The World Bank has urged other multilateral development banks (MDBs) to follow its example in issuing “outcome bonds” after the pricing of a $225 million deal that will funnel money into reforestation in the Amazon.
“We hope some of our MDB peers join us,” Michael Bennett, global head of market solutions and structured finance at the World Bank, told Responsible Investor. “We don’t want to be the whole market here.”
He noted that some regional MDBs have reached out to the World Bank following its third issuance in the format.
Under the structure, investors forgo part or all of the coupon payment on a normal World Bank bond. The money is then used to fund a sustainability-related project, with investors paid a return based on the success of that project.
The structure was launched with a deal linked to a Rhino conservation project. The World Bank has also raised money from self-funding deals, where the projects raise money from carbon or plastic credits to pay investors their coupon.
This week’s deal will see around $36 million handed to Brazilian company Mombak to either acquire land or enter into agreements with landowners for reforestation using native tree species in the Amazon.
The reforestation will generate carbon credits, which the World Bank has entered into an agreement with Microsoft to offtake.
Nuveen was the largest investor in the deal. Other participants included T Rowe Price, Mackenzie Investments, Rathbone and Velliv Pension.
Bennett said the deal, the largest yet in the format, enabled greater participation from investors, including “significant new participation”.
“We heard from some investors that they would be either more interested or able to put in larger orders if the deal sizes were bigger. Some investors have requirements around minimum deal size and once we get over $200 million we start getting more into what people see as a liquid benchmark size,” he said.
“Some investors were able to participate in the earlier deals but wanted to put in bigger orders, but also didn’t want to be the majority of the deal.”
A source close to the deal told Responsible Investor that a “huge component” of the existing World Bank buyer base would not look at outcome bonds because of the structured nature and the exposure to project risk.
There are still issues with liquidity as well, despite the $225 million size, as normal World Bank issues can reach up to $6 billion, the source said, adding that some interested investors were unable to buy a dollar-denominated bond.
However, the deal was ultimately oversubscribed and new buyers on the deal were “all very positive” on the concept and structure, the source said.
They added that having Microsoft as the offtaker was “comforting to a certain extent”, given the firm’s status as a market leader in the carbon credit market and the “significant amount” of due diligence it carried out.
A number of investors involved in the deal noted the attractiveness of the combination of environmental impact and outsize returns.
“We feel this bond aligns well with the mandates of our funds given the prospect of measurable environmental impact and potentially attractive financial returns, hence the decision to participate in the deal,” Stuart Chilvers, co-manager of two Rathbones funds which bought the bond, told Responsible Investor.
The excess coupon on an outcome bond deal tends to be negatively correlated to the portion of guaranteed coupon that investors give up – the higher the guaranteed minimum coupon, the lower the premium.
In the case of the rainforest bond, the premium is about 40 basis points above what a plain vanilla World Bank bond would pay for the same maturity.
Both Chilvers and Ellen O’Doherty, an impact credit analyst at T Rowe Price, noted that the offtake contract with Microsoft removed carbon market price risk for investors.
O’Doherty told RI that T Rowe Price welcomed the environmental, biodiversity and social co-benefits of the deal. She added that the bond should “offer a decent spread pick-up for triple-A risk, which helps to compensate for the liquidity premium”.
“Defensive bonds like these help to protect portfolios from drawdowns in large risk-off events,” she said. “For example, the best-performing bond in our impact credit strategy during the Silicon Valley Bank crisis was the IBRD Wildlife Conservation bond [the ‘Rhino bond’].”
Umbrella bonds
Looking ahead, Bennett said the World Bank has a “robust pipeline” of outcome bonds.
“We have a lot of banks and project developers coming to us, a lot of banks now want to get involved,” he said, noting that HSBC – the sole bookrunner on the deal – had introduced Mombak to the World Bank for this bond. RI understands that Mombak is an existing HSBC client.
“I don’t think it’ll ever be a true assembly line, but we hope to be doing more deals, bigger deals, higher frequency,” said Bennett.
The World Bank is keen to do another deal before the end of the year, and that multiple are being worked on, but they take time to review, he added. The issuer is looking at deals across carbon credits, plastic credits, and biodiversity and conservation.
The Rhino-linked bond gained a lot of publicity, but Bennett said any other “species bond” would have to look at an “umbrella species”, where protecting the species “means a large habitat and a large area of biodiversity has been protected”.
“We’d be looking at something that signals more than just an increase in that species but actually general biodiversity co-benefits,” he said.