World Bank set to issue up to US$1 billion in debut hybrid note this year

The World Bank is looking to issue up to US$1 billion in a debut hybrid note on capital markets this year, a senior executive told Reuters, as development banks face increasing pressure to find new ways to boost their lending.

The G20 group of major economies has urged multilateral lenders to explore hybrid financing structures in a push to try and maximise balance sheets and increase funding to help developing economies cope with crises, including climate change.

The World Bank would be only the second multilateral lender to issue such an instrument, after the African Development Bank (AfDB) sold its hybrid capital note in January – the first such financing of its kind from a multilateral lender.

When the AfDB sold this deeply subordinated, debt-like equity instrument, it said it hoped to establish this as a new asset class.

“We are working towards a potential pilot transaction some time this calendar year,” said George Richardson, director of the capital markets and investment department at the World Bank Treasury.

“It would be interesting to see if we can find a new way of raising money. The proof is in the pudding,” said Richardson, adding the lender was talking to investors about the issue and was also closely monitoring market conditions.

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Looking at the ratings that would be assigned to the new instrument, Richardson said the World Bank was convinced that hybrid capital issued by multilateral development banks would be a better credit, relative to senior, unsecured bonds, than currently reflected in the rating agencies’ methodologies.

“These state that hybrid capital will be rated 3 to 5 notches below senior ratings,” he said, adding that Fitch was undergoing a methodology change and it remained to be seen what changes the ratings agency would make on hybrid capital.

“We are not commercial banks nor a corporate. Our governance and ownership structure makes us better credits than commercial banks and corporates,” he added.

Moody’s assigned an AA3 rating to the AfDB issue, three notches below the bank’s AAA rated bonds. The AfDB hybrid issue traded at 97.6 cents in the dollar on Tuesday, according to LSEG data, below its debut of just over 100 cents in the dollar in early February. REUTERS