Dealing with inflated funding needs while working from home might have proved more of a challenge if it were not for the fact that investors are hungry to put money to work in ethical and secure endeavours and be part of solution to the crisis.
This has meant an acceleration of the trend towards assessing the social impact of the way proceeds of capital market investments are used, as well as the environmental impact.
For supranationals, this is the fulfilment of a long-held wish, although the fact that it has come as the result of a health crisis and global pandemic makes it a painful victory. With a health crisis rapidly turning into an economic crisis, some of the panellists are looking afresh at their business models, and how they can best fulfil their role as development banks to alleviate poverty and protect employment.
While some have sought to capitalise on the surge of interest in products that aim to fight the consequences of the coronavirus by issuing Covid-19 labelled bonds, raising money specifically to combat the virus, others on the panel highlighted that, as development banks, all their lending has socially beneficial aims.
As a result, many have chosen to use sustainable development bonds which, although the proceeds are not segregated from the proceeds of vanilla funding, nevertheless highlight supranationals’ efforts to bring about the UN’s Sustainable Development Goals with particular projects.
The global lockdown has also afforded issuers and bankers the opportunity to take stock of the way we do business, and to ask if returning to the way things were is really what we should be hoping for once the risk from coronavirus has receded. With the increasingly sharp focus on environmental, social and governance considerations, can the MDBs, who lead the way in the field, continue to justify frequent trips abroad to meet investors?
Participants in the panel were:
Eila Kreivi, director and head of the capital markets department, European Investment Bank
Domenico Nardelli, treasurer, Asian Infrastructure Investment Bank
Kalin Anev Janse, CFO, European Stability Mechanism
Sherif Ayoub, CFO, Arab Petroleum Investment Corporation
Spencer Dove, managing director, public sector debt capital markets, Nomura International
Antonio Recine, director of financial policies and international bond issues, CAF - Development Bank of Latin America
George Richardson, director, capital markets department, The World Bank Treasury
Moderator: Lewis McLellan, SSAs and MTNs editor, GlobalCapital
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GlobalCapital: How will your funding programmes be affected by the coronavirus pandemic?
Eila Kreivi, European Investment Bank: At the European Investment Bank, we announced a borrowing programme of €60bn at the beginning of the year. We usually have a flexibility of about 10% of the annual programme, which we may have to use this year. But otherwise, we expect to be able to remain pretty much within the framework for the year.
Kalin Anev Janse, European Stability Mechanism: Our announced funding programme for the European Financial Stability Facility [EFSF] and the European Stability Mechanism [ESM] is €30bn in total for this year, of which €11bn is for the ESM. Our new pandemic crisis tool offers up to €240bn of financing for the countries of the eurozone. Every country can draw up to 2% of their GDP. Analytically, one could say that the ESM is attractive for about 10 countries if you compare our financing costs with their financing costs. That means we are speaking about a potential of €80bn that could come to the market. Now, if these lines are open, that doesn’t mean €80bn will immediately be drawn, but our €30bn funding programme in 2020 very much depends on how the Covid-19 crisis develops and how this new tool, the Pandemic Crisis Support facility, is deployed and used by member states.
Sherif Ayoub, Apicorp: Our DCM funding programme usually hovers around $1bn and that’s adjusted up or down, depending on ALM considerations. We have recently announced a counter-cyclical package for member countries, which may affect our requirements.
Antonio Recine, CAF: For this year, we are planning around $5.5bn of funding. This is an increase compared with the past couple of years. We have been raising between $4bn and $5bn per year. But, as with many of the MDBs here, we are receiving a much stronger demand this year, so we are going to increase our funding plan further.
Given the increase of the funding for the year, we will be looking at the various markets that we participate in with a possible increase of one benchmark in our main markets and more funding from private placements.
George Richardson, World Bank: We’ll see a more dramatic change for the International Development Association’s borrowing requirement than for the International Bank for Reconstruction and Development.
For the 2020 funding year, which ends in a couple months, it was only $2bn-4bn. After the Covid-19 response package announcements that we have made so far, the funding requirement has grown to at least $5bn, so we’ll be issuing another bond at least this fiscal year.
