The New Development Bank ended a 16-month hiatus from the international bond markets last week in what was the first step towards fully winning back investor confidence in the institution amid concerns of its ties to Russia.
NDB was established in 2014 by the Brics states of Brazil, Russia, India, China and South Africa before making its debut in the international bond markets in 2020, spearheaded by Leslie Maasdorp, the bank’s chief financial officer. The bank gradually built out a curve with a series of issuances to finance its pandemic support package over the following 18 months before an abrupt pause to its funding programme following Russia’s invasion of Ukraine in February 2022.
‘The reason why we didn’t issue last year was because of price, not that we couldn’t issue,’ said Maasdorp. ‘Our secondary levels have been mispriced and do not reflect our double-AA credit rating’.
The spread of NDB’s bonds in the secondary market surged in 2022 and are still far from an AA credit as investors have put to action their concerns of NDB’s links to Russia, with Russian ownership accounting for 19.4% of the bank’s capital and the share of Russia in its total loan portfolio standing at 14% at the end of 2021.
NDB’s inability to access the dollar bond market at low rates led Fitch to downgrade its outlook on the bank to ‘negative’ in July 2022, stating that, ‘NDB could face challenges to issue a long-term bond on US capital markets, including working with US financial institutions to arrange and underwrite issuance, given reputational risk associated with a bank with large Russian ownership’. NDB has frozen all loan disbursements and new approvals in Russia since March 2022 but Russia still maintains a role on the board where it can exercise its voting power.
NDB spent much of 2022 meeting investors with non-deal roadshows and bilateral meetings to inspire confidence before pressing on with plans to return to the international bond markets in early 2023. Citi, Crédit Agricole, HSBC and Industrial and Commercial Bank of China were appointed by NDB on 16 February to sound out interest on its return to the market with S&P later that month, affirming its AA+ rating on the bank with a stable outlook. ‘That, for us, was a real boost of confidence from one of the largest credit rating agencies recognising the efforts the bank made during 2022’, said Maasdorp.
However, any plans to immediately bring the deal to the market in March were dealt a blow following the collapse of Silicon Valley Bank and Credit Suisse during that month. ‘There was a lot of uncertainty in financial markets and commentaries flagging a potential broader systemic risk, so we had to avoid these few weeks,’ said Maasdorp.
NDB eventually sold the deal on 19 April, sealing its return to the bond markets with a $1.25bn three-year benchmark at a spread of 125bp over secured overnight financing rate mid-swaps, which was also the issuer’s debut dollar benchmark in green format. The final order book came in at just under $2bn from over 50 investors. Updates on the deal and the pricing supplement explicitly stated that the use of proceeds of the bond would not be used to finance or refinance loans in Russia.
‘We priced the transaction at SOFR plus 125bp, which is where our secondaries were trading so there was no new issue premium,’ said Maasdorp. ‘Normally there is a new issue premium associated when issuers come to the markets and we have seen this from other recent issuances from double-A entities. Investors recognise there is already a premium built into our secondary levels and that we should be issuing much cheaper.’
It was the smallest of NDB’s previous four fixed rate dollar benchmark issuances but according to Asif Sherani, head of debt capital markets syndicate for Europe, Middle East and Africa at HSBC, one of the banks that led the deal – the initial plan was to size the bond at $1bn.
The goal for NDB now is to bring more investors back to its bonds, which will in turn bring down its spreads and cost of borrowing further. ‘There are some investors that are still sidelined from participating in the name but that education process between the issuer and investors is still ongoing,’ said Sherani. ‘The success of this transaction will help garner their interest.’
The early signs are encouraging. ‘The new bond has performed roughly 5bp to 6bp,’ said Sherani. ‘The primary issuance has been very helpful in providing an injection of liquidity into the secondary curve. The spreads should continue to grind tighter but how quickly that happens is to be seen.’
‘In an ideal world, we believe our price should come down close to SOFR plus 100bp,’ said Maasdorp. ‘We believe we have started a new journey, a journey that will result in us being able to tighten our price going forward as investors become more and more confident with our repositioning.’
Re-establishing itself as a frequent borrower with more issuances this year will help NDB on this journey and that is the plan, according to Maasdorp. NDB has a $6bn funding target for 2023 and plans are already underway for the next dollar benchmark with the bank also looking to bring a debut bond in euros.
Leslie Maasdorp, NDB’s CFO, will be speaking at the Public Sector Debt Summit, the annual flagship event by OMFIF’s Sovereign Debt Institute on May 23 in London. Click here to explore additional speakers and secure your spot at the event.
Burhan Khadbai is Head of Content at the Sovereign Debt Institute at OMFIF.