International Bond Markets –
Insights of External Bond
Issuance
Andrea Dore
Lead Financial Officer
World Bank Capital Markets Department
Future Economic Policies and Non-Traditional
Sources of Finance
Maputo, March 22-25, 2010
Maputo, Mozambique
Contents
I.
Strategic Objectives of International Capital Markets
Issuance
II.
Bond Markets for International Issuers
III.
Issuing / Price Setting Mechanisms
IV.
Insights of External Bond Issuance: Process and elements
that debt managers should consider
2
Strategic objectives of international
capital markets issuance
 Fund foreign currency requirements
 Expand the investor universe
 Familiarize international investors with issuer’s credit
 Meet government funding needs beyond the domestic market capacity
 Raise market profile and visibility
 Demonstrate access to funding or markets
 Instill market confidence
3
Bond Markets for International
Issuers
4
Domestic Bond Markets
 Historically, the first segment to appear in any jurisdiction
 Domestic markets become internationalized as regulations become
more lenient for foreign issuers or when domestic investors open
“off-shore” portfolios
 Only two purely domestic markets remain somewhat important to
emerging market sovereign borrowers
– Yankee market
– Samurai market
5
Eurobond Markets
 Eurobond markets is the term commonly used to describe the “offshore” component of any currency market
 Originated as the Eurodollar market, and now includes any
currency financing issued internationally (e.g. euro brazilian reais,
eurorand, euroyen, etc)
6
Global Bond Markets
 In the late 1980’s, the World Bank issued the first “Global bond”
 Merges the Eurobond market with the US domestic market
 Documentation is to US SEC standard and includes international
settlement with links to US clearing systems for US$ denominated
securities
 Used when the ability to place with US investors is necessary or
desired
 For the most part, has replaced sovereign Yankee issuance
7
Choice of Bond Markets Segments
Major Currency Bond Market Segments for
International Issuers
Domestic = sold only to domestic investors
Offshore = sold "Euromarket" international investors
Global = sold to domestic, "Euromarket" and US investors
Currency
Market or Market Segment
Offshore
Domestic
Global
(Euro)
U.S. dollar
Euro
Pound Sterling
Japanese yen
Canadian dollar
Australian dollar
8
Issuing / Price Setting
Mechanisms
9
Choices in Price Setting
Mechanisms
 Auction
– Rarely used in non-domestic issuance by a sovereign
– In most cases, it will not produce best price outside domestic markets
 Competitive Bidding
– Related to auctions, but has ability to produce best short term price
– Carries high risk that bond will perform poorly if price pushed too far
 Book Building
– Most frequently used method in international capital markets
– Pricing set based on investor demand
– Executed well, this method will produce best sustainable costs
10
Insights of External Bond Issuance:
Process and elements that debt managers
should consider
El Banco Mundial se estrenó en
Colombia con emisión de bonos
de deuda
Bavaria hace swap de monedas por
US$200 MM fruto de la emisión de
bonos del Banco Mundial
BM emitió en Colombia
US$200 millones en bonos
World Bank picks
Colombia for first
Latin domestic
Banco Mundial
colocó bonos
World Bank breaks new ground with debut 3 year euro
El Banco Mundial hace historia en Colombia
IBRD'S RM760 MLN SECURITIES PRICED AT
3.58 PCT P.A.
29 April 2005
Bernama Daily Malaysian News English
Thursday 28th April 2005
Histórica colocación de bonos del
BM en Colombia
COLOMBIA / World Bank Goes Local
12
The World of International Bond
Issuance
Price talk, price guidance or whisper?
Billing and delivering?
Straight line allocation?
Momentum has stalled?
Pot? Pot within a pot?
Take pre-orders in Asia, then open books in Europe?
The investor is asking
for protection?
• Unique and arcane jargon
• Multi disciplinary
• Established and expected behavior
13
Steps in a New Issue Process
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Market Selection
Tenor, size, cashflow and format selection
Hedging
Lead managers
Syndicate group
Syndication method
Fees
Documentation
Marketing
Announcement / Launch
Book-building
Sizing new issue / allocation
Pricing
Media Outreach
Secondary Market
14
1 Market selection
 US dollar dominance for emerging market issuance is being challenged
by the Euro market
– International trade is increasingly denominated in Euros
– Larger percentages of foreign exchange reserves are being held in Euros
 Japanese yen, particularly in Samurai format, continue to be interesting
in some situations
– Long dated demand for credit by Japanese investors can sometimes lead
to best funding costs
– Efficient way to raise JPY liability
 Local currency issuance in international markets by sovereigns
– Driven by international investor desire for higher yields and uncorrelated
assets.
