March 2002

BONDS

INTER-AMERICAN DEVELOPMENT BANK BORROWS $7 BILLION IN 2001

Bank expects to raise up to $8 billion in 2002

The Inter-American Development Bank, which continues to be a leading source of multilateral financing for economic and social development in Latin America and the Caribbean, raised $7 billion in international capital markets during 2001. The IDB had borrowed $8 billion in 2000.

Bank expects to raise up to $8 billion in 2002, according to Håkan Lonæus, acting chief of the Capital Markets Division. "As in previous years, the borrowings will be done with a combination of U.S. dollar benchmark global bond offerings and issuance in other currencies swapped into U.S. dollars. We also have need for the equivalent of US$400 million in Swiss francs," Lonæus said.

The IDB, which has had a triple A credit rating from both Moody’s and Standard & Poor’s for its debt ever since its first bond issue in 1962, regularly turns to capital markets to seek the lowest cost financing for its funding program. Thanks to its prudent policies, the Bank is able to offer borrowing member countries long-term loans at very competitive interest rates.

With its total approved capital standing at $101 billion, and given its member countries’ credit quality and support and its preferred creditor status in all its borrowing members, the IDB is well positioned to remain among the top-rated lending institutions.

Highlights of 2001

Last year the IDB carried out 31 borrowing transactions. The average maturity of the borrowings was four years, with maturities of individual transactions ranging from two years to 10 years.

The IDB continued to focus its funding on institutionally targeted bond issues in 2001. In the U.S. dollar market, the Bank refocused its issuance to fewer and larger transactions in response to the expressed interest of investors for more liquid bond issues. A $2 billion, five-year issue was executed in January, and a $2 billion, three-year deal was issued one week after the September 11th terrorist attacks. That issue met with overwhelming demand as investors sought high quality, liquid, short-dated securities in the face of economic uncertainty and plunging equity markets.

The success of this issue contributed to the reopening of the supranational sector. The three-year issue was subsequently increased by an additional $500 million in October, thus raising its total outstanding issue size to $2.5 billion. With these issues, the Bank further developed its institutional investor base, especially in the Americas. Overall, institutional investors bought 91 percent of the Bank’s bond issues in 2001. This compares to 99 percent in the year 2000. The largest changes between these two years were a large increase in sales to Japanese retail clients and a continued augmentation of the U.S. institutional investor base.

The IDB also strives to broaden the demand for its securities through issuing debt in a variety of currencies, maturities and structures. The IDB issued its inaugural Australian dollar bond and its first Hungarian forint bond in 2001, and it re-entered the Polish zloty market. In addition, it continued to access the Hong Kong dollar and the pound sterling, and it returned to the Swiss franc markets after a two-year hiatus. The Bank executed the first ever supranational bond with embedded call features in the Taiwan dollar market. After swap, most financing was in U.S. dollars (85 percent), while the remaining borrowings (15 percent) were swapped into Japanese yen, euro currency and Swiss francs.

The IDB also maintains a discount note program, which offers an additional cash management tool. Discount notes are short-term securities of up to one year issued in the U.S. agency market. The Bank’s program is authorized to issue up to $5 billion outstanding, but the average balances are aimed to be much smaller. During 2001 the Bank issued $2.9 billion of discount notes.

In order to keep tight control on credit risk exposures, the Bank enters into swaps only with highly rated counterparties with negotiated master agreements that provide for daily marking to market and collateralization.

The financial press recognized the Bank’s funding again. At the end of 2001, a poll within the capital market community conducted by Euroweek named the Bank’s 2006 US dollar benchmark global bond issue as the best US dollar straight bond of the year 2001. Also, in December 2001, IFR Asia named the Bank as the best supranational in the Taiwan dollar market.

Outlook for 2002

In 2002 the Bank will borrow between $6 and $8 billion. The IDB will continue to rely on institutionally targeted benchmark transactions in 2002, and it expects to issue at least two larger benchmark deals in U.S. dollars. Following this strategy, the Bank has already issued a three-year, $2 billion benchmark transaction. The Bank now offers a yield curve in the U.S. dollar market, including bonds maturing in 2003, 2004, 2005, 2006 and 2010.

As in other years, most of the funding needed is in U.S. dollars, with a small requirement in Swiss francs. The benchmark issuance will be supplemented by arbitrage-driven transactions as opportunities emerge.