Next fiscal year, we’ll see a pretty significant increase. Before the Covid-19 package, the funding requirement was estimated to be about $5bn. Now, it’s potentially $10bn-$12bn. Not tremendously big compared with other borrowers, but still a pretty significant jump in the requirements and the demands to support our member countries through the fallout of the Covid-19 crisis.
GlobalCapital: Can you tell me about some of the measures your institutions are taking to mitigate the impact of Covid-19?
Anev Janse, ESM: When this Covid-19 crisis started in Europe, a €540bn response package was rapidly created involving the ESM, the EIB and the European Commission. Some €100bn comes from the Commission, €240bn comes from us and €200bn comes from Eila at the EIB. At ESM, we have a total lending capacity of €500bn, of which only €90bn are currently used, so we have €410bn still available.
For this crisis, with our Pandemic Crisis Support facility, we are agreeing another €240bn, if needed, to support domestic financing of direct and indirect healthcare, cure and prevention related costs resulting from the Covid-19 crisis.
We won’t need new shareholders’ capital and it won’t touch our rating. Ratings agencies have given us that confirmation.
But it’s a significant amount that we can pump into the economy. What makes this new and innovative is that it’s something new built on an old instrument. We have slashed our service fees from 50bp to 25bp. We have slashed our margin from 35bp to 10bp. It’s an extremely cheap mechanism that we have created for countries to borrow from us. It allows them to borrow against triple-A rated credit, even though they are not triple-A rated, with only one condition: that they spend it on direct and indirect healthcare costs, which is quite a broad wording.
This is part of the ultimate solidarity that we have created on a European level to help each other through these difficult times.
I think, for investors, the most interesting part is that if countries draw on these credit lines, the bonds to finance these would be the ultimate social stability bonds. The proceeds are 100% targeted on healthcare costs. So this is, I think, a new market, a growing market. For ESG investors, the ESM can be very attractive.
Kreivi, EIB: We are providing a guarantee facility. You can think about it as a guarantee mandate. These guarantees will be extended by a group of member states who are willing to participate. In a way it is an indirect way of making use of shareholder resources. The €200bn that Kalin mentioned is the amount that can be mobilised with €25bn of guarantees. We will not be lending the extra €200bn, but will be mobilising it through guarantees.
Richardson, World Bank: To tackle Covid-19, first, we had phase one, which was a fast-track facility for a very immediate short-term response. Mostly, we diverted existing resources into programmes that are more health-related to support the immediate needs and help member countries fight Covid-19.
Then there was phase two, which was a $150bn announcement from the three institutions — roughly equal in size between the International Finance Corporation, IBRD and IDA. The take-up, unsurprisingly, has been fastest with the poorest countries. If you look at the schedule of loan approvals, the poorest countries are vastly ahead. Those are the countries that are going to need the biggest help.
There’s also the work that the supranational MDBs are doing with the G20, to assess options for rescheduling clients’ debt. There are other ideas too — all stones are being turned to discover the various ways that we can support our clients through what everyone is expecting to be quite an extended period in which emerging markets and developing economies deal with the shock of the economic downturn that has happened in developed countries on the consumer side of the world. That’s what has been announced, but I expect there will be more coming.
GlobalCapital: Will some of you be making additional demands on your shareholders, matching the additional demands on your lending capacity?
Recine, CAF: We are receiving stronger demand from our country members. We actually have three facilities in place right now. One is a counter-cyclical emergency credit line of $2.5bn. There is a smaller contingent credit line of $300m that is directed to attend public health systems of the country members. Finally, we have technical assistance for $400,000 for each country, also related to the capacity of the public health systems.
We are currently in the middle of a $4.5bn capital increase that was approved in 2015. This includes capital contributions of subscribers already committed from the country members up to 2025. The capital contributions that we are receiving will allow us to continue to grow our loan portfolio without reducing our capitalisation ratios and it will give us an extra capacity.
And finally, there is another source of capital that we hope to have very soon. Some of the country members have expressed their interest in becoming full member countries, which would require them to contribute a larger amount of capital. The three countries that have publicly expressed their interest are Mexico, Dominican Republic and Costa Rica. So that will help a lot in increasing our capacity.
Ayoub, Apicorp: We announced in April at our general assembly what Moody’s called a “very substantial” increase in our capital base. We are moving from a regional to a larger MDB. Our authorised capital increased from $2.4bn to $20bn; subscribed capital from $2bn to $10bn; paid up from $1bn to $1.5bn.
