Having opened up three new local currency bond markets in just over a year, the Asian Development Bank (ADB) has its sights set on a benchmark deal from China, as well as looking at possible transactions in the Philippines, Indonesia and Pakistan. Here, funding head, Juan Limandibrata, shares his thoughts.
Over the past 15 months, the ADB has opened three local bond markets, in Malaysia, India and Thailand, why these markets in particular, and what were you trying to achieve?
Limandibrata: In each of these countries the bond markets have developed quite significantly over the past few years, which gave us confidence a successful bond deal could be placed. Also, each of the governments wanted to open up their respective market, so we were responding to the government's initiatives.
In the case of India, we had local currency funding requirements. What happened after the Asian financial crisis is that our borrowers tried to avoid a currency mismatch as much as possible and had a strong preference for local currency loans. In India, in particular the objective was to fund our rupee-denominated loans.
However, this was not the case in Thailand and Malaysia, because we have swapped the proceeds into US-dollars and used them to fund our US-dollar loans
What constraints did you have in terms of size and pricing for these deals?
None really. The size of the respective deals was driven primarily by demand, especially in the case of India. When we launched that bond, we had four Rupee-denominated loans amounting to about Rs5 billion, so we designed the size of that particular issue to match those loans.
With respect to the bond offerings of Thailand and Malaysia, there was no size constriction because we were able to build a substantial book size for both of those deals during the roadshows. The only limitation was based more on the cross-currency swap side, in that we based the size of those deals on what the swap market could absorb.
Overall, what is the ADB's funding strategy, especially where it concerns local debt markets?
The overriding strategy is to diversify our funding sources. Our core funding strategy is to maintain a strong presence in key currency markets, and we're keen to fund in as many markets as possible to avoid dependence on a select few markets.
Under this strategy, we have borrowed in some 22 different markets globally. This strategy allows the ADB to achieve attractive funding costs on a sustainable basis for the benefits of our borrower.
How much of your funding strategy is determined by your lending policy?
They're only related in terms of size. Of course, our annual funding programme is dependant on our lending programme, but in terms of market timing, tenure and overall structure it's totally independent. This allows us maximum flexibility in terms of our market approach.
You are said to be looking at opening up China next, how close is a deal to market?
It would be naïve to give a specific time frame for the completion of that deal, but what I can say is that the deal is progressing into the latter phases of regulatory framework and documentation. So if we can continue to proceed in this manner, it is likely that we will see a deal before the end of the year.
How do you think the market will react to this inaugural Chinese issue?
ADB's plan is to issue up to Rmb2 billion, and what we have heard from the market is that demand has been very strong, so we are expecting a very significant book size when we take the deal to market. Also, the deal will carry a long-term maturity and we're garnering quit a lot of interest from insurance companies. So baring any catastrophic economic upheavals, I can foresee a book that could be 3-4 times over-subscribed.
What do you foresee about the future of Chinese issuance?
The government has not allowed ADB and other supranationals to swap the proceeds into US dollars, so the bond proceeds have to be used domestically to fund our loans in China. On that basis, any future deals will be demand driven. At the moment, the Rmb2 billion target size will be sufficient for our lending requirements over the short-term.
Having said that, our policy in general is to try to maintain a regular presence in any market in which we have issued bonds. We're not interested in issuing one-off transactions, and that will continue to be the case with China. But of course that will be determined by loan demand and market conditions. If both are there we would like to come to the market on a regular basis
What other markets are you looking to open up in the near-term?
We're also working on a possible transaction in the Philippines; we have a peso loan that we need to fund so our preparation is quite advanced in that market and market conditions all point to the loan being finalized soon. So we hope to launch that issue in the not too distant future.
Of course we're always looking at other markets, but again that will be demand driven on the lending side. If our colleagues on the lending side identify loan demand then we will start discussions with the respective governments about possible issuance.
The other issue is if these governments would like to open up their markets and ask ADB to be the first issuers, which has been the case in most markets in the past, but that will be determined by the degree of development in these markets. Based on that, there are some markets that you can say we are looking at for possible issuance, Indonesia and Pakistan for example. In both countries we are pretty active on the lending side and given the focus on local currency financing I could expect, sooner rather than later, there will be loan demand in these countries.
What, in aggregate, would be the largest amount you could raise in the local markets in the forthcoming year?
Our approach is driven by loan demand and we want to play a catalytic role in these markets, our objective is not to crowd out domestic issuers. When we think about the transaction, we want to make sure we issue a deal that will provide sufficient liquidity to the market. Because these deals are primarily local currency loans, the demand is obviously not as big as US-dollar denominated loans, which are sold primarily to governments. Local currency loans are limited to private sector borrowers, which translate to smaller sizes, and in any given year, in any given country we are looking at $100 million ceiling.
Now that Treasury levels have come back in after months of volatility following the GM and Ford blowout, will ADB be active in the global bond market?
We have a policy to issue one benchmark of global bonds per year, so we have been able to maintain that policy over the past few years, and we will continue that trend this year, with a planned $1 billion issue later in the year. This works well given our modest funding requirements of $4 billion to $5 billion for this year.