The New Development Bank is in “active” talks with investors about issuing a new U.S. dollar bond before the end of the year — a move aimed at shoring up its image in financial markets following a Fitch Ratings downgrade of the institution last month over its links to Russia, Devex has learned.
The bank is preparing an investor roadshow for later this year in which it will make clear that the new bond will be used to fund projects in all its member states except Russia, NDB Chief Financial Officer Leslie Maasdorp told Devex. NDB’s founding members include Brazil, Russia, India, China, and South Africa, known collectively as the BRICS economies.
The Shanghai-based lender put all its operations in Russia on hold in March, just after the invasion of Ukraine and the imposition of a slew of Western sanctions on Moscow. For the upcoming bond, this means the financing it raises will not be used for Russian investments.
“The bank is presently in active dialogue with our investor base to explore the feasibility of a benchmark-size U.S. dollar bond offering in the final quarter of 2022,” Maasdorp said.
“The proceeds from the new upcoming bond issuance will be devoted to finance sustainable infrastructure in all the other member countries of the bank,” he said, adding that a “use-of-proceeds clause” will be stated on the bond to dictate where it is used.
The upcoming bond issuance could be a closely watched measure of the institution’s access to U.S. dollar markets and whether it has sufficiently assured its core investor base to lend to a development bank in which Russia has a 20% ownership stake.
But will it be enough to convince investors to effectively set aside the “R” in BRICS?
The target of the upcoming bond issuance would be the bank’s existing base of investors in Europe, the Middle East, Asia, and Latin America — regions where it has already sold to official institutions, such as central banks.
The Fitch Ratings move, which dropped NDB down one level and kept its outlook negative, centered almost entirely on the agency’s concerns about the bank’s inability to “break the Russian nexus,” Fitch said in a statement.
The negative outlook indicates the agency is worried that the Russia exposure may haunt NDB into the future, particularly its access to U.S. dollar markets — which explains the bank’s interest in showing it has access by planning for the dollar bond issuance. U.S. dollars and other major currency issuances are more appealing among investors seeking less risk, given their stability.
A major part of the concern over NDB’s Russian exposure stems from the financial sanctions that Western nations have slapped on Moscow, which will likely not be lifted as long as the war in Ukraine drags on. Russia recently defaulted on its debt for the first time since 1998, as it could not pay its bondholders.
However, in its statement, Fitch highlighted that the bank is expected to “honour its debt obligations over the medium term.”
Maasdorp told Devex that the bank’s “balance sheet and liquidity is strong,” meaning he foresees no problems meeting future cash flow obligations.
NDB has been rapidly scaling up lending. By the end of 2020, the bank increased its portfolio by 63.6% over the previous year, taking total lending to $24.4 billion, according to an annual report issued in 2021. During that year, NDB also issued its first U.S. dollar bonds, with a first issuance for $1.5 billion and a second for $2 billion.
Development banks have capital from their shareholders that they can tap into for lending but also borrow money on markets at low interest rates to pass on those savings to clients. Credit ratings are crucial because high ratings mean lower interest rates. For example, at the World Bank, where many of the clients are low-income nations, the Washington-based lender can give loans to countries with poor credit ratings at rates they would never be able to get on their own.
NDB has not issued a hard currency bond since late 2021. But earlier this year it issued the “largest ever Panda Bond” in China, with a value of over $1 billion. A Panda Bond is a bond issued in Chinese yuan by non-Chinese investors. According to a person familiar with the bank’s planning, NDB is also considering issuances in European currencies, as well as other major denominations.
In an email to Devex, the bank confirmed the “plan to work towards a new dollar issuance in the fourth quarter of 2022. In this regard, we have already started our investor engagement process and intend to sharpen this engagement once the summer break in markets [is] over.”
NDB also said it is confident it will “satisfy investors that the Bank has put all transactions in Russia on hold, and that the Bank is fully compliant with relevant international sanctions.”
Because multilateral banks are backed by consortiums of sovereigns and are generally seen as safe, it is rare for them to be downgraded or placed on a negative outlook. While NDB never had the AAA top-level rating of most of its peers, it still enjoys AA — the third-highest ranking at Fitch — after the downgrade last month.
The plan for a potential upcoming U.S. bond issuance would not be carried out on U.S. markets, due to regulatory issues. The bank, which only approved its first projects in 2016, has not yet registered to issue bonds onshore in the U.S. Its existing U.S. dollar issuances were done on European markets, notably London, and they continue to trade freely.
However, one issue raised in the Fitch statement was whether NDB’s Russian links could lead to a deterioration in access to U.S. capital markets and hurdles working with major U.S. institutions like banks, which could then hurt the bank’s business model.
Recently, the United Arab Emirates and Bangladesh became members, and Egypt is also vying for a slot. Other countries are also seeking to join, as China, the driving force behind NDB, looks to grow membership.
Even with an audience outside the U.S. for its investor roadshow, the bank is trying to demonstrate that it is financially detangling itself from Russian exposure, which can help it further down the line with assurances on market access.
NDB “intends to align itself strongly with its peer MDB’s and other international financial institutions which are all de-risking themselves from Russia related risk,” according to an official familiar with the bank’s position.
Shabtai Gold is a Senior Reporter of Devex based in Washington. He covers multilateral development banks, with a focus on the World Bank, along with trends in development finance. Prior to Devex, he worked for the German Press Agency, dpa, for more than a decade, with stints in Africa, Europe, and the Middle East, before relocating to Washington to cover politics and business.
