The plan comes in the wake of a series of offshore Indian rupee bonds last year that investors lapped up.
The IFC has set its sights on Bangladesh for its next local currency development in Asia. Earlier this month, at the World Bank and International Monetary Fund’s Spring Meetings, members of the IFC approached the Bangladeshi delegation about the idea of selling offshore bonds in taka.
“This is a pretty recent development, it started about three to four weeks back,” said Keshav Gaur, global head of treasury client solutions at the IFC, based in Washington DC. “We began analysing our projects in the country and what we have done for capital markets in neighbouring countries there.”
Offshore taka bonds would fulfil a number of the IFC's goals. On the one hand, it needs local currency for the projects it has planned for the country, including boosting the private sector, financing banks and funding infrastructure projects. But its involvement will also draw foreign investors, who might not otherwise look at Bangladesh.
“Both onshore and offshore taka bond issuance have their own merits, but offshore is the best way to bring in investors, especially those who simply want to take long term exposure to currency and economy,” said Gaur. “They will not have to worry about credit risk — they will only be taking on the currency risk.”
And currency risk is likely to be low, with the taka one of the most stable currencies among its peers. It weakened by only around 1.8% on average against the dollar in the past decade, according to a report released in April by Saurav Anand, macro research analyst at Standard Chartered. It was trading at Tk76.10 to the dollar on April 29.
Masala magic
The IFC has already had huge success selling offshore local currency bonds in Indian rupees — nicknamed Masala bonds.
It issued the first Masala bond from its programme in September, raising Rp6bn ($95m) in a deal than included three five and seven year tranches. It followed that up with another landmark in November, selling a Rp10bn 6.3% 10 year trade that was the first London listed deal in the currency. The issue drew a swarm of European real money accounts as well as some US asset managers, with proceeds used to invest in infrastructure bonds issued by domestic lender Axis Bank.
Since then the European Bank for Reconstruction and Development (EBRD) and German development bank KfW have issued Masala bonds.
Now the IFC has the same plans for offshore taka bonds, which are expected to be issued in the next two to four months, depending on regulatory approvals. The institution is looking to set up a taka bond programme worth $1bn-equivalent, which will be listed in London.
“It’s an untested market, very nascent," said Gaur. "We will target a three year tenor in the beginning, we will see investor appetite and look to stretch the tenor in other issues."
Pricing is yet to be confirmed, but the yield on the IFC’s November 2024 Masala bond was around 2% lower than the equivalent government rupee bond. But at 6.3%, it still offered investors a nice pick-up for a triple-A rated credit.
In addition to the returns on offer, there are plenty of other reasons for investors to look at Bangladesh.
“The country has a very stable growth path, of about 6%-6.5% over the last decade,” said Anushka Shah, analyst within Moody’s sovereign risk group. “And — despite natural disasters, political transitions, and a global slowdown — growth volatility is lower than for all other countries rated by Moody’s.”
Better bond market
And as with the offshore rupee bonds, the IFC taka issuance could be an important step in opening up Bangladesh’s bond market to a wider investor base.
At the start of this month, the Reserve Bank of India revealed a plan to allow Indian corporates to sell offshore rupee bonds, and there are signs that Bangladesh could be ready for more international participation in its bond market.
“Foreign Institutional Investors (FIIs) can buy or sell Bangladesh bonds without restrictions, and deepening Bangladesh’s capital markets is a policy priority,” wrote StanChart’s Anand in the April report.
In 2013 the government ended a one year lock-in period for FIIs buying government bonds, and there are no longer restrictions on redemption and repatriation of foreign capital in Bangladesh’s debt markets.
Anand also highlighted the government’s efforts in the corporate bond sector to speed up the process for private placement issuance, eliminating transaction taxes for bonds and reduction in the stamp duty for the transfer of assets on income passed through special purpose vehicles.
And last year Banglalink issued a $300m five non call three bond, the first offshore debt from the country.
Bangladesh is not entirely free of obstacles, however. Shah at Moody's noted that challenges for the country’s continued growth include its low per capita income, which limits tax revenues and growth. Additionally, the fractious political environment, which has frequently resulted in street protests and strikes, could also affect growth.