisms

IV. Insights of External Bond Issuance: Process and elements that debt managers should consider

Contents

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Strategic objectives of international capital markets issuance

Fund foreign currency requirements

Expand the investor universe

Familiarize international investors with issuer’s credit

Meet government funding needs beyond the domestic market capacity

Raise market profile and visibility

Demonstrate access to funding or markets

Instill market confidence

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Bond Markets for International Issuers

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Domestic Bond Markets

Historically, the first segment to appear in any jurisdiction

Domestic markets become internationalized as regulations become more lenient for foreign issuers or when domestic investors open “off-shore” portfolios

Only two purely domestic markets remain somewhat important to emerging market sovereign borrowers– Yankee market– Samurai market

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Eurobond Markets

Eurobond markets is the term commonly used to describe the “off-shore” component of any currency market

Originated as the Eurodollar market, and now includes any currency financing issued internationally (e.g. euro brazilian reais, eurorand, euroyen, etc)

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Global Bond Markets

In the late 1980’s, the World Bank issued the first “Global bond”

Merges the Eurobond market with the US domestic market

Documentation is to US SEC standard and includes international settlement with links to US clearing systems for US$ denominated securities

Used when the ability to place with US investors is necessary or desired

For the most part, has replaced sovereign Yankee issuance

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Choice of Bond Markets Segments

DomesticOffshore (Euro)

Global

U.S. dollar

Euro

Pound Sterling

Japanese yen

Canadian dollar

Australian dollar

Major Currency Bond Market Segments for International Issuers

Market or Market SegmentCurrency

Global = sold to domestic, "Euromarket" and US investors

Domestic = sold only to domestic investors

Offshore = sold "Euromarket" international investors

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Issuing / Price Setting Mechanisms

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Choices in Price Setting Mechanisms

Auction– Rarely used in non-domestic issuance by a sovereign– In most cases, it will not produce best price outside domestic markets

Competitive Bidding– Related to auctions, but has ability to produce best short term price– Carries high risk that bond will perform poorly if price pushed too far

Book Building– Most frequently used method in international capital markets– Pricing set based on investor demand– Executed well, this method will produce best sustainable costs

Insights of External Bond Issuance: Process and elements that debt managers

should consider

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El Banco Mundial se estrenó en Colombia con emisión de bonos de deuda

Bavaria hace swap de monedas por US$200 MM fruto de la emisión de bonos del Banco Mundial

Banco Mundial colocó bonos

Histórica colocación de bonos del BM en Colombia

COLOMBIA / World Bank Goes Local

World Bank picks Colombia for first Latin domestic

Thursday 28th April 2005El Banco Mundial hace historia en Colombia

BM emitió en Colombia US$200 millones en bonos

IBRD'S RM760 MLN SECURITIES PRICED AT 3.58 PCT P.A. 29 April 2005Bernama Daily Malaysian News English

World Bank breaks new ground with debut 3 year euro

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The World of International Bond Issuance

Straight line allocation?

Billing and delivering?

Momentum has stalled?

Pot? Pot within a pot?

Take pre-orders in Asia, then open books in Europe?

The investor is asking for protection?

• Unique and arcane jargon• Multi disciplinary• Established and expected behavior

Price talk, price guidance or whisper?

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Steps in a New Issue Process

1. Market Selection2. Tenor, size, cashflow and format selection3. Hedging4. Lead managers5. Syndicate group6. Syndication method7. Fees8. Documentation9. Marketing10. Announcement / Launch11. Book-building12. Sizing new issue / allocation13. Pricing14. Media Outreach15. Secondary Market

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US dollar dominance for emerging market issuance is being challenged by the Euro market

– International trade is increasingly denominated in Euros

– Larger percentages of foreign exchange reserves are being held in Euros

Japanese yen, particularly in Samurai format, continue to be interesting in some situations

– Long dated demand for credit by Japanese investors can sometimes lead to best funding costs

– Efficient way to raise JPY liability

Local currency issuance in international markets by sovereigns

– Driven by international investor desire for higher yields and uncorrelated assets.

