With the ADB annual meeting due to begin in Shanghai next week, we spoke to ADB funding head, Juan Limandibrata about how he will refinance $15 billion of redemptions over the next three years:
What were you trying to achieve with your recent $2 billion benchmark issue?
The issue reflects ADB's core funding strategy of maintaining a strong presence in key currency markets by way of regular issuance of benchmark global bonds. Given ADB's large funding requirements for the next few years, it is important to position ADB strategically in the US dollar sector, which is one of the most active and visible global bond markets. Under this strategy, we have issued a total of eight US dollar global bonds since 1994. After an absence of almost two years, the issue helped put the ADB name back in front of investors globally and provide a constructive benchmark for the execution of our future funding requirements.
Was it a disadvantage having been out of the global bond markets for two years, or did it work in your favour?
It worked in our favour, as evidenced by the fact that we did not pay a new issue premium and were able to price the issue flat to our secondary spreads. We got strong sponsorship from investors globally, especially from Asia. Having said that, we embarked prior to the transaction on a series of roadshows across Asia, Japan, and the United States to refamilarize investors with the strength of ADB credit quality.
That was the tightest the ADB has ever come against the World Bank, right?
There was not a comparable World Bank issue because their most recent 5-year benchmark deal was done in September 2001. On a LIBOR basis, however, the pricing of the issue was quite competitive relative to our peer group.
But, even still, you must be very encouraged that it is a much tighter spread than previous issues?
Yes, the spread was very competitive!
During the Asian crisis there was a perception that the ADB may have credit quality problems. Do you think that perception has now disappeared?
It is not an issue at all now. Right after the financial crisis, our key financial indicators were under pressure in terms of interest coverage ratios and reserve loan ratio, mainly due to increased lending volume to the effected countries. But we put in place an action plan in 2000 to rectify the declining trends in our ratios by increasing our loan charges. So during the roadshow, we were able to show investors the recovery of our key financial indicators. In particular, our interest coverage ratio is now back at the pre-crisis levels, while the reserve loan ratio continues on an improving trend. This, combined with the recovery of all the affected countries in Asia, makes that concern no longer an issue.
Do you feel your recent bond benefited from the so-called Asian bid?
Without question. We all know that the backbone of the US dollar global market has been the Asian investors. Their familiarity with the ADB's name and credit quality obviously helped the success of the issue a great deal.
Why do you have to borrow so much more this year than in the past couple of years?
If you look at our redemption schedule for the next few years that's going to tell the story. We are looking at a redemption amount of about $15 billion for the next three years, and that is driving our funding requirement. Basically, this redemption is due to all the bond issues we did during the Asian crisis, most of which are maturing in the next few years.
Does this mean you will have to return more to the big, benchmark, global bond strategy?
We are expecting a funding requirement of about $7 billion, starting May this year till April next year. We have prefunded about $2 billion through the $2 billion issue in January. So the net funding requirement is about $5 billion. At the moment the private placement market is providing us with very attractive funding, so we will focus our strategy for 2002/03 on maximizing our access to cost efficient funding opportunities in that market to generate a large part of the 2002/03 funding requirement. This is important because the benefits of sub-libor borrowing costs will be passed on to our borrowers.
Depending on the progress achieved through this private placement strategy, later this year or early next year, we may consider another benchmark issue.
In addition, the 2002 funding requirement would include a direct Japanese yen requirement, which has not been the case in the past few years. Subject to competitive cost efficiency relative to the US dollar bond market, we could also consider a benchmark issue in yen in 2002/03.
Why do you have direct yen requirement this year?
Until 1993, we were primarily lending in yen, and as a result the size of this lending facility was quite large. In 2002, some of the yen bonds undertaken in the late 80s and early 90s to fund this lending facility will mature. The amount is about $2 billion-equivalent, although half of that has been prefunded through the $2 billion global issue we did in January.
So there is still the yen equivalent of $1 billion that has to be funded?
Yes, and the proceeds of such borrowings will be kept in yen.
If we take a blended view of your sub-libor borrowing via the benchmark issues and the private placements, what would be the approximate number? Sub-libor 30?
As a matter of policy, we don't publicise such information.
The ADB is an institution interested in transparency, why not publish this number?
These borrowing costs are subject to negotiation with underwriters. In any case, our target funding cost changes from time to time depending on market conditions and types of issuance.
Is the ADB going to be active in the local currency bond markets this year?
Yes, that has been part of our strategy and is consistent with our developmental role. The last time we did something in the regional bond markets was in 1999, mainly because of our limited funding requirements in 2000 and 2001. Going forward, the large funding requirements will allow ADB to return to these markets again, subject to acceptable funding costs.
You haven't issued a Singapore dollar bond before. Are you keen to break into this market?
Of course, we are keen to issue in that market, but unfortunately the cost û when compared to the dollar market û has not been very favourable. Other than that we are keen to tap the Singapore dollar bond market, and hopefully there will be windows of opportunities in 2002 that would support such an issuance.
What would you estimate, in aggregate, would be the largest amount you could issue in the local markets in the forthcoming year?
Depending on the cost-efficiency, we could probably raise $500-750 million from the regional bond markets
