The World Bank has received a “very high level of interest” for the first phase of its hybrid debt issuance programme, treasurer Jorge Familiar told GlobalMarkets. Under pressure from its shareholders, the traditionally conservative Bank has pivoted in the last 15 months to become an enthusiastic adopter of new financial techniques.
MDBs are just beginning to explore issuing hybrid capital. It is subordinated debt, but if structured in the right way with loss absorption triggers, the rating agencies will treat it as 100% equity, enabling MDBs to increase their lending without raising more common equity capital.
The G20 and countries including the US have urged MDBs to issue hybrids as part of a panoply of reforms.
While the US intends to provide guarantees to boost multilateral lending, instead of buying hybrids, Germany already committed in September to a €305m hybrid private placement.
The World Bank’s Development Committee is expected to formally endorse hybrid issuance on Thursday. Speaking on Wednesday morning, Familiar said he hoped more shareholders would make public their interest in investing in World Bank hybrids in “days, if not hours” — even if the size would be subject to subsequent budgetary discussions at a national level.
Germany intends to recognise the hybrid as official development assistance, which would mean it counted towards its international ODA commitments. Familiar said most other countries had indicated they would follow this path too, rather than treating hybrids as an investment.
“There’s an enormous level of interest in this instrument and the power it can bring in sustainable development,” he said. “I am very hopeful that we will have other countries stepping forward and announcing their interest in participating in hybrid capital. In many cases, if not all, it will be subject to parliamentary approval or the recognition of the instrument and the contributions as ODA.”
If it is classed as ODA, Familiar said many countries were thinking about either forgoing the hybrid coupon payments or sending them to a trust fund for global public goods.
Issuance will begin with private placements to shareholders. But Familiar is attending the Global Philanthropy Forum in San Francisco next week, hoping to interest charitable foundations.
Issuance to both shareholders and philanthropic partners will be priced the same as the Bank’s senior debt, which in dollars pays 35bp-40bp over the secured overnight financing rate (Sofr).
The Bank is considering whether some of this issuance could be tailored to support specific goals, such as combatting climate change.
The Bank will also start approaching commercial investors about a pilot deal of up to $1bn. Familiar said commercial banks’ hybrid debt was typically priced at 200bp-300bp over senior debt, but he thought the fact that shareholders would buy at the World Bank’s senior funding cost could help tighten pricing with commercial investors.
Pressure valve
“The capital markets version might be worth having in our tool kit,” he said. “If we need to really boost our lending in front of an emergency, it might be useful to have a capital market instrument that can be quickly issued and help us expand our financial capacity.”
Since this is a new category of instrument, the World Bank will have to build an investor base almost from scratch.
For now, however, the Bank is focusing on placements to shareholders and development partners.
Its ceiling for hybrid issuance will be at least $16bn, which Familiar suggested could be reached in a couple of years. The ceiling may even be higher, as dialogue with rating agencies is still in progress.
“For every dollar of hybrid capital we issue we will be able to lend up to $8 in a period of 10 years,” said Familiar, using a higher leverage multiple than the 6 ratio the Bank was using recently. He said the eight-to-one ratio had come out of discussions with rating agencies.
Familiar said Germany’s contribution alone could allow another $2.5bn of lending, while the total hybrid envelope could allow additional lending capacity of more than $100bn.
Triggers for not paying coupons will consider the World Bank’s level of leverage and its volume of loans in ‘non-accrual status’, meaning the borrowers are not paying, but they have not been written, off due to the World Bank’s preferred creditor status.
There will also be a period after the trigger takes effect when shareholders can take remedial action, including recapitalisation.
Looking further ahead, Familiar said there could be more scope to increase the World Bank’s use of risk transfer instruments such as securitization, although the impossibility of transferring its preferred creditor status is a complicating factor.
“What we are picking up is significant excitement from our shareholders, with respect to the financial innovations we are putting in front of them,” he said. “It’s full speed ahead in bringing new things to the table that will allow us to expand our financial capacity.”