The World Bank has approximately $108 billion of debt outstanding, of which perhaps up to half is now estimated to be in Asian hands. This stunning statistic shows how important Asia has become for global borrowers due to the massive rise in foreign reserves in Asian central banks and the high savings rate in Asian economies.
Despite the dollar's recent decline, there seems to be no shortage of demand for dollar denominated products from the world's leading borrowers. However where before borrowers were thick and fast on the ground chasing the few dollars available on the basis of their credit, now the boot is on the other foot, as the investors chase the few borrowers that still issue regularly.
For the World Bank, its own funding needs have declined from an annual peak of $28 billion to $30 billion during the Asian financial crisis, to only around $12 billion to $15 billion in the last year. Indeed when Doris Herrera Pol, the head of The World Bank's capital markets operations visited institutional investors in a non-deal roadshow last year, several asked the World Bank to issue more debt.
It is not just the scarcity value that attracts lenders to the World Bank's bonds, but the reputation it has as an issuer that leaves something on the table. "We don't try to squeeze the last basis point out of every deal as we may only do one or two global bonds a year, says Herrera Pol. "We want investors to be satisfied with the performance of our bonds."
This reputation has also bolstered the World Bank's position in the non-traditional markets it now issues in. Where before its US dollar global bond programme would have been its mainstay, now other types of products such as uridashi bonds [foreign currency bonds sold to Japanese retail investors] and structured notes are playing a larger role in its annual funding programme.
"We haven't really needed to do much global bond issuance because of the appetite we have seen for other products at attractive terms to the Bank. This means we could have filled our borrowing programmes easily," she says. "But strategically we view maintaining our presence in the global US dollar benchmark market as important vis a vis our institutional investor base, including central banks."
In Japan, The World Bank is synonymous with reconstruction efforts after the war and as such, is held in high regard by its investors, who understandably have an average age above 60 years. But large Japanese institutions have also played an important role especially in the structured note and reverse enquiry deals.
Changes to the lending structure of the bank have also affected its borrowing programme in the last few years. In 1999 borrowers were given complete discretion on the currencies they can select for their World Bank loans, where before it was a cocktail of yen, dollars and deutschemarks.
As borrowers started choosing the currency, the bank's balance sheet became more and more US dollar-based as most borrowers prefer to take their loans in dollars. Under the World Bank's articles of agreement, the bank cannot take any currency risk on its balance sheet, so as it had more and more loans in US dollars then there was a shift in liabilities towards US dollars and a decrease in its yen and Euro funding requirements, an irony given how much demand there is from Japan for World Bank paper.
The bank does borrow in other currencies with the help of currency swaps. "At the end of day, we assess our issuance or funding opportunities across currencies, and execute transactions that are cost competitive in USD terms," says Herrera-Pol. "Everything the World Bank borrows gets put in a pool of funds, we average the cost and add a lending spread. The net interest rate on our loans to all our clients is now USD Libor plus 25 basis points. We have to care about the cost of what we borrow because everyone of our borrowers benefits from our borrowing cost and would be affected if our cost rises."
That being said, Herrera-Pol says that the bank is looking to do more Asian currency issuance. She says the bank has prepared the groundwork in Thailand and Malaysia to do local currency deals, and will issue if the costs are competitive and the deals meet the objectives of the development of the local markets by the authorities.
In India too the bank is a willing issuer although it has been waiting for the last two years for costs to come down. With 66% of its most recent global bond in June being placed into Asia, there is no shortage of World Bank paper in Asian accounts.