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International Bank for Reconstruction & Development – ‘ANNLRPT’ for 9/22/14

On:  Tuesday, 9/23/14, at 10:06am ET   ·   For:  9/22/14   ·   Accession #:  1193125-14-349397   ·   File #:  83-00003

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Table of Contents

FILE NO. 1-3431

REGULATION BW

RULE 3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

450 Fifth Street, N.W.

Washington, D.C. 20549

REPORT OF

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

With respect to one or more proposed issues

of debt securities of the Bank

Filed pursuant to Rule 3 of Regulation BW

Dated: September 22, 2014

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The following information is being filed pursuant to Rule 3 of Regulation BW with respect to one or more proposed issues of debt securities of the International Bank for Reconstruction and Development. As authorized by Rule 4 of Regulation BW, certain information is to be provided in the form of an Information Statement, attached as Exhibit A. Certain information specified in Schedule A to Regulation BW is not available at the date of this Report.

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Information Statement

International Bank for Reconstruction

and Development

The International Bank for Reconstruction and Development (IBRD) intends from time to time to issue its notes and bonds with maturities and on terms determined by market conditions at the time of sale. The notes and bonds may be sold to dealers or underwriters, who may resell them, or they may be sold by IBRD directly or through agents.

The specific currency, aggregate principal amount, maturity, interest rate or method for determining such rate, interest payment dates, if any, purchase price to be paid to IBRD, any terms for redemption or other special terms, form and denomination of such notes and bonds, information as to stock exchange listing and the names of the dealers, underwriters or agents in connection with the sale of such notes and bonds being offered at a particular time, as well as any other information that may be required, will be set forth in a prospectus or supplemental information statement.

Except as otherwise indicated, in this Information Statement (1) all amounts are stated in current United States dollars translated as indicated in the Notes to Financial Statements—Note A and (2) all information is given as of June 30, 2014.

AVAILABILITY OF INFORMATION

This Information Statement will be filed with the U.S. Securities and Exchange Commission electronically through the EDGAR system and will be available at the Internet address http://www.sec.gov/edgar.shtml.

Upon request, IBRD will provide additional copies of this Information Statement without charge. Written or telephone requests should be directed to IBRD’s main office at 1818 H Street, N.W., Washington, D.C. 20433, Attention: Capital Markets Department, tel: (202) 477-2880, or to IBRD’s Tokyo office at Fukoku Seimei Building 10F, 2-2-2 Uchisaiwai-cho, Chiyoda-ku, Tokyo 100-0011, Japan, tel: (813) 3597-6650.

The Information Statement is also available on IBRD’s Investor Relations website at http://www.worldbank.org/debtsecurities/. Other documents and information on IBRD’s website are not intended to be incorporated by reference in this Information Statement.

September 16, 2014

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Box 1: Key Financial Indicators, Fiscal Years 2010-2014

As of and for the fiscal years ended June 30

In millions of U.S. dollars, except ratios which are in percentages

This document provides Management’s Discussion and Analysis (MD&A) of the financial condition and results of operations for the International Bank for Reconstruction and Development (IBRD) for the fiscal year ended June 30, 2014 (FY14). Box 1 summarizes key financial data. At the end of this document is a Glossary of Terms and list of Abbreviations and Acronyms. IBRD undertakes no obligation to update any forward-looking statements. Certain reclassifications of prior years’ information have been made to conform to the current year’s presentation (For further details see Note A: Summary of Significant Accounting and Related Policies in the Notes to the Financial Statements for the year ended June 30, 2014).

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SECTION I: EXECUTIVE SUMMARY

IBRD is the largest multilateral development bank in the world with 188 member countries. As part of the World Bank Group (WBG)¹, its two main goals are to end extreme poverty and promote shared prosperity. To meet these goals, it provides loans and products and services related to other development activities for economic reform projects and programs. IBRD also provides or facilitates financing through trust fund partnerships with bilateral and multilateral donors. Its ability to intermediate the funds it raises in international capital markets to developing member countries is important in helping it achieve its development goals. IBRD’s financial goal is not to maximize profits, but to earn adequate income to ensure its financial strength and sustain its development activities.

