Seeking Alpha

Randy Durig's  Instablog

Randy Durig
  • on Bonds
Send Message
Our team at Durig Capital work tirelessly to provide you with the premier Global Fixed Income services that to help US and World investors. We achieve high institutional yields from around the globe for the retail investor. Search the globe for best yielding investments, providing updated... More
My company:
Bond-Yields.com: Providing Global High Institutional Yields for our Investors !
My blog:
Bond-Yields.com: Providing Global High Institutional Yields for our Investors !
My book:
Bank Offshore
  • This Weeks Best Bond......Can this be "Real" 0 comments
    Oct 28, 2010 5:55 PM
    International Bank Reconstruction and Development in Brazilian Real 6.89% YTM due 6/12



    This week we are expanding our approach and highlighting a multinational non government organization.  The World Bank has issued some fixed income instruments that offer higher yields, the highest ratings, an array of options in currencies to help our investors globally diversify their income streams.

    In recent weeks we have had a lot of inquiries about investing in foreign denominated debt.   Currently, the state of the US economy has many wondering what will happen next. The Government has accelerated it’s deficit spending with hopes of restarting the economy.  These additional levels of debt and government growth could possibly provide a constantly prolonged weakening effect to the US Dollar.  The Federal Reserve has hinted that it will keep interest rates at record lows to assist in the recovery process.  Being able to lend at these levels is attractive although it also means it is hard for investors to generate current income.  Unemployment continues to be newsworthy as levels still hover around 10%.  With the US balance sheet, low interest rates, and high unemployment investors as seeking higher yielding issues.  We have found an Institution in the World Bank that offers AAA rated bonds, higher yields, and foreign currency exposure that investors are seeking.

    We have found one bond that is very attractive to us that is issued by the World Bank.

        

        The following provides details about this issue:

    • International Bank of Reconstruction and Development
    • Denominated in Brazilian Real
    • Matures on June 15, 2012
    • Coupon of 8.75%
    • Price 102-24 Brazilian Real
    • Trades in lots of 5 bonds (5000 Real)
    • Exchange rate = .5917 US Dollar/Brazilian Real
    • Yield to Maturity of 6.89%


    The World Bank is headquartered in Washington D.C. with 100 member offices in 130 different countries being represented by 10,000 employees.  The World Bank does not have ownership stakes like common retail banks do but instead is owned and operated by 187 member countries.  

    One of the features that we like about the World Bank bonds is that they allows investors to diversify their assets out of US denominated assets.  They offer bonds denominated in 51 different currencies with 62% of the bonds denominated in US Dollar. We previously wrote about a Brazilian Government bonds that matured in 2016 and highlighted the superior yields investors could attain.  Investors requested bonds that had shorter maturities than the last, five plus years, issue we offered.  While reviewing out options, we identified an offering at the World Bank that achieved our Real denominated exposure needs while having a maturity of 18 months.

    One of the subordinated divisions of the World Bank is called the International Bank for Reconstruction and Development.  The bank first started issuing bonds on global financial markets just after World War II ended in 1947.  Since that time, the World Bank has had the the highest credit rating available of AAA.  They have never needed to make a capital call or to write off a loan.

    With such a strong credit rating, World Bank bonds are ideal for investors that look to gain exposure to interest rates, currencies, inflation rates, equity indices, and other indices.  At Durig Capital, we are utilizing these highly rated debt instruments, gaining also higher yield,  to limit our clients exposure to the US currency.  

    As of June 30, 2010, the World Bank reported paid in capital of $11.5 billion US Dollars with an additional $178.4 billion US Dollars that is considered callable capital.  Callable capital is defined as pledges that member countries have made to the World Bank in case capital is needed to repay loans.  About 38% of the callable capital has been pledge by the United States, Japan, Germany, France and the UK illustrating that the bank has a strong foundation and that not all the capital is linked to one country.

    The way the World Bank diversifies its lending practices to different countries in also attractive to investors.  No sovereign nation can lend more than 16.5% of the over all lending portfolio.  This helps mitigate risks such as natural disasters and political unrest or revolution.  Currently the largest lender in China representing about 13% of the overall portfolio with Brazil the second largest with just over 11%.  The other larger lenders include India, Mexico, Turkey, Indonesia, Colombia, and Argentina.   

