Washington, DC, January 25, 2000—The World Bank launched the first-ever fully integrated global electronic bond offering via the Internet on Wednesday, January 19, garnering many headlines in the financial press and marking an apt start to the new cyber-millennium.
The $3 billion 5-year global notes surpassed expectations—by 8 am Washington time on Thursday January 20, the order book already exceeded $5 billion. Of that, as much as $1.7 billion of the orders came through the Internet.
"The transaction sets a new standard in the market in terms of market reach, liquidity, transparency and innovation,"explained Afsaneh Mashayekhi Beschloss, Vice President and Treasurer of the World Bank, who helped kick-start the concept during the summer of 1999. "The Bank was the first international borrower in a number of capital markets and also one of the first to really spend time with investors to come up with innovative products that met investors' needs," Beschloss says. "For investors, the Internet bond is quite revolutionary, in that for the first time, the mid-size and retail investors get access to the kind of market information and type of product that was only available to the institutional investors."
"The integration of Internet technology in fixed-income markets offers an excellent opportunity to broaden the distribution of securities and improve efficiency in secondary market trading," adds Treasury Finance Department Director, Gumersindo Oliveros. "This transaction points the way in which the Internet will be changing the bond market."
Indeed, as a consequence of using Internet technology, participation has been broad across regions: 50 percent of the electronic bond was sold to accounts in the Americas, 26 percent to Asian investors, and 24 percent to Europe. North American demand was about twice as large as on past global bond issues by the Bank. And the investor base has been diverse—over 20 percent of the issue was placed with middle-market accounts (regional banks, smaller insurance companies and corporates) and individual investors through some 570 separate tickets. The largest ticket was for a few hundred million dollars, while the smallest ticket was for $1,000 to a retail investor, placed through Charles Schwab's online platform.
Oliveros explains that a small, energetic Treasury Finance team had been working on this concept for the past six months, with Lead Specialist for Capital Markets C.K. Teng and Senior Financial Officer Mehmet Ozkaya leading the design of the electronic platform and bond offering. The team resolved a host of new technical issues working in partnership with the joint lead managers Goldman Sachs and Lehman Brothers.
"It is important to introduce a comprehensive electronic platform because it creates a new standard for primary issuance and secondary market trading. It leverages off the franchise value of our traditional underwriters and expands it with the addition of new e-brokers," says C.K. Teng.
"Another important element was that for the first time in a bond offering, the order books were submitted electronically and the bookbuilding process could be monitored live via the Internet," explains Ozkaya. "This allowed the Bank to manage the total order book in real time."
Goldman Sachs (sole bookrunner) and Lehman Brothers were appointed joint-lead managers of the deal. Co-leads were ABN AMRO, Barclays, Charles Schwab, Credit Suisse First Boston, Morgan Stanley Dean Witter, PaineWebber, and Warburg Dillon Read. This was the first electronic syndicate in a bond issue since all its underwriters had the capability of offering the bonds online. Secondary market trading was immediately available through Goldman's online trading system, Web.ET. Other electronic platforms will be added to trade these securities electronically in the coming weeks.
Oliveros pointed out that this was a comprehensive team effort, where the core team was supported by contributions from within and outside of the Treasury Finance Department. Principal Financial Officer T. J. George and Senior Financial Officer Aziel Levy led the effort in managing the derivative position of the transaction.
"Given the size of the transaction and its potential impact on markets, we considered several hedging and derivative management strategies with varying degrees of complexity," notes George.
"In the end we managed to execute the strategy that best achieved our objectives and was least disruptive to the market," Levy says.
On the bond side, choosing the right timing for launch is critical to ensure that the bond performs well in the market. Senior Financial Officer Hiroshi Tsubota, who monitored developments in the USD market leading to the pricing of the transaction, says: "The bond was launched into a firm market. The yield spread has tightened since launch, and this has benefited the investors."
Senior Financial Officer Michael Koch added vital marketing elements, including a new investor website to disseminate information to the public and an email feedback line for investors. Working with underwriters, Koch set up an Internet roadshow in time for premarketing the deal. "Marketing the Bank is important in light of our objective to reach out to new investors. For the first time in Bank's offering, this bond was marketed electronically," Koch points out.
The legal team who worked on the deal—including Chief Counsel of the Finance Unit Scott White, Principal Counsel Jaap van Opstal, Senior Counsel Cliff Frazier, and Counsel Richard Bauer—hit the ground running and were involved when the deal coalesced. This meant reviewing investors' website and Internet road show content to ensure that the Bank is within disclosure rules during the premarketing phase and subsequent launch of the transaction, and working in close collaboration with outside counsel on the new procedures that underwriters need to follow in an electronic offering.
"At the moment, Internet offering and distribution of securities is a rapidly developing field, with few clearly defined rules. While regulators are concerned about the potential for abuse, the Internet also offers the opportunity to provide investors with a wealth of information about potential investments, which should allow investors to make more informed decisions than ever before," explains Frazier.
The success of the transaction owes a great deal to the strong partnership with the Bank's key underwriters, the team says.
Michael P. Mortara, Goldman Sachs' co-head of Global Fixed Income, Currency and Commodities, comments: "We're delighted to lead this milestone offering, a first in applying on-line technology to investor distribution and secondary trading, and entirely in keeping with the World Bank's commitment to market innovation."
Lehman Brothers' Jeffrey Vanderbeek, Global Head of Fixed Income, says: "We are very pleased to be leading what is the first comprehensive Internet securities offering. With this innovative transaction, the World Bank leverages the rapid development of e-commerce in the capital markets and enhances the investor distribution process and secondary market trading in World Bank global bonds."
"Individual investors have long sought to participate in World Bank offerings but have had few opportunities or venues to do so," says John Ladensack, Senior Vice President, Fixed Income, Charles Schwab & Co., Inc. "Internet technology has opened new delivery channels for retail bond investors and we applaud the World Bank for leading the way for a host of other world class issuers."
Following the success with this operation, the Bank plans to offer more products through electronic platforms.