IBRD’s financial strength derives from its capital base, through the support of its shareholders, as well as from its sound financial and risk management policies and practices, which have enabled it to build its equity. Shareholder support takes the form of capital subscriptions from members and their strong record in servicing their debt to IBRD. This shareholder support, combined with IBRD’s sound financial policies and practices, are the basis of IBRD’s financial strength and its triple-A credit rating.

IBRD’s primary business activity is providing loans to its borrowing member countries. These loans are financed through IBRD’s equity as well as borrowings raised through the capital markets. Investors view IBRD bonds as a safe investment, consistent with its financial strength and triple-A credit rating. Annual funding volumes vary from year to year, and for FY14 it reached $51 billion. Funds which have not been deployed for lending purposes are maintained in IBRD’s investment portfolio to provide liquidity for its operations.

IBRD’s primary source of income relates to the earnings on its equity, followed by the net interest margin on its loans which are funded by borrowings, and the modest margin earned on its investment portfolio. IBRD also earns income from other development activities, which include guarantees, risk management products, technical assistance (including through reimbursable advisory services) as well as trust fund partnerships. From its total revenues, IBRD pays for its operating expenses, retains amounts in reserves to strengthen its financial position, and provides support via income transfers to the IDA and to trust funds for other development purposes as decided by the shareholders.

The following is a graphical illustration of IBRD’s business model:

Figure 1: IBRD’s Business Model

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IBRD and the New World Bank Group Strategy

At the 2013 Spring Meetings, the WBG’s Board of Governors endorsed the twin poverty reduction goals. In addition, at the 2013 Annual Meetings that followed, the Governors endorsed the new WBG strategy envisaging a stronger, more selective and effective WBG in order to achieve the twin goals:

In support of this stronger role, and as part of the internal change process, the WBG has adopted a new financial sustainability framework to strengthen its financial position and expand its lending capacity.

In FY14, IBRD’s Executive Directors approved the following measures aimed at enhancing IBRD’s margins and capacity, in line with the new WBG strategy and as part of reshaping the WBG’s financial sustainability:

Together, these new measures are intended to gradually increase IBRD’s equity, lending capacity, and its ability to sustainably fund priorities that meet shareholder objectives while preserving its financial strength. In implementing these measures, Management will maintain consistent underwriting standards on the quality of its lending portfolio.

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Basis of Reporting

Audited Financial Statements

IBRD’s financial statements conform with accounting principles generally accepted in the United States of America (U.S. GAAP), referred to in this document as the “reported basis.” All instruments in the investment, borrowing, and asset-liability-management portfolios are carried at fair value, with changes reported in the income statement except for Available for Sale (AFS) securities. AFS securities are carried at fair value with changes reported in equity. The loan portfolio is reported at amortized cost, except for loans with embedded derivatives, which are reported at fair value. Management uses the audited financial statements to derive allocable income and analyze fair value results.

Fair Value Results

IBRD makes extensive use of financial instruments, including derivatives, in its operations. The fair value of these instruments is affected by changes in market variables such as interest rates, exchange rates, and credit risk. Management uses fair value results to assess the performance of the investment-trading portfolio; to monitor the results of the EMF, where IBRD mainly uses derivatives to stabilize its allocable income; and manage certain market risks, including interest rate risk and commercial counterparty credit risk.

Allocable Income

Management uses allocable income as a basis for making distributions out of its net income. Allocable income excludes unrealized mark-to-market gains and losses associated with instruments not held in the investment portfolio; it also excludes other adjustments for items such as Board of Governors-approved transfers and pension.