Market selection11

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Tenor, size, cashflow and format selection

Tenor– Each market has standard tenors that are considered normal for

issuance (“benchmark maturities”)

– Deviating from these norms is possible, but may lead to increased cost or undesired publicity

– Mostly, the benchmark maturities are set by the underlying government bond issuance in that market

– Some benchmark maturities are set due to demand created by other factors (e.g. bond indices duration)

Currency Main benchmark Maturities Less seen, but at times acceptable

US dollars 3, 5, 10, 20 and 30 years 2, 7 (euromarket),15 years

Euros 2, 3, 5, 10, 15, and 30 years 20 and 50 years

Japanese Yen 3, 5, 10, 20 and 30 years 7 years (mostly euromarket)

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Tenor, size, cashflow and format selection (continued)

Size– Setting correctly is one of several critical decisions for a debt manager

– Overly ambitious targets for size can hurt a borrower’s reputation

– Underestimating size can be partially corrected during the new issue and can lead to positive media coverage

Cashflow structure– Vast majority of benchmark issuance by sovereigns is in simple fixed rate

format

– If issuing an international markets version of a domestic bond, then other structures can, at times, be successful within a more limited scope

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Tenor, size, cashflow and format selection (continued)

Issue format– Public bond versus Private placement Each are important tools

– Public bonds Aimed at larger groups of investors Seeks visibility Generally fulfill more strategic objectives

– Private placements Usually issued to one or few investors Best used to respond to specific investor inquiry Can be used to issue unconventional structures Mostly issued from Medium Term Notes (MTN) programs

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Hedging

Traditionally, desires to raise exposure in a particular currency are fulfilled by issuing a bond in that market– This is no longer the case with interest rate and currency swaps

Decoupling the bond issuance from the end liability desire has implications on bond related matters– Ensuring that the lead manager of the bond is also best choice for the swap

can complicate the selection of banks

– The two functions can be separated, but this can create some execution risk with each counterparty free to ignore the other’s market activities

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Lead managers

Lead manager selection is another critical decision– Strong link between the bond’s success and the Lead managers abilities

and experience

Main considerations for selection:1. strength of relationships with the target investor base 2. experience, reputation and capacity / resources to trade the bonds

optimally in the secondary market3. value to the debt manager in generating ideas, opportunities and support4. incentive / reward for sponsorship of the debt manager’s other funding

products / markets

Rare for one bank to fulfill all these criteria

Most international banks, however, have at least some credentials in the larger benchmark markets

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Lead managers (continued)

To help balance the desire to reward against selecting the best in a particular market:

– Number of lead managers It is now common for bonds to have two or more Joint lead managers Reinforced by investor preference due to enhanced secondary market liquidity that

more ‘sponsors’ provides

– Rotation Easier to do when borrowing requirements are high and frequency of issuance is high

– Price Weaker bank ability can be offset with cheaper price Useful in primary market, but limited effect in secondary market Not a recommended tool, but useful for discussion as the inverse can lead to very

negative results

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Syndicate group

While not as important as the Lead managers, the syndicate group is important as a way to:– Recognize other banks valuable to the borrower– Add additional or niche distribution to the bond– Give additional sponsorship to the bond in the secondary market

Several titles that can be given:– Senior co-lead manager (less common)– Co-Lead manager (common)– Co-Manager (common)– Selling group member (uncommon to rare)

Benchmark bonds should have syndicate groups while less strategic issuance can forego other layers beyond Lead managers

Smaller bonds normally have smaller syndicate groups (3 to 5 banks)

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Syndication method

Retention– Each bank is given (“sold”) a preassigned number of bonds to sell based on

ranking within syndicate – No official coordination among retention banks– No formal ability to move bonds from one bank to another– No longer a frequently used method, except in lower layers of syndicate

group

Pot– All bonds are jointly controlled by the Lead managers– All orders are submitted to the “pot” and decisions on which orders to fill or

not are made later by Lead managers and issuer– Pot is common at the Lead manager level, and rare on the full syndicate

group

Most common variation is “Pot amongst Leads and retention to group members”

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Fees

Each market has generally accepted fees charged for the service of underwriting and selling bonds

Normally quoted as a percentage of notional paid upfront (e.g. 0.10%)

Fees normally increase as underwriting risk increases or complexity of transaction increases

In several of the major markets, fees tend to be equal across markets for similar borrowers or structures (e.g. Triple A supranational pay between 0.10% to 0.15% for 5-year fixed rate bonds in US$, Euro and Yen markets)

Fee reductions from the norm happen due to competitive pressures, but have both short and long term implications for borrowers

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Documentation

Documentation aspect of bond financing in the international capital markets can be complex and resource intensive– Even more so when issuing into markets with higher legal and registration

requirements (e.g. US market)

