Bangladesh to make international bond market debut

It has been a long time coming, but an inaugural international bond issue from Bangladesh is being stitched together and in green to boot.

One of Bangladesh’s leading private sector banks is preparing a dollar-denominated green bond deal that will not only mark its own international capital markets debut, but also the country’s as well.

As such, a prospective $100 million transaction by City Bank will set an important pricing benchmark for the country’s credit risk.

Local bankers say the offering is expected to come later this year or early next year and will be backed by the International Finance Corporation (IFC), which took a 5% stake in the bank last spring.

In some ways, the deal follows-on from the work the supranational has done in India where it supported a $50 million transaction by YES Bank in 2015. It issued a $50 million equivalent bond with a 6.45% coupon in India’s offshore rupee-denominated Masala bond market and then used the proceeds to become the sole investor a similarly sized onshore issue, which carried an 8.95% coupon.

The IFC’s transaction won a lot of plaudits, but the offering, which YES Bank executed a few days later, was criticised after the latter tried to cut costs and did not pay for a second opinion or certification of its green bond credentials. Ba3 rated City Bank is not expected to go down the same road and also wants to place its deal with a wider group of investors so it sets a true benchmark.

Bankers have long tried to get the sovereign to establish an international yield curve for the country’s corporate credits, to no avail. As FinanceAsia has written a number of times before, government officials view their absence as a badge of honour.

Bangladesh may rank as a frontier market country, but it is very proud of the fact that it has a completely clean re-payment record with all of the multinational lenders it works with. It also enjoys a very low government debt-to-GDP ratio compared to peers across South Asia.

In 2017, this stood at just 27.1% compared to 67.2% in neighbouring Pakistan and an even higher 77.6% ratio in Sri Lanka further south. This is one of the reasons, why Bangladesh also has a higher credit rating of Ba3/BB-/BB- compared to B1/B+/B+ for Pakistan and B3/B/B for Sri Lanka.

One of the most interesting aspects of City Bank’s prospective deal is what the funds will be used for. Local bankers say proceeds will largely support the greening of the country’s outsized ready-made garment (RMG) industry.

Bangladesh is the world’s second largest exporter after China, with the sector accounting for revenues of just over $20 billion per annum. Yet while it may be very important to the Bangladeshi economy, it is not a sector that many investors would automatically equate with much environmental awareness: the opposite in fact.

The devastating fire at Rana Plaza, which claimed 1,138 lives in 2013, only served to underscore the longstanding image many people have of badly run and unsafe sweatshops churning out cheap T-shirts for the Western masses. However, local bankers say safety standards have been completed overhauled since then and green building design marks the next logical step for the industry.

“Most RMG factories now comply with the Accord on Fire and Building Safety, which was signed by 200 of the world’s leading apparel brands very soon after the fire,” said one banker. This requires companies to operate from buildings, which have been signed off by an accredited engineer, have fire-fighting equipment installed, as well as fire safety doors, which meet European standards.

The banker added: “These days, Bangladesh also has a high number of certifications in leadership in energy and environmental design (LEED) from the US Green Building Council.”

For example, Bangladesh now has 67 LEED buildings, compared to 40 in Indonesia, 30 in India and 10 in Sri Lanka. Of these, 13 meet the highest platinum criteria.

Bankers also say a dollar-denominated bond offering makes sense since dollars are a natural hedge for RMG sector revenues. It should also help to extend the maturity curve and lower the cost of funding in Bangladesh since City Bank would like to issue a five- to seven-year deal in a country where it is hard to find dollar-denominated funds beyond the two-year mark.

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