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World Bank Sustainability Bond

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Le contenu de cet article sera accessible en français à une date ultérieure. Restez à l’affût!

On April 15, the World Bank raised a record-breaking USD 8 billion from global investors to support its member countries and strengthen health systems in developing countries as they address the human and economic impacts of COVID-19. BMO Capital Markets was proud to act as joint lead manager on the 5-year global benchmark bond, the largest ever US dollar denominated bond issued by a supranational. 

Jonathan Hackett, MD and Head, Sustainable Finance, BMO Financial Group, joined Sean Hayes, Managing Director, Head of US Syndicate at BMO Capital Markets, to discuss what the bond means for the world of sustainable finance, and how it fits into BMO’s Purpose commitments, to double the good for thriving economies, a sustainable future and an inclusive society.

BMO COVID-19 Insights podcast is live on all major channels including AppleGoogle and Spotify.

Following are excerpts from their conversation, edited for length.

Jonathan: Sean, why don’t we start with you telling us a little about your role at BMO and how it fits into the World Bank sustainability bond issuance program?

Sean: I sit within US Fixed Income across high grade debt. Typically that's out of our New York City Office.

In terms of how this all fits together, and your question about sustainability and the bond issuance program, BMO and World Bank have been working together on Sustainable Development Bonds since their first specifically labeled issuance back in January of 2018. That first deal highlighted women and girls’ empowerment, and that was an overwhelming success. It has since been followed with others, highlighting the United Nations Sustainable Development Goals, such as water & oceans and health & nutrition. As it relates to our relationship with the World Bank, we've been very fortunate to have led all six of their Canadian dollar sustainable development benchmarks.

And of course now, the most recent topic of conversation was this record-breaking US dollar 8 billion sized 5-year, and I think that one really truly speaks volumes about the investor buy-in to the World Bank mission and its mandate to mobilize sustainable finance. Both the size of the bond and demand at $12.5 billion were records for supranational transactions.

Jonathan: And to what do you really attribute the success of this bond issuance? Is it the timeliness with COVID?

Sean: I would credit a number of different things. I’d start with a combination of the World Bank’s purpose, among other things like improving market tone, pricing, timing, tenor selection. The World Bank is AAA rated by all the major rating agencies, and they've been issuing debt for over 70 years now. They're viewed as one of the most liquid, flight-to-quality credits that has access to capital markets during even the most uncertain of times. All that said, World Bank Treasury ahead of this deal decided to hold a global investor call to update its bond investors regarding their efforts to support its member countries and addressing the impacts of COVID-19.

Did they need to have a global investor call to have a successful transaction? Of course not. But that extra layer of thoughtfulness to address what's really on all of our minds right now, that made a huge difference here. We can talk about all the nitty gritty of issuing a bond; we can talk about how the five-year tenor was under-supplied versus the rush of more defensive, shorter, two- to three-year tenors, which often happens in a challenged backdrop.

I can talk about pricing. It's very rare, historically, that you can buy World Bank five-year debt at what ultimately shook out here as Midswaps plus 24 basis points, the equivalent at the time of Treasuries plus 36.5 basis points. The deal came with four basis points of concession versus World Bank secondary bonds, which I would say is above norm in SSA space. But as attractive as this may have been in those respects, one of World Bank’s very close peers had just issued a five-year a few weeks prior, 13 basis points cheaper than this level, and with more concession. That deal was $2 billion size with a $4 billion plus book, so it can't be about price, either.

Timing was impeccable. Extremely strong equity markets had rebounded over 25% since late March lows. I would also add that many core fixed-income investors were back in buying mode. So, I do think that that made a notable difference, but all of that said, I mostly attribute this one to World Bank’s approach.

High-grade credit markets had seen a historic amount of debt issuance since the outbreak began, and, given the economic ramifications COVID-19 will have on the world, I think every debt borrower right now – not SSAs and corporates – everyone is being asked by investors, how will the pandemic impact their financials, their future earnings, their profitability.

I think World Bank’s role in responding to the situation at hand, paired with taking that extra step to give investors comfort in both borrowing and investing for impact to respond to the crisis, is what really shined through here.