Then there is callable capital, which is a significant part of our capital base. This increased from $1bn to $8.5bn. The callable capital is clearly much higher than our total debt outstanding by a large margin. So, it’s a clear sign of support from member countries pumping in capital that could be called if needed. So that is something that is important for us and it allows us, in return, to be there for our member countries.
Domenico Nardelli, AIIB: Like other MDBs, AIIB’s board of directors has approved a new facility targeted at providing support to member countries in the wake of the Covid-19 crisis and it will amount to between $5bn to $10bn depending on demand. We are experiencing very strong demand for this facility.
We have run an analysis on our balance sheet and we have concluded that we are not going to need any capital increase to provide for this additional financing. We have a large balance sheet with a large equity contribution that has been just given to us. We are a new MDB, in operation for just a few years. We have a balance sheet that we have just started to leverage and we have determined in our analysis between us in finance and colleagues in risk and strategy departments that we have ample capacity to continue to leverage the balance sheet and provide for demands that we are seeing, so we have no further need for capital injection.
GlobalCapital: With the extra supply hitting the market, have you seen any indications of strain?
Spencer Dove, Nomura: There’s really not a great deal of strain when you look at supranationals or across the sovereign space.
In early May, we had the third largest week ever for IG corporate supply. And the market took it down. Then, we saw the Fed issue $32bn of new 10 year paper and we saw a new Australian 10 year note for nearly A$20bn ($13.5bn), and a £12bn Gilt ($14.9bn).
The market seems to have phenomenal capacity to take this supply down. Our sector is a real beneficiary because we have copious amounts of QE taking paper out of the street and people are very happy to go back into the SSA world at levels that six months ago they couldn’t imagine investing in.
GlobalCapital: What about on the operational side?
Dove, Nomura: Apart from home schooling, there isn’t too much strain. There are a few little visits around the corner of the door every once in a while, needing some help with various school projects.
The reality is we all work on technology platforms for our entire working life. Whether my desk is looking at my front window or looking at somebody else in the office, not much changes. It’s not as easy working on a laptop with one small screen. But we are an inventive bunch of people, both issuers and bankers, and we adapt to new technologies like we are doing today and find new ways of doing things.
I think the reality is that those who need a lot of technology support, such as our traders, have either been set up in various locations or, if they need to work from home, they have got full trading kits installed in their houses. I think the worst I heard was that one of our traders didn’t have a desk or table he could use, so he was having to sit and work on the floor.
But that’s teething issues. When you think about it, moving the thousands and thousands of people from big offices to working from home basically over the course of a weekend with no notice is a phenomenal achievement. It’s the same on the issuer side. We know that people are using multiple locations to work and a lot of people are working from home. I expect it may continue like this for some time.
Nardelli, AIIB: I also wanted to offer some perspective because in this part of the world we were early in the cycle to adopt the working from home approach that has since become common. Here at the bank, we had to close down our office in the first half of February, and we found ourselves working from remote locations. The added challenge was that the period coincided with the Chinese New Year holiday.
Another challenge was that many people were outside of Beijing and outside of China, including myself. I was back in my country.
I have to say, I agree with what Spencer said. I think we were surprised by the extent to which things operated and functioned well, and how we were able to conduct business as usual, particularly in treasury. We were able to execute our second ever private placement while working remotely.
We had people in settlements, and all areas of operations, working away from headquarters. Everything functioned. I think, as Spencer said, the real challenge is to come up with protocols and different ways to work efficiently if this is going to go on for a long time.
Twitter, the social media company, has offered its employees who want to do so the opportunity to work from home for ever. So for some it is a permanent situation, which clearly requires developing some new protocols or some new procedures and ways to keep people working together.
Kreivi, EIB: Are you back in the office, Domenico?
Nardelli, AIIB: We’re back to the office. We re-opened on March 16 and the staff gradually returned. I was back in China on March 4. Some are still struggling to return, but the office is up and running.
Anev Janse, ESM: At the beginning of February, I had a call with Andrew Cross, the AIIB CFO. He explained to me that they were working remotely. He was in the US and he’s from New Zealand. At the ESM, we decided we should just try to see if we could run the entire CFO team remotely and, later on run the ESM as a whole remotely, just in case it were to happen here.
