IBRD Financial Solutions IBRD Financial Solutions A Client Focused - - PowerPoint PPT Presentation

IBRD Financial Solutions IBRD Financial Solutions

A Client‐Focused Approach t A hi i D bt M t G l to Achieving Debt Management Goals

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 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 these risks.

• The process begins with and is built around the client’s

The process begins with and is built around the client s financing needs and risk management objectives.

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• The outcome is a customized financial solution that supports
• verall development objectives.

IBRD is a full‐service financial provider Traditionally… …Today

Serving: Eligible Serving: All member countries borrowers Providing: Access to fi f Providing: Financial solutions to access, protect and manage development resources and to finance for development Offering: One size fits de e op e t esou ces a d to help address global challenges Offering: Broad menu of financial Offering: One-size-fits all loans services

 Loans  Credit enhancement (guarantees)  Risk management tools  Risk management tools  Asset/wealth management  Treasury management services

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Shift in delivery model to client‐focused approach: Customized financial solutions based on needs/risks of each client

Cost of borrowing for sovereigns is volatile

10 00% 12.00%

EMBIG and IBRD Spread over US Treasuries

July 15, 1999 to October 15, 2010

6.00% 8.00% 10.00% 2.00% 4.00% %

• 2.00%

0.00% Jul-99

• v-00

Apr-02 ug-03 an-05 ay-06 Oct-07 eb-09 un-10 J N A Au J M O Fe Ju

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 i h i h lif f h G i 11 f l 1 t 2010 h l 4

Source: JP Morgan, World Bank, and Bloomberg

instrument at the time. The current average life of the EMBIG is 11.7 years . As of July 1st 2010 the longest average maturity offered by IBRD is 18 years.

IBRD is a competitive source of financing Funding Cost Comparison1

Spreads over USD 6‐month LIBOR as of October 15, 2010 6-mo LIBOR on October 15, 2010 = 0 45%

IBRD Fixed Spread IBRD Variable Spread ( 0.60% , 0.85% and 1.15% respectively ) ( 0.28% , 0.38% and 0.48% respectively )

= 0.45%

1.92% 1.48%

EMBIG Europe EMBIG Asia

3.09% 2.52%

EMBIG Latam EMBIG Africa

3.39%

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% EMBIG Middle East

EMBIG Spread IBRD Spread 12 years and less IBRD Spread 12+ to 15 years IBRD Spread 15+ to 18 years

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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

Flexible, cost‐effective tools offer clients ways to manage multiple financial risks IBRD financial solutions Financial Issues

• Contingent credit lines
• Provide low cost loans
• Liquidity/ credit crunch
• Provide low‐cost loans
• Mobilize private resources with

guarantees

• Mismatch between foreign

currency loans and local

• Provide local currency financing
• Execute derivatives transactions to

convert currencies currency loans and local currency revenues

• Cash flow/ liquidity issues

j di i li i h

• Customize repayments; provide

longer repayment terms (up to 30 jeopardizing compliance with investment programs yrs)

• Boost confidence with guarantees
• Reduced private sector appetite

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• Fix interest rates using derivatives

(swaps, caps, collars)

• Interest rate volatility

IBRD offers a full menu of financial solutions

Loans

IBRD Flexible Loan Local currency loans Sub‐national finance

Contingent Financing

Deferred Drawdown Option (DDO)

Credit Enhancement

Partial risk guarantees (IBRD/IDA) Partial credit and policy based guarantees

Hedging Products

Currency swaps (also non‐IBRD) Interest rate swaps (also non‐IBRD) Interest rate caps and collars Commodity price swaps Commodity price swaps

Catastrophe Risk Management

Weather hedges Cat DDO Insurance pools C h b d Catastrophe bonds

Client Advisory Services

Asset management Public debt management Asset and liability management

Client Advisory Services

y g 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

Financial Risk C Ri k g y g g g

 However, swap market in UYU was not sufficiently developed

Financial Solution B k t B k O ti t i lt d t i l

 Currency Risk  Back-to-Back Operation: two simultaneous and symmetrical

transactions executed with a high level of coordination between IBRD and the Uruguayan Ministry of Finance

Domestic & International Investors World Bank Government

• f

Uruguay

UYU 1,981.53 mm (USD100 mm.) UYU 1,981.53 mm (USD100 mm.) Inflation-linked Bond 3.40% Coupon Inflation-linked Loan 3.40% Coupon + 0.30%

Domestic & International Investors World Bank Government

• f

Uruguay

UYU 1,981.53 mm (USD100 mm.) UYU 1,981.53 mm (USD100 mm.) Inflation-linked Bond 3.40% Coupon Inflation-linked Loan 3.40% Coupon + 0.30%

Structure Outcome



Expands local currency financing to countries where the currency swap market is not sufficiently developed, helping Governments to reduce foreign exchange risk Th b d i t ib t t th d i f d ti it l k t d i f

9 

The bond issue contributes 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 financial solutions to its members

Catastrophe Risk Example: Weather Derivative in Malawi

Recurrent drought and impact on maize production create food insecurity and Development Objective Customized Financial Solution production create food insecurity and malnutrition

• Weather derivative

transfers risk of catastrophic drought

G t h ti t li biliti Financing Problem

to the market

• In the event of severe

and catastrophic Client Needs:

Government has contingent liabilities since it may need to import food and fund food security responses in the event of a drought

• Uncertainty about rainfall volumes

creates uncertainty about maize d ti l d i l tilit Risk Management Problem

and catastrophic drought, government has quick access to contingent financing

production, supply, and price volatility

• Government concerned about

continuously relying on donors to help in the event of an emergency

• Can be linked to a

commodity hedge which caps price of

10

g y

p p maize imports

Securing Long‐term Financing for Clean Technologies in Mexico

Background

 Client goal:

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 p p p , p p vehicles, and introduce low carbon buses.

 Issues:

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.

 Requirements:

Innovative approach to meet shortfall at concessional rates. Risks

 Shortfall risk

q

pp 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

 Currency risk  Interest rate risk

 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 installments as project revenues materialize  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.