    One feature that we find very attractive about the World Bank is their conservative lending practices.  Their rule is as follows “The World Bank can never lend more than subscribed capital, reserves, and surplus.”  This year the estimated subscribed capital, reserves, and surplus is approximately $218 billion US Dollars while they have outstanding loans and guarantees of $120 billion US Dollars.  As we have mentioned in previous articles, we like to see short term assets and cash that is greater than long term debt.  In this case, short term assets and cash exceed total debt by over 180%.       

    Historically, the World Bank sold there issues to large pension funds and institutional investors.  With the ongoing development of global financial markets that is occurring, issues that were once only offered to the above mentioned clientele are slowly becoming available to individual investors.  

    Funds generated from the issuance of bonds by the World Bank applied toward numerous projects.  In 2010 alone, the World Bank is projected to lend $34 billion US Dollars.  Last year represented the largest amount the World Bank financed for a year with $44 billion being financed.  Much of last years activity was due to refinancing issues at reduced yields.  

    Risks

    There is unique risks associated with bonds issued in a currency that is not the investors local currency. This risk is effected by numerous interwoven factors that include but are not limited to geopolitical, foreign trade, inflation rates, sovereign interests rates, currency supply and currency demand factors.  Lately, US Dollar has been losing value to some foreign currencies due to some of the above mentioned factors however the past movements are not indicative of future performance.  Principal and interest payments could adversely be affected by changes in the values of foreign currencies.   We believe that investors could reduce the overall purchasing power risk of their portfolio if an allocation of foreign denominated debt were included in the portfolio.
       
    Brief Overview of Select Issues

    Example of 2010 World Bank Issues

    Amount (millions)

    AUD

    150

    BRL

    40

    COP

    25,000

    HUF

    2,500

    MXN

    200

    NOK

    400

    NZD

    50

    RUB

    750

    TRY

    50

    ZAR

    100

    Settlement Date

    3/5/10

    3/2/10

    3/2/10

    3/2/10

    3/5/10

    3/2/10

    3/3/10

    3/2/10

    3/2/10

    3/3/10

    Maturity Date

    2/15/17

    3/2/17

    3/2/20

    5/19/17

    3/5/20

    5/19/17

    3/3/17

    3/2/17

    3/2/17

    3/3/17

    Issue Price

    100.575

    102

    102

    99.56

    100.45

    99.60

    100.895

    102

    102

    100.9

    Par

    100

    100

    100

    100

    100

    100

    100

    100

    100

    100

    Coupon

    6%

    9.50%

    8%

    5.50%

    7.50%

    3.75%

    5.625

    7.50%

    10%

    8.75%

    Currency

    AUD

    1,000

    BRL

    5,000

    COP

    10,000

    HUF

    1,000

    MXN

    1,000

    NOK

    50,000

    NZD

    1,000

    RUB

    50,000

    TRY

    1,000

    ZAR

    1,000



    Country Codes
    AUD=Australian Dollar            BRL=Brazilian Real        COP=Colombian Peso       
    HUF=Hungarian Forint            MXN=Mexican Peso        NOK=Norwegian Krone   
    NZD=New Zealand Dollar            RUB=Russian Ruble        RY=Turkish Lira
    ZAR=South African Rand

    Conclusion

    Many foreign currencies like Brazilian Real require a 250 bond minimum purchase.  We are working to provide our clients world income in smaller allotments.  This allows individual clients the high yielding world investments, with the ability to properly weight the assets allocations with regards to their own portfolio.  In the past we have been able to purchase $10,000 US Dollar.

    The World Bank bonds give investors a premium yield.  The highest AAA ratings and a strong balance sheet tell us default risk is minimal.  We believe receiving a high yield, diversifying away from the dollar and minimal credit risk could be an excellent  way to protect against the probability of a prolonged fall of the US dollar.


    Disclosure: Durig Capital and it’s clients currently do have positions in World Bank bond issues.
Back To Randy Durig's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.