At the beginning of February the virus hadn’t taken off in Europe but we started deploying this and tested running the institution remotely.
A few weeks later, we had to do it for real, and we were quite well prepared.
Second, we speak in a lot of these Euromoney panels about technology and how technology is changing and those of you that know me know I’m very passionate about this.
For the past few years at ESM, we have moved completely into the cloud infrastructure. So for us, working from home was a piece of cake.
With Bloomberg Anywhere, with trading systems fully in the cloud, remote working is the easiest thing you can do. You just take your laptop, your screens, and you can work from any place around the globe.
What is most important to me is thinking ahead. How will work life look like in the next decades? Will we do all these roadshows? They’re great opportunities to meet investors in person, but at the same time we can build a very close relationship with them through video conference calls. I do many video conference calls with investors and it works very well, so we can save costs and save the environment. I think this is probably one of the best green solutions that we have currently accomplished.
This will change society for a long time. With Eila at the EIB we will be organising a big flagship capital markets conference digitally on July 1-2. It will be 100% virtual and live. So this is another aspect of how we are changing how we do business. We are bringing Europe to the entire world.
Recine, CAF: CAF has had in place a contingency and business continuity plan for many years now, in case operating from one or more of the 13 offices was not possible. These plans were in place since the start of our decentralisation process.
Execution has been straightforward. Investor meetings through the telephone have been productive, but in my opinion nothing compares with face to face meetings for explaining our credit or recent developments.
GlobalCapital: What about Covid-19 response bonds? We have seen issuers raising money where the proceeds are deliberately targeting the impact of Covid-19 in various formats. Will you be using these? How has the arrival of this instrument changed the market?
Dove, Nomura: Sustainability was always the most challenging of the ESG pillars for investors to get their heads around. The speed with which we have been forced to react to Covid-19 has made people much more willing to look at and accept this is as part of the broader ESG framework.
We’ve seen it in all regions. Investors have been jumping over themselves to publicly support Covid-19 bonds. Issuers have very quickly been able to find the right assets to map to the UN’s sustainable development goals with respect to health. As a result, they have been putting out very large bonds to support the efforts against the disease.
What I would worry about slightly in the immediate future is that green bonds may take a back seat. So much work has gone into green bonds over the past four or five years and it would be a shame for it to be neglected now.
Kreivi, EIB: I wouldn’t say that the green agenda has taken a back seat, but we have seen less focus on green bonds. That’s quite normal in the circumstances.
The very frequent comment we are getting is that this is only the first stage of what could happen if we don’t tackle the climate agenda. We will have millions of refugees coming over and that will mean quite different kinds of problems.
People are connecting the dots on these two topics — Covid-19 and the green agenda. What I’m happy to see is that the ‘S’ letter is catching up with an ‘E’ letter in ESG. It’s a good thing.
Most of the increases in borrowing for anybody — governments, supranationals, corporates — are related to this pandemic or its economic consequences. However, not all uses of funds are the same. You can have a government that is raising money to bail out airlines and not putting any limitations on dividends, share buybacks or furloughs, and so on. On the other hand, you can have some very specific funding addressing the healthcare sector or SME unemployment support.
I think we have to separate the wheat from the chaff in that sense. It’s very good that the focus on social aspects is now coming into focus, because not all Covid-19 related borrowing is the same. You need to see where the money is going, and what is being done with it. Is there any conditionality, for example, even in the case of governments? This is talked about much more than it was 10 years ago in the previous crisis.
Dove, Nomura: I agree. Things have been made more straightforward by authorities getting guidance out very quickly in terms of what fits the bill for the right kind of lending. I think that has been very helpful and very supportive to the market.
Nardelli, AIIB: The experience that Covid-19 bond issuers have had is very different compared with the way the green bond market has developed.
This crisis here has been sudden and has been very intense. It has hit the lives of people close to us. The impact has been really strong.
Some of us here — Eila at EIB, George at World Bank and others — have been pioneers in the green bond market, but it has taken a long time to develop, even though it has always enjoyed broad sympathy. Pollution is something that is invisible and slow. It affects you slowly, progressively. This virus has hit suddenly and strongly, so it has generated a conviction that spending on infrastructure is critical to resolve this crisis and critical to recovery.
This is what infrastructure investment is about. This is also the reason why we at AIIB as a bank are focused on infrastructure.