Summary of Financial Results (Sections II and IX)

IBRD had a net loss of $978 million in FY14 compared with a net income of $218 million in FY13. The net loss in FY14 was primarily due to unrealized losses incurred on the non-trading portfolios, consistent with the changes in interest rates during the year (Table 2).

Allocable income was $769 million in FY14, 21% lower than in FY13. The decrease was primarily due to significant unrealized mark-to-market losses on the investment portfolio primarily from a security issued by an Austrian bank, and lower earnings from equity funded loans primarily due to lower interest rates (Figure 2).

On August 7 2014, the Executive Directors recommended that IBRD’s Board of Governors transfer out of FY14 income $635 million to IDA and $134 million to Surplus.

Figure 2: Net Interest Revenue

In billions of U.S. dollars

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Balance Sheet Analysis

Table 1: Condensed Balance Sheet

In millions of U.S. dollars

Lending Highlights (Section III)

IBRD’s principal assets are its loans to member countries. In FY14, loan commitments (including guarantees) totaled $18.6 billion, 22% above FY13 (Figure 3). This year’s commitments mainly consist of $4.7 billion to the Europe and Central Asia region, $4.6 billion to the Latin America and the Caribbean region, and $4.2 billion to the East Asia and Pacific region.

Gross disbursements in FY14 were $18.8 billion, 17% above FY13. This primarily consisted of $6.5 billion to the Europe and Central Asia region, $5.7 billion to the Latin America and Caribbean region, and $3.4 billion to the East Asia and the Pacific region.

As of June 30, 2014, IBRD’s net loans outstanding were $152 billion, $10.3 billion higher than that from a year earlier (Figure 4). The increase was due mainly to $8.9 billion in net loan disbursements made in FY14 and currency translation gains of $1.3 billion, consistent with the 4.5% appreciation of the euro against the U.S. dollar during the year.

Investment Highlights (Section V)

As of June 30, 2014, the net investment portfolio totaled $42.7 billion (Figure 5), with $41.6 billion representing the liquid asset portfolio (see Note C: Investments in the Notes to the Financial Statements). The goal of the liquid asset portfolio is to ensure sufficient cash flows to meet all of IBRD’s financial commitments, as reflected in the prudential minimum liquidity level. This level is set at $26 billion for FY15, an increase of $1.5 billion over FY14, reflecting higher projected debt service and loan disbursements for the coming year.

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The liquid asset portfolio increased by $9 billion relative to a year earlier, reflecting the impact of increased borrowing activity in anticipation of large loan disbursements in early FY15 and higher projected debt service for the coming year. The portfolio was at 170% of the prudential minimum liquidity level on June 30, 2014, above the 150% maximum guideline. From time to time, IBRD may hold liquid assets over the specified maximum to give it flexibility in timing its borrowing transactions and to meet its working capital needs.

Figure 5: Net Investment Portfolio

          In billions of U.S. dollars

The maturity profile of IBRD’s liquid asset portfolio reflects a high degree of liquidity, with $27.3 billion (or more than 65% of total volume) maturing within six months, of which $19.3 billion is expected to mature within one month.

Borrowing Highlights (Section VI)

In FY14, IBRD issued debt securities in 22 different currencies to both institutional and retail investors. It raised medium- and long-term debt of $51 billion, which was $28 billion higher compared to FY13 (Figure 6). The increase in medium- and long-term debt issuance in FY14 is primarily as a result of funding a higher volume of redemptions, preparing for anticipated large loan disbursements in early FY15 and replacing short-term debt with longer-term debt.

As of June 30, 2014, the borrowing portfolio totaled $154.8 billion, $17.8 billion above the level on June 30, 2013 (see Note E: Borrowings in the Notes to the Financial Statements). This was due mainly to net new borrowing issuances of $15.9 billion and currency translation losses of $1 billion, consistent with the appreciation of the euro against the U.S. dollar during the period.

