IBRD Financial Solutions A Client Focused Approach to Achieving Ahi i Debt DbtManagement tgoals SDM Forum October 2010
Main Messages Clients face a range of risks and challenges in putting together financing to meet development objectives and achieve debt management goals. IBRD has an extensive menu of financing and risk management products and services to help clients deal with these risks. The process begins withand isbuiltaround the client s financing needs and risk management objectives. The outcome is a customized financial solution that supports overall development objectives. 2
IBRD is a full service financial provider Traditionally Serving: Eligible borrowers Providing: Access to finance for development Offering: One-size-fits all loans Today Serving: All member countries Providing: Financial solutions to access, protect and manage development e e resources and to help address global challenges Offering: Broad menu of financial services Loans Credit enhancement (guarantees) Risk management tools Asset/wealth management Treasury management services Shift in delivery model to client focused approach: Customized financial solutions based on needs/risks of each client 3
Cost of borrowing for sovereigns is volatile 12.00% EMBIG and IBRD Spread over US Treasuries July 15, 1999 to October 15, 2010 10.00% 00% 8.00% 6.00% % 4.00% 2.00% 0.00% -2.00% Jul-99 N ov-00 Apr-02 Au ug-03 J an-05 M ay-06 Oct-07 Fe eb-09 Ju un-10 EMBIG IBRD Fixed Spread greater than 15 years and up to 18 IBRD Variable Spread greater than 15 years and up to 18 The spreads presented on the graph correspond to the longest average maturity available for each instrument at the time. The current average life of the EMBIG is 11.7 years. As of July 1 st 2010 the longest average maturity offered by IBRD is 18 years. Source: JP Morgan, World Bank, and Bloomberg 4
IBRD is a competitive source of financing IBRD Variable Spread Funding Cost Comparison 1 Spreads over USD 6 month LIBOR as of October 15, 2010 6-mo LIBOR on October 15, 2010 = 0 45% ( 0.28%, 0.38% and 0.48% respectively ) = 0.45% IBRD Fixed Spread ( 0.60%, 0.85% and 1.15% respectively ) EMBIG Asia 1.48% EMBIG Europe 1.92% EMBIG Africa 2.52% EMBIG Latam 3.09% EMBIG Middle East 3.39% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% EMBIG Spread IBRD Spread 12 years and less IBRD Spread 12+ to 15 years IBRD Spread 15+ to 18 years 1/ IBRD lending rates include an annualized front end fee of 0.03%. For sovereign issuances, spreads over LIBOR are based on current secondary market yields. Source: Bloomberg and World Bank 5
Flexible, cost effective tools offer clients ways to manage multiple financial risks Financial Issues Liquidity/ credit crunch Mismatch between foreign currency loans and local currency revenues Cash flow/ liquidity issues jeopardizing i compliance with ih investment programs Reduced private sector appetite Interest rate volatility IBRD financial solutions Contingent credit lines Provide low cost loans Mobilize private resources with guarantees Provide local currency financing Execute derivatives transactions to convert currencies Customize repayments; provide longer repayment terms (up to 30 yrs) Boost confidence with guarantees Fix interest rates using derivatives 6 (swaps, caps, collars)
IBRD offers a full menu of financial solutions Loans Contingent Financing Credit Enhancement Hedging Products Catastrophe Risk Management Client Advisory Services IBRD Flexible Loan Local currency loans Sub national finance Deferred Drawdown Option (DDO) Partial risk guarantees (IBRD/IDA) Partial credit and policy based guarantees Currency swaps (also non IBRD) Interest rate swaps (also non IBRD) Interest rate caps and collars Commodity price swaps Weather hedges Cat DDO Insurance pools Catastrophe bonds Asset management Public debt management Asset and liability management Capital market access strategy & implementation Transaction processing, reporting, and IT
Annexes
Example: Local currency financing via local currency bond issue in Uruguay Background Uruguayan authorities expressed strong interest in receiving financing in UYU from IBRD However, swap market in UYU was not sufficiently developed Financial Risk Financial Solution Currency Risk Back-to-Back B k Operation: two simultaneous and symmetrical transactions executed with a high level of coordination between IBRD and the Uruguayan Ministry of Finance Structure Domestic & International Investors UYU 1,981.53 mm (USD100 mm.) Inflation-linked Bond 3.40% Coupon World Bank UYU 1,981.53 mm (USD100 mm.) Inflation-linked Loan 3.40% Coupon + 0.30% Government of Uruguay Outcome Expands local currency financing to countries where the currency swap market is not sufficiently developed, helping Governments to reduce foreign exchange risk The bond issue contributes t to the deepening of domestic capital markets and is a source of diversification to domestic pension funds and international investors Exemplifies IBRD's commitment to provide customized 9 financial solutions to its members
Catastrophe Risk Example: Weather Derivative in Malawi Client Needs: Development Objective Recurrent drought and impact on maize production create food insecurity and malnutrition Customized Financial Solution Weather derivative transfers risk of catastrophic drought to the market Financing Problem Government has contingent t liabilities since it may need to import food and fund food security responses in the event of a drought In the event of severe and catastrophic Risk Management Problem drought, government Uncertainty about rainfall volumes has quick access to creates uncertainty about maize contingent financing production, supply, and price volatility Government concerned about Can be linked to a continuously relying on donors to help in commodity hedge the event of an emergency which caps price of maize imports 10
Securing Long term Financing for Clean Technologies in Mexico Client goal: Issues: Requirements: Risks Shortfall risk Currency risk Interest rate risk Background Increased motorization has lead to significant increase in GHG emissions in Mexico, making it one of the more carbon-intensive economies in Latin America. Mexico needed to implement sustainable transport policies, scrap non-compliant vehicles, and introduce low carbon buses. Transformation of urban transport system requires more than US$2.7 billion of financing. Overall project viability dependent on availability of necessary funding at concessional rates. Innovative approach to meet shortfall at concessional rates. Development Solution IBRD blends US$200 in concessional financing from the Climate Technology Fund (CTF) with US$150 million from IBRD. Blending two sources of financing reduces overall interest burden, enabling project s implementation IBRD loan flexible terms provide option to request disbursements in either US dollar or Mexican peso, at fixed or floating rate Repayment schedule customized to allow Mexico to pay principal in increasing installments as project revenues materialize Outcome Mexico mobilizes necessary volume of funds at financial terms that meet its requirements to enable project s implementation. Flexible terms of IBRD loan and embedded risk management options allow Mexico to manage interest rate, currency, and repayment risk. Co-financing scheme allows Bank and CTF to jointly support Mexico s efforts to take climate change agenda forward.