INTERVIEW: IIB turns to members’ local debt markets for funding

INTERVIEW: IIB turns to members’ local debt markets for funding
By Ben Aris in London May 19, 2016

The International Investment Bank (IIB) is increasingly turning to its members’ domestic capital markets to raise funds, giving these markets a boost in the process.

The Moscow-based multilateral lender tapped the Romanian market for the first time in October 2015 to raise RON111mn (€25mn) with a three-year bond, Denis Ivanov, deputy chairman of IIB’s management board, told bne IntelliNews on the sidelines of the European Bank for Reconstruction and Development’s (EBRD) annual general meeting in London in an exclusive interview. 

“This was our first bond issued in Romania and the biggest among [international financial institutions] issued on the local exchange in the last six years,” said Ivanov. “The spread includes a premium as it was our first issue, but we expect the yields to come down with subsequent issues.”

The IIB’s philosophy is to raise funds in the country where the money will be invested and the bank already has several significant investments in Romania. “We already finance several Romanian projects, such as Romcab, a leading national manufacturer of wiring and cables, and we are always looking to expand our portfolio,” said Ivanov. “Last month [in April] we did a co-financing deal with the Black Sea Trade and Development Bank to finance a Bulgarian-Romanian Tyras dairy project, and there are more in the works.”

Set up in Soviet times to foster cooperation and trans-border investment amongst the Comecon countries, the bank has been remaking itself over the last three years as a modern international financial institution (IFI), with the transition programme officially ending at the close of 2015. Today, five out of the nine shareholders are EU members, sharing a majority of the votes on the IIB Council, and the Russian government only owns a minority stake.

The IIB has been actively raising money from its members’ local debt markets. It has already issued four bonds in Russia (so-called “mibovki” bonds) worth a total of RUB14bn (€190mn) and one in Slovakia with a five-year maturity worth a total of €30mn. The Romanian bond was the first that the bank had issued in the local leu currency and the largest issued in the market by an IFI since 2009. The IIB is actively discussing tapping the international capital markets again in the near future and still has half an eye on a possible Eurobond issue. The IIB has issued bonds worth a total €340mn in euro equivalent and the plan is to raise more, including up to another RON200mn this year. “[The Romanian bond issue] is good for the development of the local capital market,” said Ivanov. “We worked closely with the local regulator, Ministry of Finance and stock exchange to find the best solutions for investors, both local and foreign.”

The first Romanian issue has proven extremely popular among local investors and is now one of the most liquid bonds on the Bucharest exchange, making it a valuable asset for local pension and insurance companies. International bond funds have yet to take a significant dip into this particular pool, partly because the bond was not available through the Clearstream international settlement system at the time of the issue (although it is available now). “The next issue in Romania should be available from the very beginning [on the international settlement system],” said Ivanov, “but we understand there has already been some international investors buying the bond on the secondary market.”

Deepest pool

Russia remains by far the largest market for raising capital for the IIB, not for any political reason, but simply because it is by far the largest and most liquid market in the region. Unlike in other countries, where the local money raised is used to fund projects in the country, Moscow is used to raise general funding for the bank’s operations across its entire patch.

The bank took an important step forward this year after Moscow Exchange (MOEX) registered an IIB borrowing programme for RUB100bn (€1.4bn). Previously, the bank had to register each individual bond and state its amount prior going to the market. But with a registered programme the bank is free to issue when it likes, in any amount up to the maximum and in any of the main currencies such as rubles, US dollars, euros, Swiss francs, renminbi and sterling, which makes the whole process both more straightforward and cheaper.

Issuing in Russia also has the advantage of being able to tap a pool of international investors who are actively investing in the market after MOEX was hooked up to the international settlement systems in 2012. “Over the last two years foreign investors have not been very active [in Russia]. Now foreign investors are starting to return to MOEX,” said Ivanov. “We stay out of politics, but we see that the market has stopped falling, as everyone is becoming more pragmatic and the interest in the region is growing again.”

Going forward, the bank hopes to further develop its members' bond markets by buying into innovative debut bonds. This year it has already bought into a CNY1bn (€145mn) yuan-denominated bond issued in Hungary, the first of its kind in the region. The bank is also setting up a green bond portfolio to finance environmentally friendly projects. The IIB has invested into the green bonds of other financial institutions and is working with its member countries to organize some local green issues in the future.