Benefiting from a clear international pipeline and Asian price leadership, the Asian Development Bank (ADB) has been able to return to the international dollar markets in some style. With a $2 billion transaction, which matches for size a previous benchmark of May 1998, the triple-A rated credit has managed to re-position its credit where it always believed it should be - at the tighter end of the supranational spectrum.
A five-year deal was priced last night (Tuesday) in New York via Nomura and Morgan Stanley, the two banks that have traditionally monopolized its business, plus HSBC, which joins the ranks as bookrunner for the first time. For all three banks, what the deal lacks in fees (only 10 cents) it will make up for in league table standing and repute with one of the region's prime clients.
The first deal to be launched off the ADB's new self-led MTN programme, pricing came at 99.61% on a coupon of 4.875% to yield 51bp over Treasuries. Syndicated on a full retention basis, there were a total of eight co-managers each taking $20 million in bonds (1%) and numbering: BNP, Daiwa, Deutsche Bank, Goldman Sachs, Lehman Brothers, JPMorgan, Salomon Smith Barney and UBS Warburg.
Having been absent from the public bond markets for the past couple of years, ADB and particularly its new head of funding, Juan Limandibrata, were understandably keen to set a successful benchmark. The bank also wanted to set a tightly priced one given the substantial borrowing programme it has lined up for the next three years.
Having raised $2 billion in 2001 and $1.7 billion in 2000, the $7.5 billion earmarked for 2002 is reminiscent of its borrowing programme at the height of the Asian crisis when in 1998, it raised a record $9.6 billion. Indeed, about 70% of the $18.5 billion scheduled to be raised through to 2005 will re-finance borrowings undertaken during the Asian crisis, most of which had three to five-year tenors.
At the time, the bank hoped that more frequent international borrowing would give its yield curve the kind of liquidity investors often complained it lacked relative to other supranationals with larger borrowing programmes. Instead, however, investors demanded a yield premium to compensate for a perceived reduction in credit quality.
Having consistently aimed to price about 2bp back of the World Bank, ADB consequently found itself coming about 6bp back and at the height of secondary market widening, saw its paper trade out to the double-digit level beyond the World Bank. This time round it is said to have come 1.5bp behind World Bank on a like-for-like basis and 2.5bp back of US agency Fannie Mae, which launched a $4 billion five-year deal late last week.
Part of the reason why it has been able to do so can be explained by the successful stress testing its credit ratios underwent during the Asian crisis. For example, where its loan book is concerned (62% of its $44 billion asset base), no public sector recipient has ever defaulted. Likewise, private sector NPL's never broke through the 0.2% mark even at the height of the crisis.
Analysts also point out that ADB has one of the most impressive ratios of rating to callable capital. Some 60% of callable capital derives from member countries rated double-A or above. In the triple-A category it also ranks marginally higher than the IADB, AfDB, CAF and NIB, though substantially lower than the EIB.
However, the main reason was the strength of Asian demand, which underpinned an order book with about half-a-dozen $100 million plus orders. Although the three leads had not tallied a consolidated book at the time FinanceAsia went to press, it is estimated that about 75% of bonds were placed in the bank's home region, with heavy participation by Asian central banks. US investors are also said to have made a respectable showing, with Europe, the most notable absentee.
As one observer explains, "Asian investors and particularly the central banks have been big buyers of triple-A paper since the beginning of the year. At the moment, they have the most cash to put to work of any investor base in the dollar market and they naturally favour the ADB, because it is a credit they understand well. This deal, therefore, had a very strong Asian distribution focus."
He also goes on to say, "demand from Middle Eastern investors was strong too. The only weak link was Europe and particularly the UK where you'd expect some participation from asset managers.
"They held back because bond spreads have tightened a long way this year and they remain uncertain whether the rally will continue. This will largely depend on whether the US Treasury decides to conduct monthly rather than quarterly auctions for five-year bonds. If it chooses the former, ADB's issue should trade in nicely as investors move in to pick up paper in the secondary market."
The final ingredient of the deal's primary market success was its timing. Originally primed for launch last week, the deal was held back after Italy, L-Bank and then Fannie Mae all issued large benchmarks into the Euromarkets. The three leads expected to bring the deal back at the beginning of next week after the forthcoming FOMC meeting, but were suddenly presented with a market window on Friday following comments from Federal Reserve chairman Alan Greenspan.
"No investment bank had anything lined up ahead of the FOMC meeting, but being fully prepared, ADB was ready to go as soon as Greenspan made it clear there wouldn't be an interest rate cut this week," one observer concludes. "For a borrower which wants to grab investors' attention and set an important strategic benchmark for itself, a clear market like this couldn't have been better."