New Asset Class Emerging: The World Bank’s Debut Hybrid Capital Note and Its Implications on Capital Markets and Development Finance

The World Bank is set to issue up to $1 billion in a debut hybrid note on capital markets this year, following in the footsteps of the African Development Bank (AfDB) which successfully sold a similar instrument in January. This move comes as development banks are under pressure to find innovative ways to increase their lending capacity.

The World Bank will become only the second multilateral lender to issue such an instrument, marking a new asset class for these institutions. George Richardson, director of the capital markets and investment department at the World Bank Treasury, stated that they are currently working on a potential pilot transaction for this calendar year. Richardson emphasized the importance of exploring new ways to raise funds and is engaging with investors and monitoring market conditions to assess the viability of this initiative.

Richardson believes that multilateral development banks should be considered better credits compared to commercial banks and corporations, due to their unique governance and ownership structure. While ratings agencies typically assign lower ratings to hybrid capital, Richardson is confident in the creditworthiness of these instruments and is optimistic about their potential reception by investors.

Despite being assigned an AA3 rating by Moody’s – three notches below its AAA rated bonds – the AfDB hybrid issue saw promising trading performance following its debut. With the World Bank considering a similar move in the near future, all eyes are on its potential impact on capital markets and development finance landscape.