15
2
Tenor, size, cashflow and format
selection
 Tenor
– Each market has standard tenors that are considered normal for
issuance (“benchmark maturities”)
– Deviating from these norms is possible, but may lead to increased cost
or undesired publicity
– Mostly, the benchmark maturities are set by the underlying government
bond issuance in that market
– Some benchmark maturities are set due to demand created by other
factors (e.g. bond indices duration)
Currency
US dollars
Euros
Japanese Yen
Main benchmark Maturities
Less seen, but at times acceptable
3, 5, 10, 20 and 30 years
2, 7 (euromarket),15 years
2, 3, 5, 10, 15, and 30 years
20 and 50 years
3, 5, 10, 20 and 30 years
7 years (mostly euromarket)
16
2
Tenor, size, cashflow and format
selection (continued)
 Size
– Setting correctly is one of several critical decisions for a debt manager
– Overly ambitious targets for size can hurt a borrower’s reputation
– Underestimating size can be partially corrected during the new issue and
can lead to positive media coverage
 Cashflow structure
– Vast majority of benchmark issuance by sovereigns is in simple fixed rate
format
– If issuing an international markets version of a domestic bond, then other
structures can, at times, be successful within a more limited scope
17
2
Tenor, size, cashflow and format
selection (continued)
 Issue format
– Public bond versus Private placement
Each are important tools
– Public bonds
 Aimed at larger groups of investors
 Seeks visibility
 Generally fulfill more strategic objectives
– Private placements




Usually issued to one or few investors
Best used to respond to specific investor inquiry
Can be used to issue unconventional structures
Mostly issued from Medium Term Notes (MTN) programs
18
3 Hedging
 Traditionally, desires to raise exposure in a particular currency are
fulfilled by issuing a bond in that market
– This is no longer the case with interest rate and currency swaps
 Decoupling the bond issuance from the end liability desire has
implications on bond related matters
– Ensuring that the lead manager of the bond is also best choice for the swap
can complicate the selection of banks
– The two functions can be separated, but this can create some execution risk
with each counterparty free to ignore the other’s market activities
19
4 Lead managers
Lead manager selection is another critical decision
–
Strong link between the bond’s success and the Lead managers abilities
and experience
 Main considerations for selection:
1. strength of relationships with the target investor base
2. experience, reputation and capacity / resources to trade the bonds
optimally in the secondary market
3. value to the debt manager in generating ideas, opportunities and support
4. incentive / reward for sponsorship of the debt manager’s other funding
products / markets
 Rare for one bank to fulfill all these criteria
 Most international banks, however, have at least some credentials
in the larger benchmark markets
20
4 Lead managers (continued)
 To help balance the desire to reward against selecting the best in a
particular market:
– Number of lead managers
 It is now common for bonds to have two or more Joint lead managers
 Reinforced by investor preference due to enhanced secondary market liquidity that
more ‘sponsors’ provides
– Rotation
 Easier to do when borrowing requirements are high and frequency of issuance is high
– Price
 Weaker bank ability can be offset with cheaper price
 Useful in primary market, but limited effect in secondary market
 Not a recommended tool, but useful for discussion as the inverse can lead to very
negative results
21
5 Syndicate group
 While not as important as the Lead managers, the syndicate group
is important as a way to:
– Recognize other banks valuable to the borrower
– Add additional or niche distribution to the bond
– Give additional sponsorship to the bond in the secondary market
 Several titles that can be given:
–
–
–
–
Senior co-lead manager (less common)
Co-Lead manager (common)
Co-Manager (common)
Selling group member (uncommon to rare)
 Benchmark bonds should have syndicate groups while less
strategic issuance can forego other layers beyond Lead managers
 Smaller bonds normally have smaller syndicate groups (3 to 5
banks)
22
6
Syndication method
 Retention
– Each bank is given (“sold”) a preassigned number of bonds to sell based on
ranking within syndicate
– No official coordination among retention banks
– No formal ability to move bonds from one bank to another
– No longer a frequently used method, except in lower layers of syndicate
group
 Pot
– All bonds are jointly controlled by the Lead managers
– All orders are submitted to the “pot” and decisions on which orders to fill or
not are made later by Lead managers and issuer
– Pot is common at the Lead manager level, and rare on the full syndicate
group
 Most common variation is “Pot amongst Leads and retention to
group members”
23
7 Fees
 Each market has generally accepted fees charged for the service of
underwriting and selling bonds
 Normally quoted as a percentage of notional paid upfront (e.g.
0.10%)
 Fees normally increase as underwriting risk increases or
complexity of transaction increases
 In several of the major markets, fees tend to be equal across
markets for similar borrowers or structures (e.g. Triple A
supranational pay between 0.10% to 0.15% for 5-year fixed rate
bonds in US$, Euro and Yen markets)
 Fee reductions from the norm happen due to competitive
pressures, but have both short and long term implications for
borrowers
24
8
Documentation
 Documentation aspect of bond financing in the international capital
markets can be complex and resource intensive
– Even more so when issuing into markets with higher legal and registration
requirements (e.g. US market)
 Learning and making preparations in this area should be done
much in advance of a new issue
– Leading banks can provide initial knowledge
– Experts at MDB’s can provide guidance
– Establishing a relationship with a reputable law firm can be of value
25
9 Marketing
Marketing is another critical part of any new issue process

Three main goals of marketing:
1.