The response has been massive. Some of the numbers that Kalin and George and others have been citing are very impressive numbers. The market has been really responsive because the urge to react has been immediate in the case of this crisis.
Anev Janse, ESM: The market growth has been impressive. In the first four months of this year, more social bonds have been issued than in the entirety of 2019. Second, if you look at the percentages, last year the social bond market was only one tenth of the size of the green bond market. Now it’s one third. It’s a huge catch-up.
This switch from ‘E’ to ‘S’ in crisis time is the right move. We now need social support. The worst-hit countries need support for their healthcare and for SMEs. So, focus on the social response in this crisis is very important.
This is different from the previous crisis. Last time, the financial world caused it. Now we can be part of the solution. We can use finance for good by channelling large amounts of money to solve the Covid-19 crisis.
I think it will also broaden the view that we will not only look at green, but examine the ‘E’, ‘S’ and the ‘G’. Building on the EU’s green taxonomy, the next step is to start building a social taxonomy. How should we make sure the proceeds of social bonds are well spent?
Kreivi, EIB: That was always the plan, but it will hopefully be speeded up now.
Recine, CAF: The bond we issued in May was focused on our Covid-19 response. We do have a green bond framework, but there is a stronger need to develop a social bond framework. We had that planned for later on, but I think we are going to accelerate our plans to have that social bond framework in place sooner.
Richardson, World Bank: The ‘S’ catching up with the ‘E’, as Eila said, is very welcome news. For the mission of the World Bank, we hope it’s a permanent catch‑up. There’s still the ‘G’, which is hugely important for us in our world and the countries that we work with.
The focus on the ‘E’ and the green bonds, not to be too critical, has always been a little bit myopic. However, it was a necessary means to an end to get people to focus on the full ESG spectrum.
There has been a big shift in attitude from 10 years ago to now. These days, it’s much easier to get people to focus on the impact of what the proceeds fund. In that respect, the ‘E’ was the right place to start.
We’ve all seen articles and pictures from the satellites of how pollution is massively reduced, and air quality and marine life is coming back to places where it was struggling. That’s great news for anyone focused on the ‘E’.
But we have to consider the impact on other sectors — countries that are oil exporters, for example. There are people who still depend on that industry for their livelihood.
To focus on one sector is to be wilfully blind to the others. That’s why we have always tried to shift things towards the full ESG spectrum. That’s the main reason for our sustainable development bonds. They are full balance sheet bonds, but they give investors or dealers or ourselves the chance to promote their involvement with one or several parts of the lending programmes that we have.
Yes, at the moment everybody wants to hear about what we will do in health before, during and after the virus. Soon, we will get back to people wanting to hear more about environment.
There are also various micro sectors within these sectors which people are particularly interested in. One of the most successful sustainable development bonds we have ever done was a bond denominated in Canadian dollars that we sold a couple of years ago. We used that bond to engage with investors on maternal health. That really got everybody’s attention.
At that time, our CEO, Kristalina Georgieva, who’s now the head of IMF, was a big supporter of these projects. All the sectors are important, and that’s why we want to focus on continuing to move the market towards full balance sheet products.
For MDBs like us, it’s particularly relevant to look at our entire balance sheet because all the bonds we issue are essentially social bonds, but that doesn’t mean that a corporate can’t think along those terms.
If we get all investors to focus on that, then the corporates have to figure out a way to make themselves work under this new model.
Kreivi, EIB: When the technical expert group was working on the EU taxonomy, there was an element that some people thought was controversial or difficult. The text said that you have to do good for the environment, and not cause harm to other aspects of the environment, but it also said that you have to take into account minimum social safeguards. What was included was a stipulation regarding respecting employee rights and human rights and fighting corruption.
This was seen as a bit of a difficult part of the equation, but I think this crisis shows that that was actually a very necessary part and needs to be refined even further. We should not have environmental investment without social safeguards.
Ayoub, Apicorp: I agree. For us, because we work within the energy space, where energy transition is happening, the ‘E’ parts are particularly important for us, and as George said the ‘G’ has always been extremely important.
I would like to highlight that what I’m not hearing a lot of people talking about is the ‘P’ and ‘E’ parts — poverty reduction and employment.