Learning and making preparations in this area should be done much in advance of a new issue– Leading banks can provide initial knowledge– Experts at MDB’s can provide guidance– Establishing a relationship with a reputable law firm can be of value

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Marketing

Marketing is another critical part of any new issue process

Three main goals of marketing:1. Provide target investors with necessary information2. Obtain initial estimate of investor interest3. Begin new issue “momentum”

Marketing is primarily accomplished with investors, but in some markets, the press can be included

– Some markets specifically forbid discussions with the press prior to the conclusion of the new issue process

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Announcement / Launch

Announcement and Launch are two of three market standard events in the primary market where an official announcement is made

In some cases, these two announcements can be combined into one

These message are normally released onto Reuters, Telerate and Bloomberg

Announcement (“Mandate Announcement”)– Officially makes public a borrower’s intention in a market– Normally occurs just before the new issue process begins, but can occur

earlier, such as before a deal related roadshow– The composition of the Announcement message is the most freeform of

the three However, depending on situation it could be important to include certain information

or omit others. Lead managers will provide best recommendation

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Announcement / Launch (continued)

Example Announcement Screen

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Announcement / Launch (continued)

Example Announcement Screen

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Launch– The launch of a transaction is the point in time when bond sales are officially

begun, and mark the beginning of the Primary market

– At times, the official launch of a bond occurs after the orderbook has been opened. In this case, orders taken before launch are considered “indicative”, “soft”, or “indications of interest”

– Launch announcement follow a stricter set of rules for the information that is required and, in most markets, follows a standard form

Announcement / Launch (continued)1010

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Announcement / Launch (continued)

Example Launch Screen

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Announcement / Launch (continued)

Example Launch Screen

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Book-building

Book-building period is when orders are actively being taken

Can last from a few hours to several days

The price at which orders are taken is called price guidance or price talk, and normally a spread to an underlying reference (e.g. the “on-the-run” 5 year US Treasury)

Price guidance can be a range of possible spreads or a specific number (e.g. “+20 to +22 over”, “+low 20’s over”, “+21 area”, “+21 over”)

– Normally, price guidance begins as a range and is refined during the bookbuilding phase as the order book grows and investor feedback on price is collected

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Sizing new issue / allocation

Sizing of the transaction is normally set at the beginning of the process– Borrowers normally know exactly the amount of funds they can raise

In some cases, the borrower may have some flexibility in size, and will set the size after gathering information from investors in the bookbuilding phase

Allocation is the point in time when the Lead managers, together with the borrower, decide which orders to fill fully, partially or not at all– The first step is to determine which orders are good at the final spread

to be used– For those orders that remain, the Lead managers will provide a

recommendation to the borrower on which to allocate– Borrowers normally only provide general guidance, and allow the

experience of the Lead managers to make specific allocation decisions (e.g. “allocate central bank orders first”, “allocate those investors who are more likely to buy-and-hold first”, etc)

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Pricing

Pricing is the moment in time when the coupon of the bond is set and the initial Issue price of the bond is determined

– At pricing, the yield level of the underlying reference (e.g. 5-year US Treasury) is observed, and the final spread chosen for the new issue is added

– The new issue’s resulting yield level is then converted to the initial Issue price after selecting a coupon

In most markets, the coupon is chosen as the multiple of 0.125% that most closely matches, but which does not exceed, the initial yield of the new issue

– Bloomberg provides a very straightforward calculator that the majority of the market uses for these calculations

– The results are then announced on the Pricing announcement

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BC4 <Go> (bloomberg)

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Pricing (continued)

Example Pricing Screen

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Pricing (continued)

Example Pricing Screen

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Media outreach

One of the most important conduits of visibility for a new issue is the immediate press it receives in the first days after pricing

To ensure the borrower’s message and details of the bond are communicated correctly to the press, a “Press Agent” is normally assigned– One of the Lead managers which is deemed to have a good press relations

office and who can produce good first drafts of press releases, questions and answers and/or talking points for all Lead managers to uniformly use in their discussions with the press

– Press agent will also schedule and coordinate press calls for the borrower following pricing

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Secondary market

The first few days of trading sets the tone for the bond’s reputation in the markets

The most important influence a borrower can have on the initial secondary market performance is the selection of the Lead managers

The allocation of bonds at the end of the book-building period is also very important

Closely monitoring the secondary market in the first few days and communicating frequently with the Lead managers also helps

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Questions

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Thank you

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