Gamechanger -- is what best describes the debut of Bangla Bond, a taka-denominated debt instrument, on the London Stock Exchange on November 11 for Bangladesh.
A brainchild of the International Finance Corporation, the private sector arm of the World Bank Group, the Bangla Bond not only brought onboard a new set of foreign investors but was also an acid test for the Bangladesh growth story on the global stage.
Answers to questions on the soundness of Bangladesh’s economic fundamentals and longevity of the current stellar growth momentum would be found somewhat based on the response of global investors, who are heavy on due diligence.
“We have seen quite strong interest from investors,” Wendy Werner, IFC’s country manager for Bangladesh, Bhutan and Nepal, told The Daily Star in an interview on Wednesday upon her return from London.
IFC eventually plans to float $1 billion in Bangla Bonds, but for now it tested the waters by issuing just $9.5 million.
And that first tranche was 30 percent oversubscribed, meaning the demand was more than supply -- a bellwether of what lies ahead for Bangladesh and Bangla Bond.
All bond payments (including the initial subscription amount and any subsequent coupon and principal payments) will be settled in dollars, in an amount determined based on the applicable dollar-taka exchange rate, with the investors taking on the exchange rate risk.
The proceeds of the first tranche were converted to taka and lent out to Pran-RFL Group, which was about Tk 80 crore, at 11-11.5 percent interest -- much lower than what the local financial institutions are offering.
On coupon payment dates and upon maturity after three years, IFC will take the taka earnings from its investments in Bangladesh and convert the amounts back into dollars to pay the offshore investors in the taka bonds.
Thus, IFC will be taking on the credit risk of projects or clients in Bangladesh and investors, who are institutional investors and asset management companies and regular subscribers of IFC’s local-currency denominated bonds, the exchange rate risk.
In other words, it is a win-win situation of Bangladeshi companies, the government and the country as a brand.
“So I think that’s what the real gamechanger here is,” said Werner, who was previously IFC’s manager for Trade and Competitiveness Advisory Services for the East Asia Pacific region.
The three-year bond carries a coupon rate of 6.3 percent, which is in line with what the emerging market and frontier countries’ bonds fetch -- meaning investors are not being compensated an extraordinary amount for bearing the risk of carrying a taka-denominated bond that had no benchmark pricing or yield curve before this.
The investors who signed up for Bangla Bond are those who are interested in the South Asian nation but are not quite ready yet to set up something onshore and invest domestically in the stock market -- but they still want to have Bangladesh as part of their risk portfolio, according to Werner.
“This gave international investors a type of investment product that they know and that they already invest in but Bangladesh also got into the international game with this bond.”
The benchmark pricing and the yield curve were set by the IFC’s Treasury unit based in Washington DC after sounding out the market and hearing the sentiment of investors. But the government treasury bond served as a guide.
“Even though the Bangladesh government does not have an offshore sovereign bond, investors still would look at government treasuries as kind of a benchmark,” said Werner, who holds a joint MBA and MA degree from George Washington University.
The germ for the Bangla Bond began as far back as 2015, after the successful launch of Indian rupee-denominated Masala Bond in 2014.
The government and the Bangladesh Bank endorsed the issue of Bangla Bond. Finance Minister AHM Mustafa Kamal and his predecessor AMA Muhith are strong proponents of the Bangla Bond.
“I think it’s a way for Bangladesh to expand its reputation and footprint outside, which has been a big part of what the government wants to do,” she said, adding that the name Bangla Bond was suggested by Prime Minister Sheikh Hasina and Kamal.
Work on the Bangla Bond and how it would be structured took a few years.
“And we also had to find the right time in the market and the right projects to start with. So, all of those pieces you took a couple years to come together. But I think it’s a good time for Bangladesh now.”
Bangladesh’s macro fundamentals have always been strong, but in the last month came the news of the country’s eight-place leap forward in the World Bank’s Ease of Doing Business 2020 index, adequate to put it in the list of top 20 reformers for the year.
“So all of that made a very good story externally and it just worked out for this timing. It wasn’t necessarily a few years ago that we set this date.”
The bond is now trading on the LSE.
“It is kind of more visible. You want these market-based instruments that give you an indication of what the market is saying about Bangladesh. And it’s very positive indications already from the international market.”
IFC plans to issue multiple tranches amounting to $300 million over the next couple of years, with the next round taking place early next year.
But that depends on a number of factors, mainly the takers for the taka proceeds of the bond.
“When we start any of these we have to start them in a way that we are linking directly to a project. IFC does financial intermediation -- we are not serving as as an investment bank or a financial investor in the market. It’s our bond for sure but we need to have projects that we directly linked the funding to.”
Pran-RFL had already struck a deal with IFC when the first tranche was floated.
“But Bangladesh actually has a very strong market demand. This shows that the more projects there are and the more conducive the domestic business environment is, investors will come in.”
They will come in through the offshore route like the Bangla Bond, onshore or by direct investment.
“Investors will come if you set up the right projects and serve their interests,” she said, adding that IFC is considering floating a Nepalese rupee-denominated bond.
Within Asia, IFC has issued local currency denominated bonds of India, the Philippines, Myanmar, Cambodia, Indonesia, Fiji, Kazakhstan, China and Japan.
Werner hopes other entities would come forward and issue Bangla Bonds of their own using the structure formulated by IFC.
“In India we have done more than $3 billion in Masala bonds just from the IFC side and others have issued billions more. So the idea is that this should not just stay as an IFC instrument.”
This has paved the way for the government and individual corporates in Bangladesh to issue offshore bonds denominated in taka.
“This was meant to get the market started. That’s what the idea is and that’s the same idea that we have used in 52 other locations.”
Going forward, IFC will be scaling up its involvement in Bangladesh, both in terms of lending and advisory services. At present, its Bangladesh portfolio is worth $1.2 billion.
Affordable housing, agri-business, infrastructure and financial inclusion will get particular focus.
Werner, who previously worked in Tajikistan and the West Balkans, is encouraged by the way the government has started addressing the issue of improving the business climate in Bangladesh.
“The government has clearly started down that path and we will see definite improvements over the coming years,” she said, while lauding the initiative of setting up special economic zones.
The other challenges for the government are coming up with the next solid export earner after garment and enhancing the overall state of manufacturing in terms of compliance, value-addition and sustainability.
“But it’s all going in the right direction for Bangladesh.”