IBRD Financial Solutions IBRD Financial Solutions A Client Focused - PowerPoint PPT Presentation

IBRD Financial Solutions IBRD Financial Solutions A Client ‐ Focused Approach t A hi to Achieving Debt Management Goals i D bt M t G l SDM Forum October 2010

Main Messages  Clients face a range of risks and challenges in putting together financing to meet development objectives and achieve debt financing to meet development objectives and achieve debt management goals.  IBRD has an extensive menu of financing and risk management products and services to help clients deal with these risks these risks.  The process begins with and is built around the client’s The process begins with and is built around the client s financing needs and risk management objectives.  The outcome is a customized financial solution that supports overall development objectives. 2

IBRD is a full ‐ service financial provider Traditionally… …Today Serving: All member countries Serving: Eligible borrowers Providing: Financial solutions to access, protect and manage Providing: Access to development resources and to de e op e t esou ces a d to finance for fi f help address global challenges development Offering: Broad menu of financial Offering: Offering: One-size-fits One size fits services all loans  Loans  Credit enhancement (guarantees)   Risk management tools Risk management tools  Asset/wealth management  Treasury management services Shift in delivery model to client ‐ focused approach: Customized financial solutions based on needs/risks of each client 3

Cost of borrowing for sovereigns is volatile EMBIG and IBRD Spread over US Treasuries July 15, 1999 to October 15, 2010 12.00% 10 00% 10.00% 8.00% 6.00% % 4.00% 2.00% 0.00% -2.00% Jul-99 ov-00 Apr-02 ug-03 an-05 ay-06 Oct-07 eb-09 un-10 Au Fe Ju J O A N J M EMBIG IBRD Fixed Spread greater than 15 years and up to 18 IBRD Variable Spread greater than 15 years and up to 18 The spreads presented on the graph correspond to the longest average maturity available for each instrument at the time. The current average life of the EMBIG is 11.7 years . As of July 1 st 2010 the longest l 1 t 2010 h l i h i h lif f h G i 11 f average maturity offered by IBRD is 18 years. 4 Source: JP Morgan, World Bank, and Bloomberg

IBRD is a competitive source of financing Funding Cost Comparison 1 6-mo LIBOR on Spreads over USD 6 ‐ month LIBOR October 15, as of October 15, 2010 2010 = 0 45% = 0.45% ( 0.28% , 0.38% and 0.48% respectively ) IBRD Variable Spread IBRD Fixed Spread ( 0.60% , 0.85% and 1.15% respectively ) EMBIG Asia 1.48% EMBIG Europe 1.92% EMBIG Africa 2.52% EMBIG Latam 3.09% EMBIG Middle East 3.39% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% EMBIG Spread IBRD Spread 12 years and less IBRD Spread 12+ to 15 years IBRD Spread 15+ to 18 years 1/ IBRD lending rates include an annualized front ‐ end fee of 0.03%. For sovereign issuances, spreads over LIBOR are based on current secondary market yields. Source: Bloomberg and World Bank 5

Flexible, cost ‐ effective tools offer clients ways to manage multiple financial risks Financial Issues IBRD financial solutions  Contingent credit lines  Liquidity/ credit crunch  Provide low cost loans  Provide low ‐ cost loans  Mobilize private resources with guarantees  Mismatch between foreign currency loans and local currency loans and local  Provide local currency financing currency revenues  Execute derivatives transactions to  Cash flow/ liquidity issues convert currencies jeopardizing compliance with j di i li i h investment programs  Customize repayments; provide longer repayment terms (up to 30 yrs)  Reduced private sector appetite  Boost confidence with guarantees  Interest rate volatility  Fix interest rates using derivatives 6 (swaps, caps, collars)

