Supranational bond of the year – IBRD

Bookrunners: Barclays Capital, HSBC, JP Morgan, Credit Suisse

Issuer: International Bank for Reconstruction and Development
Size: $4.5 billion
Date of issue: May 26, 2010
Maturity: May 26, 2015
Ratings: AAA (Moody’s/Fitch/S&P)
Nominal coupon: 2.375% (semiannual)
Price: 99.546
Yield: 2.472%
Spread: 5yr US Treasuries + 32.45bp

After a period in May when the Eurozone sovereign crisis caused widespread investor concern, the International Bank for Reconstruction and Development launched the year’s largest deal to that point, reopening the US dollar bond market after a two-week closure.

The issue was one of two large transactions IBRD, the World Bank’s arm for reducing poverty in middle-income and creditworthy poorer countries, completed this year as part of its ongoing funding programme. The May offering was targeted at the five-year US dollar market, in which the bank wished to re-establish itself after a 19-month absence.

Despite the challenging macroeconomic backdrop, a flight to quality worked in IBRD’s favour; strong investor interest meant the Bank was able to increase the deal to $4.5 billion, more than double the $2 billion trade originally expected.

The triple-A rated deal – which like all World Bank debt was collectively backed by member countries – accumulated an order book of $2.5 billion within four hours of opening on May 17, before closing at $5.6 billion on May 18. It subsequently launched on May 26.

Investor enthusiasm was particularly noteworthy given the borrower decided against offering the notes at a premium to compensate for market volatility. Instead, the deal was issued with the pre-planned nominal coupon of 2.375% and priced at a discount to yield 2.472%, equivalent to a spread of 32.45 basis points over five-year US Treasuries.

This was marginally tighter than some comparable supranational issues, such as the European Investment Bank’s triple-A US-denominated 2.875% bond due January 15, 2015, which was trading at 2.481% on May 26.

George Richardson, head of capital markets at the World Bank, says investors viewed the deal as a refuge from European sovereign vulnerability.

“Because of the crisis, anything that had a European flavour began to widen out very fast. However, since we do not lend to Eurozone sovereigns, we instead benefited from a flight to safety,” he says.

Lee Cumbes, director of frequent borrower origination at one of the bookrunners, Barclays Capital, says: “Given pressures in the market in the preceding weeks, the temptation might have been just to price the new issue cheaply for speed of execution. However, the IBRD deal team maintained discipline, pricing through many traditional peers in Europe, and at a very narrow differential to US agencies.”

Richardson says he was particularly pleased with the broad investor base, with 140 orders. “Usually US dollar transactions comprise very large chunky orders. A usual number is maybe 50 or 60 orders, so we were surprised by the granularity of the order book,” he says.

The investor base was spread across the continents, with nearly half (48%) of the end investors based in Asia, 27% from the Americas and around one-fifth from Europe. The remainder were from the Middle East and Africa.

With regards to the high proportion of Asian accounts on the trade, Richardson says: “Asia has a fairly large group of central banks, which have significant assets under management. They are strong followers of all supranational banks, making them a strong component of any Eurodollar transaction.”

Sixty percent of the issue was distributed to central banks and official institutions, while 29% went to funds, 8% to banks and corporations, and 3% to pension and insurance funds.

The bond has performed well in the secondary market, trading at 1.024% at its tightest on November 4. On November 9 it was trading at 1.0711%. By comparison, the EIB’s 2.875% bond due January 2015 was trading at 1.149% on the same date.