2.
3.

Provide target investors with necessary information
Obtain initial estimate of investor interest
Begin new issue “momentum”
Marketing is primarily accomplished with investors, but in some
markets, the press can be included
–
Some markets specifically forbid discussions with the press prior to the
conclusion of the new issue process
26
10 Announcement / Launch
 Announcement and Launch are two of three market standard
events in the primary market where an official announcement is
made
 In some cases, these two announcements can be combined into
one
 These message are normally released onto Reuters, Telerate and
Bloomberg
 Announcement (“Mandate Announcement”)
– Officially makes public a borrower’s intention in a market
– Normally occurs just before the new issue process begins, but can occur
earlier, such as before a deal related roadshow
– The composition of the Announcement message is the most freeform of
the three
 However, depending on situation it could be important to include certain information
or omit others.
 Lead managers will provide best recommendation
27
10
Announcement / Launch
(continued)
Example Announcement Screen
28
10
Announcement / Launch
(continued)
Example Announcement Screen
29
10
Announcement / Launch
(continued)
 Launch
– The launch of a transaction is the point in time when bond sales are officially
begun, and mark the beginning of the Primary market
– At times, the official launch of a bond occurs after the orderbook has been
opened. In this case, orders taken before launch are considered “indicative”,
“soft”, or “indications of interest”
– Launch announcement follow a stricter set of rules for the information that is
required and, in most markets, follows a standard form
30
10
Announcement / Launch
(continued)
Example Launch Screen
31
10
Announcement / Launch
(continued)
Example Launch Screen
32
11 Book-building
 Book-building period is when orders are actively being taken
 Can last from a few hours to several days
 The price at which orders are taken is called price guidance or
price talk, and normally a spread to an underlying reference (e.g.
the “on-the-run” 5 year US Treasury)
 Price guidance can be a range of possible spreads or a specific
number (e.g. “+20 to +22 over”, “+low 20’s over”, “+21 area”, “+21
over”)
– Normally, price guidance begins as a range and is refined during the
bookbuilding phase as the order book grows and investor feedback on price
is collected
33
12 Sizing new issue / allocation
 Sizing of the transaction is normally set at the beginning of the
process
– Borrowers normally know exactly the amount of funds they can raise
 In some cases, the borrower may have some flexibility in size, and will
set the size after gathering information from investors in the
bookbuilding phase
 Allocation is the point in time when the Lead managers, together with
the borrower, decide which orders to fill fully, partially or not at all
– The first step is to determine which orders are good at the final spread
to be used
– For those orders that remain, the Lead managers will provide a
recommendation to the borrower on which to allocate
– Borrowers normally only provide general guidance, and allow the
experience of the Lead managers to make specific allocation decisions
(e.g. “allocate central bank orders first”, “allocate those investors who
are more likely to buy-and-hold first”, etc)
34
13 Pricing
 Pricing is the moment in time when the coupon of the bond is set
and the initial Issue price of the bond is determined
– At pricing, the yield level of the underlying reference (e.g. 5-year US
Treasury) is observed, and the final spread chosen for the new issue is
added
– The new issue’s resulting yield level is then converted to the initial Issue
price after selecting a coupon
 In most markets, the coupon is chosen as the multiple of 0.125% that most closely
matches, but which does not exceed, the initial yield of the new issue
– Bloomberg provides a very straightforward calculator that the majority of the
market uses for these calculations
– The results are then announced on the Pricing announcement
35
BC4 <Go> (bloomberg)
36
13 Pricing (continued)
Example Pricing Screen
37
13 Pricing (continued)
Example Pricing Screen
38
14 Media outreach
 One of the most important conduits of visibility for a new issue is
the immediate press it receives in the first days after pricing
 To ensure the borrower’s message and details of the bond are
communicated correctly to the press, a “Press Agent” is normally
assigned
– One of the Lead managers which is deemed to have a good press relations
office and who can produce good first drafts of press releases, questions
and answers and/or talking points for all Lead managers to uniformly use in
their discussions with the press
– Press agent will also schedule and coordinate press calls for the borrower
following pricing
39
15 Secondary market
 The first few days of trading sets the tone for the bond’s reputation
in the markets
 The most important influence a borrower can have on the initial
secondary market performance is the selection of the Lead
managers
 The allocation of bonds at the end of the book-building period is
also very important
 Closely monitoring the secondary market in the first few days and
communicating frequently with the Lead managers also helps
40
Questions
41
Thank you
42
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43