The World Bank plans to launch a $1.5 billion global bond issue in coming months. This new type of security will be underwritten and distributed simultaneously in the euromarkets and the U.S. domestic market. It will be traded globally on a 24-hour basis.
World Bank Vice President & Treasurer Donald C. Roth stated that "this new type of World Bank issue will bring together the fragmented international bond markets and provide greater liquidity and reduced investor cost in trading these bonds."
The exact timing of the new issue will depend on market conditions and final official World Bank Board approval.
The Bank also announced the formation of a multinational team of investment dealers to complete preparations for the transaction and bring it to market. The management team consists of Banque Paribas, Deutsche Bank, First Boston Corporation, Goldman Sachs, IBJ International, JP Morgan, Merrill Lynch, Morgan Stanley, Salomon Brothers, Shearson Lehman Hutton, Swiss Bank Corporation, The Nomura Securities Co., Limited, Union Bank of Switzerland and Yamaichi Securities. Deutsche Bank and Salomon Brothers will be co-lead managers.
The transaction announced today is the product of extensive consultations by World Bank staff, over a one-year period, with more than 125 institutional investors and retail money managers in 16 countries, as well as numerous investment dealers in Asia, Europe and North America. These discussions explored the factors influencing the choice of securities by bond market investors and the deficiencies they perceive in the way in which U.S. dollar bonds are distributed and traded in international markets.
Based on these consultations, the Bank has concluded that the investment needs of institutional investors are no longer served by the continuing segmentation of the market for its offerings of U.S. dollar bonds into domestic and euromarket sectors. Accordingly, the Bank has concluded that it can make the dollar bonds it offers more attractive to investors in the U.S., Europe and Asia by consolidating its dollar offerings into issues of $1.5 billion or more to be offered simultaneously in both sectors. The Bank's traditional U.S. dollar borrowing operations have been discrete, $200-750 million issues in either the U.S. domestic or eurodollar market. The proposed transaction will also incorporate significant improvements in the distribution and trading facilities to be provided by the managers of the transaction, and in the clearing and settlement arrangements for the securities.
The Bank and the investment dealers with whom it has consulted estimate that these changes will significantly increase the liquidity of its issues and thereby effect an important reduction in investors' costs of trading World Bank bonds.
Mr. Roth observed that the conventional explanation for the continuing segmentation of the dollar market between "euro" and domestic sectors is that (1) U.S. tax law discourages Americans from owning eurobonds because they are issued in bearer form, while (2) euromarket investors -- thought to be concerned with the anonymity of their holdings -- will not buy registered securities of the kind offered in the U.S. The Bank's consultations revealed, however, that the second element of this explanation is wrong. Rather, it is institutional investors' dissatisfaction with the liquidity of registered securities in the European time zones, and not their registered form, that is the major impediment to the sale and trading of registered securities in international markets. These same investors, moreover, repeatedly expressed concern that impediments to the sale of bearer bonds in the U.S. deprive these securities, in times of dollar weakness, of much of the benefit of non-currency-sensitive, U.S.-based demand for dollar bonds. The Bank's new issue seeks to address both of these concerns.
Discussing the proposed transaction, Mr. Roth commented that "most of the euromarket investors we talked with said they wanted bonds that traded well in London and could be sold freely in the States when U.S. demand was stronger. They're not getting that now, except in U.S." Treasuries. We and our managers think this new approach will do it."
The proposed issue would be traded by bond dealers in London, as part of their eurobond operations, and in Tokyo. In the U.S., the bonds would be handled by the same traders that deal in the securities of U.S. government-sponsored agencies. Mr. Roth added, "The size and liquidity of this issue will make it behave in the market much more like the large agency issues than the smaller transactions we've done before. It really makes more sense for this type of World Bank issue to trade in the agency sector in the United States, given the volume of our annual borrowing and the U.S. Government's role as our largest stockholder, while retaining the Bank's status as the benchmark issuer in the dollar sector of the Eurobond market."
The final important element in the proposed transaction will be an improved link between clearing systems in the U.S. and the euromarket. The improvements should allow these securities to be delivered from one system to another without the loss of interest often associated with this activity.