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Sunday, 20 April 2014

LatAm lending

Minimal credit risk, real liquidity and the prospect of outperformance are just three reasons to lend to the IADB. That is before you take into account the broad array of currencies available and, of course, the warm feeling you get from socially responsible investing, which all explain why the bank has no trouble meeting its annual funding requirements. Solomon Teague reports.

An important preliminary element of the Inter-American Development Bank’s (IADB) issuance process is continual dialogue with investors to gauge demand and canvas feedback. Much of its debt is issued on a reverse enquiry basis. This leads it to issue in a wide range of currencies: it has issued in eight already in 2008, and managed 12 last year.

The bank has been a beneficiary of a flight to quality since the onset of the credit crunch. Investors are keener than ever to access Triple A names to minimise their credit exposure, especially as many of the Triple A structured credit investments they made have failed to deliver as advertised. They are also attracted to the IADB due to the liquidity it offers and the performance of its debt – a function of its competitive pricing and performance in the secondary market, said Laura Fan, head of funding at the bank.

For example, in its biggest issue of the year, IADB priced its US$1.5bn March 2013 issue at the end of February at mid-swaps less 24bp, or US Treasuries plus 60.25bp, through JPMorgan, Morgan Stanley and RBC CM. The 3.5% deal priced with five-year notes yielding around 2.9%, and soon after rallied by nearly 30bp.

It was one of two benchmark issuances expected this year. Last October it issued another benchmark, five-year US dollar deal through Citi, HSBC and Morgan Stanley, raising US$1bn. It was the final instalment of its US$5bn annual funding needs and, again, it had no trouble attracting investors, despite a simultaneous rally in Treasuries.

The deal launched at mid-swaps less 21bp, amid concern regarding the duration of the issue, which did not follow the conventional wisdom of going for 10-year. Instead it issued a 4.75% deal due October 2012, a decision which was ultimately vindicated by the deal tightening after launch.

This year the bank’s affiliate the Inter-American Investment Corp became the first Latin American borrower to tap the Japanese bank market, using a cross-border syndication without credit enhancement. Dubbed the Ninja loan, the US$50m three-year opened up the Japanese market to a range of new investors at a time when the US loan market was looking more volatile. Margins were undisclosed, but heard in line with Double A names in US – anywhere between 25bp and 50bp over Libor. The deal was arranged by Mizuho, among several other Japanese banks and BBVA's Tokyo branch.

It is partly the IADB’s ties to Japanese investors – especially retail investors – that drives its currency diversity. With Japanese investors looking to invest in higher yielding currencies there has been an extra incentive to issue in non-core currencies, explained Fan.

For example the bank sold a A$200m tap of its three-year Kangaroo bonds in February via lead manager TD Securities, bringing its total outstanding on the bond to A$800m. The due June 2011s have a coupon of 5.75% to yield 7.58%, equating to 79bp equivalent governments.

And its 7.50% April 15 2015 Kauri issue, originally launched last December, was increased by NZ$200m in January, bringing the total to NZ$300m. This deal was led by joint lead managers Bank of New Zealand and TD Securities, with the new tranche having a gross reoffer price of 102.581707.

But it is not only Japanese retail investors that hold the IADB in high esteem, or who drive it towards non-core currencies; many of these deals have found favour with a broad range of investors – from central banks to pension funds and asset managers. In fact, around 40% its benchmark issues are taken by central banks, said Fan.

There is also a segment of investors who are attracted to IADB as a socially responsible investment for the work it does in promoting sustainable growth and poverty reduction in Latin America and the Caribbean.

There is plenty more yet to come. Its annual financing target is US$9bn, of which it has so far raised US$5.6bn. A good portion of the remainder is likely to be in US dollars, Fan said, though a range of other currencies is also possible.

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