Jonathan: How does this reflect on sustainable finance, broadly?

Sean: World Bank, through each of its deals, raises awareness across a variety of the United Nations Sustainable Development Goals, highlighting the many ways in which they deploy capital in pursuit of a more sustainable future. World Bank was at the forefront of developing green bond markets, pursuing awareness and a framework that has laid the foundation for green bond financing across asset classes today.

So, yes, World Bank has shifted its focus more recently to sustainable development bonds, as the need for sustainable financing grows, and has developed strong partnerships with investors directly in this pursuit. But I think the main takeaway here is we often see the SSA space lead the charge in driving new products, whether that's sustainable, green, water bonds, or even nonspecific ESG-type formats like SOFR issuance; they take the lead as global public institutions, and you see a lot of positive leakage into other sectors of the market.

What happens over time is we begin to see asset-backeds, mortgage-backeds, even corporate borrowers following into these new areas and products. So with issuance like what World Bank accomplished last week, I think it's more motivating to other sectors in the market to pay attention and ultimately follow.

Jonathan: Do you think that our work within the SSA space is going to continue to be a strength that we can draw upon for the rest of our clients as we move forward?

Sean: Absolutely. The amount of clients beyond the reach of AAA-rated SSA issuers on this deal, I’ve never seen anything like it. Keep in mind they raised $17 billion last week referencing sustainable development bonds, away from just this US $8 billion dollar deal, so it was really quite a week, and has other clients paying attention.

To name one, USAA, a US corporate insurance company, issued a sustainable bond last week as well. What's interesting is the use of proceeds were allocated to finance eligible investments, which, by definition, included relief on regular payments for USAA members. That is directly stemming from COVID impacts.

Now we've seen a company responding to the financial hardships of its customer base. That was an interesting case where payment deferrals actually drove the use of proceeds and creation of a sustainability bond. So, I think demand for sustainable assets speaks for itself in cases like these, and whether it's for World Bank’s member countries, or USAA’s customer base, I think we're seeing outlier types of demand and unique investors in these transactions. I think the leadership in SSA space that BMO has been thrilled to be a part of will quickly leak its way into other major debt capital markets.

Jonathan: So obviously this bond connects to BMO's purpose to "boldly grow the good in business and life," but is that a factor in who the World Bank works with? Is our alignment to their mission, and the other work that we do, part of why we were selected to lead this issuance?

Sean: I truly believe so, yes. Dating back to the World Bank & IMF conference in 2017, in Washington DC, where these conversations around sustainability between BMO and the World Bank were happening at a meeting table – just think about how much things have grown in the area since. I think the bank's dedication to sustainable finance was highly likely taken into account here.

I would add, we've now been a part of $14 billion of World Bank sustainable development bonds  since 2018. BMO’s purpose of “Growing the Good” alongside customers like World Bank deeply aligns with our ambition to be actionable and responsive in helping provide new investment and growth.

One of the pillars of BMO's purpose is community involvement; there's a natural alignment here with World Bank allocating resources to strengthening healthcare systems in developing countries. Last December, BMO very publicly committed to mobilizing $400 billion for sustainable finance by 2025, and World Bank has been an exemplary leader and partner.

Jonathan: Why do you feel these bonds are so important to a global economy? And what are we really accomplishing when we're funding an organization like World Bank?

Sean: They are literally being sold to support sustainable development across public and private sectors across areas of the globe where the funds are most in need. So, bond investors are providing the capital to World Bank via its debt issuance, which in turn then helps develop impoverished nations who otherwise don't have access to capital markets in many cases.

World Bank is helping the most impoverished nations. That is why the World Bank was created. Its mandate is to combat extreme poverty and to promote shared prosperity. So, I would say, the implication is huge, on the global economy in supporting the growth and the health of those countries directly related to their large borrowing program, especially at times like right now.

Jonathan Hackett Cochef, Groupe Transition énergétique BMO et chef, Financement durable
Sean Hayes Managing Director & Head of US Syndicate

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