There’s an immense amount of pressure on politicians from the general public who are suffering economically — both those who are being put into poverty if they are close to the poverty line or even the ones who are well to do or middle class. They have been squeezed like no time since the Great Depression.
When we meet next year, we are still going to be talking a lot about the role of MDBs within the context of Covid-19. But in the economic realm, maybe we should be focusing on poverty reduction and employment now. What will the role of MDBs be during and after the Covid-19 pandemic?
Should we be addressing the employment question? When you see unemployment in the US at historic numbers and the same thing in Europe and in Asia and elsewhere, what are we doing to help?
As noted before, we are trying to catch up on health, and I think a lot of good has been done in the health systems of our various member countries, both developed and developing, over the past few months. However, I’m struck by how fragile the economic stability is, and particularly by how this instability is manifested in employment.
Naturally we talk about counter-cyclical efforts, and that’s part of the role of MDBs. Some commercial banks are pulling out of deals in the infrastructure space as they contemplate their liquidity and capital positions. We are trying to fill that gap. This does not strictly fit into the environment and social realms, but we are trying to do our part to fill that gap because I think that contributes to the GDP of member countries, and the associated employment generation. It trickles down, if one believes in trickle-down economics, to the different sectors. I think we should be talking about that in the not too distant future.
Anev Janse, ESM: Don’t you think this is an opportunity? This crisis can be a threat, but it can also be a huge opportunity. We’ve pressed pause on the entire world. The whole planet has just stopped to rethink what we do, and ask whether life will be the same after Covid.
I think it is almost a philosophical question. There will be moment when we can rethink how we want to build our societies after this period of time. Do we need all these weekend trips to Barcelona five times a year? Do we need to be traveling around the globe so often? I think we could be able to rethink and rewire society a bit, which will help us to make a better world and a better planet. I agree with you. I think we should take this opportunity to try to improve the world we live in.
GlobalCapital: Has this crisis brought your role as MDBs more into focus? Will this change your attitudes, or the attitudes of investors and shareholders to your role?
Richardson, World Bank: The amount of support we have received from every single one of our shareholders has been historic. They are recognising the fact that this crisis is affecting emerging markets even more than it is affecting developed markets. Every one of them has fallen in line and recognises that so much needs to be done quickly. We have never seen it before. That recognition is remarkable.
The reaction that we have had for our bond deals shows that the sentiment extends into the private sector. It’s not just a question of a flight to quality. It’s a combination of many different things, but I think people are recognising that now is the time to support the mission of MDBs — it’s what we have always been doing.
Unfortunately, as with most things in life, it takes a crisis for people to realise mistakes, or to realise the value of something that was already there. As Kalin said, we can learn certain things from this, and change.
Ayoub, Apicorp: We are trying to deal with a whole lot while adjusting to working from home. This is unprecedented in terms of the complexity of this challenge, and how different countries are dealing with it.
There is obviously, as Spencer said, an education element of trying to do home schooling, and of course the education sector as a whole is affected by this. There’s the health sector, which is obviously among the worst affected, and, as we have discussed today, the employment and the poverty reduction considerations. Of course, there are environmental considerations as well.
I’m throwing it out there for us as an MDB community. We need there to be a mechanism where all of us make sense of this. We all have a role to play in conceptualising this threat at a theoretical level even before leading the way on a practical level.
We need to inject some sanity to the thought process in order to make sense of the madness we are facing. It’s going to take us a bit more time to do that. If we jump in and try to do too many things at once with politicians going one way and the financiers going another way — and MDBs going in a third direction — there will be unnecessary suffering caused to our constituents along the way.
I think it’s just a call for us to get together and think about this crisis much more thoroughly and to agree on where we go from here.
Anev Janse, ESM: The other big change in this crisis is the effect on how we behave as managers. Spencer mentioned this as well. I am also doing this job with a one year old and a three year old at home, combining that with running the funding and investments operations and motivating a group of staff.
I’ve had many meetings where I have had my daughter in my hands or my son interrupted, but I think it also makes our society more accepting of our full lives — the people we are and the type of leaders we are. I feel that I am more connected with my staff because I have spent much more time talking to them individually than I would have otherwise because of roadshows and other events.
I think it gives us the opportunity to be great parents, great people, and also great leaders. I think this is one of the other optimistic outcomes of this situation. Maybe I’m an optimist, but I think we should also look at the positive things that this crisis has created.
