The World Bank has a “significant pipeline” of outcome bonds it plans to issue in the next 18 months, as it strives to increase its output of these complex instruments which can enable risk-averse investors to finance difficult development projects.
Michael Bennett, head of derivatives and structured finance at the Bank’s treasury in Washington, said his team was working on a number of new issues to raise money to support sustainable development projects. Investors’ principal exposure is like a regular World Bank bond but they get a slightly lower guaranteed coupon — the rest of the coupon can vary, contingent on the success of a project. If it succeeds fully, they earn more than they would on a normal Bank bond.
Since 2021 the Bank has issued five outcome bonds totalling almost $500m, with money saved from the lower coupons financing projects such as rhinoceros conservation in South Africa, water purification in Vietnam, and most recently reforestation in the Amazon, with a $225m bond in August.
The deals have gathered strong interest. Around 15 investors signed up to the club deal for the nine year Amazon bond, which generated $36m of capital to support the reforestation activities of Mombak, a Brazilian company. Investors will get their money back from the sale of carbon credits.
But each deal is bespoke, requiring complex and time-consuming structuring. The bonds are not yet a tool to address development needs at large scale.
The World Bank is working on making the process more efficient and increasing the size of transactions to enlarge their impact.
Interest in working with the Bank is growing, from project operators, investors and investment banks.
“Right now, we’re probably working on seven or eight potential issues, which could all come to fruition in the next 12 to 18 months,” Bennett told GlobalMarkets. The first could come out in the first quarter of next year. “Based on the demand, we think the investor base would be there for that level of issuance.”
Bennett said investors were attracted by the fact that all of the deals’ principal is protected, earning them an AAAp rating from S&P. At the same time, investors’ financial return is based on measurable development outcomes, which means they can say their money goes to support a specific environmental or social project.
This is a much more direct sense of impact than investing in a use of proceeds green bond, for example, from a multilateral institution.
“I think it’s a really nice structure for essentially high grade fixed income investors and we wanted to create a structure for them, because they are looking for opportunities to support positive impact with their portfolios,” said Bennett. “There’s clearly a high degree of confidence investors can take that their money is directly supporting and their return is linked to the performance of a specific project.
“Because the returns they’re going to receive are connected to outcomes, they’re obviously going to get very clear outcome reporting, and those outcomes have to be objective and have to be able to be determined by a third party.”
Another sign of the instruments’ growing popularity is that four or five new underwriters have expressed interest. HSBC structured and sole-managed the Amazon bond; Citigroup and Credit Suisse have arranged other deals.
An important feature is the complementarity of the project to what the World Bank is already doing in the country. Looking ahead, Bennett said that while climate finance and carbon reduction were important themes, it was also looking at outcomes in areas such as health, food security, the blue economy and biodiversity.
While the World Bank has pioneered this asset class — as it did with the first green bond in 2008 — Bennett is confident other multilateral development banks will follow suit. “We definitely have no intention to be the whole market here,” he said.
The Bank is aware of other issuers working on transactions that would expand the market. “Frankly, if some other issuer comes up with a better way to do it, that’s great as well,” said Bennett. “Maybe somebody else has got a better idea, and we’re open to adapting the model based on that.”