IBRD offers a full menu of financial solutions IBRD Flexible Loan Loans Local currency loans Sub ‐ national finance Contingent Financing Deferred Drawdown Option (DDO) Partial risk guarantees (IBRD/IDA) Credit Enhancement Partial credit and policy based guarantees Currency swaps (also non ‐ IBRD) Interest rate swaps (also non ‐ IBRD) Hedging Products Interest rate caps and collars Commodity price swaps Commodity price swaps Weather hedges Cat DDO Catastrophe Risk Management Insurance pools C Catastrophe bonds h b d Asset management Public debt management Asset and liability management y g Client Advisory Services Client Advisory Services Capital market access strategy & implementation Transaction processing, reporting, and IT

Annexes

Example: Local currency financing via local currency bond issue in Uruguay Background  Uruguayan authorities expressed strong interest in receiving financing in UYU from IBRD g y g g g  However, swap market in UYU was not sufficiently developed Financial Risk Financial Solution  Currency Risk C Ri k  Back-to-Back Operation: two simultaneous and symmetrical B k t B k O ti t i lt d t i l transactions executed with a high level of coordination between IBRD and the Uruguayan Ministry of Finance UYU 1,981.53 mm UYU 1,981.53 mm UYU 1,981.53 mm UYU 1,981.53 mm Structure (USD100 mm.) (USD100 mm.) (USD100 mm.) (USD100 mm.) Domestic & Domestic & Government Government International International World World of of Investors Investors Bank Bank Uruguay Uruguay Inflation-linked Bond Inflation-linked Bond Inflation-linked Loan Inflation-linked Loan 3.40% Coupon 3.40% Coupon 3.40% Coupon + 0.30% 3.40% Coupon + 0.30% Outcome  Expands local currency financing to countries where the currency swap market is not sufficiently developed, helping Governments to reduce foreign exchange risk  Th The bond issue contributes to the deepening of domestic capital markets and is a source of b d i t ib t t th d i f d ti it l k t d i f diversification to domestic pension funds and international investors  Exemplifies IBRD's commitment to provide customized financial solutions to its members 9

Catastrophe Risk Example: Weather Derivative in Malawi Development Objective Customized Financial Solution Recurrent drought and impact on maize production create food insecurity and production create food insecurity and malnutrition •Weather derivative transfers risk of Financing Problem catastrophic drought G Government has contingent liabilities t h ti t li biliti to the market since it may need to import food and fund food security responses in the event of a Client •In the event of severe drought Needs: and catastrophic and catastrophic drought, government Risk Management Problem has quick access to • Uncertainty about rainfall volumes contingent financing creates uncertainty about maize production, supply, and price volatility d ti l d i l tilit •Can be linked to a • Government concerned about commodity hedge continuously relying on donors to help in the event of an emergency g y which caps price of p p maize imports 10

Securing Long ‐ term Financing for Clean Technologies in Mexico Background  Client goal: Increased motorization has lead to significant increase in GHG emissions in Mexico, making it one of the more carbon-intensive economies in Latin America. Mexico needed to implement sustainable transport policies, scrap non-compliant p p p , p p vehicles, and introduce low carbon buses.  Issues: Transformation of urban transport system requires more than US$2.7 billion of financing. Overall project viability dependent on availability of necessary funding at concessional rates. Innovative approach to meet shortfall at concessional rates. pp  Requirements: q Development Solution Risks IBRD blends US$200 in concessional financing from the Climate Technology Fund  Shortfall risk (CTF) with US$150 million from IBRD.   Blending two sources of financing reduces overall interest burden enabling Blending two sources of financing reduces overall interest burden, enabling  Currency risk project’s implementation  IBRD loan flexible terms provide option to request disbursements in either US  Interest rate risk dollar or Mexican peso, at fixed or floating rate  Repayment schedule customized to allow Mexico to pay principal in increasing installments as project revenues materialize installments as project revenues materialize Outcome  Mexico mobilizes necessary volume of funds at financial terms that meet its requirements to enable project’s implementation.  Flexible terms of IBRD loan and embedded risk management options allow Mexico to manage interest  Flexible terms of IBRD loan and embedded risk management options allow Mexico to manage interest rate, currency, and repayment risk.  Co-financing scheme allows Bank and CTF to jointly support Mexico’s efforts to take climate change agenda forward.