Figure 6: Borrowing Portfolio

          In billions of U.S. dollars

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Capital Highlights (Section VII)

As a result of the Board of Governors’ approval of the General and Selective Capital Increase (GCI/SCI) resolutions in FY11, subscribed capital is expected to increase by $87 billion over a five-year period, of which $5.1 billion will be paid-in. As of June 30, 2014, $42.6 billion was subscribed (including shares subscribed under the Voice Reform for which no paid-in capital was required), resulting in additional paid-in capital of $2.5 billion, of which $571 million was received during the fiscal year.

Financial Risk Management (Section VIII)

IBRD’s risk management processes and practices continually evolve to reflect changes in activities in response to market, credit, product, operational, and other developments. The primary financial risk to IBRD is the country credit risk inherent in its loan portfolio. IBRD uses a strategic capital adequacy framework as a medium-term capital planning tool to ensure that the financial risks associated with its loans and other exposures do not exceed its risk-bearing capacity.

Capital Adequacy

IBRD’s capital adequacy is the degree to which its capital is sufficient to withstand unexpected shocks. IBRD’s Executive Directors (the Board) monitors IBRD’s capital adequacy within a strategic capital adequacy framework and uses the equity-to-loans ratio as a key indicator of capital adequacy. This ratio decreased slightly to 25.7% on June 30, 2014 from 26.8% a year earlier, but was still above the 20% minimum ratio (Figure 7).

Figure 7: Equity-to-Loans Ratio

(%)

Credit Risk

IBRD’s credit risk exposure mainly consists of country and counterparty credit risk.

Management also uses risk models to estimate the size of a potential non-accrual shock that IBRD could face over the next three years at a given confidence level. The shock estimated by this risk model is used in IBRD’s capital adequacy stress testing to determine the impact of potential non-accrual events on equity and income earning capacity.

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Market Risk

IBRD is exposed to three main types of market risks: interest rate, foreign exchange rate, and liquidity risks. Of the various types of market risks faced by IBRD, the most significant is interest rate risk. IBRD’s exposure to currency and liquidity risks is minimal because of its risk management policies. Various strategies are used to minimize these risks, as follows:

Operational Risk

IBRD recognizes the importance of operational risk management activities, which are embedded throughout its financial operations. While the day-to-day operational risk management lies with the business functions, a new Operational Risk Department under the WBG Chief Risk Officer was created in May 2014 to assist business units in identifying, assessing, and managing operational risks. The department aims to improve operational risk awareness, management and reporting across the IBRD. It is also responsible for developing and maintaining the operational risk management framework for finance, risk and technology functions.

IBRD’s approach to managing operational risk includes reporting relevant key risk indicators, monitoring internal and external events, and identifying emerging risks that may impact business units. IBRD will make use of its operational risk framework to further advance business decision-making and to improve the efficiency of its financial operations.

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SECTION II: ALLOCABLE INCOME AND INCOME ALLOCATION

IBRD’s financial model comprises leveraging shareholder funds with borrowings from the capital markets in order to provide long-term loans to borrowing member countries. The interest rate charged on these loans is based on a Board-determined contractual spread and IBRD’s actual or projected borrowing cost (Table 5).

Net Interest Revenue

IBRD earns its net interest revenue (revenues less cost of borrowings) from the following main sources (Figure 9):

Lending spread:    Earnings from lending spreads account for 44% of IBRD’s net interest revenue in FY14 (37% - FY13). This income is the difference between the lending rate charged to borrowers and the rate at which IBRD borrows (Figure 8). IBRD’s weighted average lending spread (WAS) has remained at around 60 basis points.

Figure 8: Derived Spread

Equity contribution:    Equity contribution is comprised of the borrowing costs saved from funding loans with equity instead of borrowings, as well as income from the EMF. This accounted for 55% of IBRD’s net interest revenue in FY14 (55% - FY13).

Spread on liquid assets:    Income from the spread on liquid assets accounts for 1% of IBRD’s net interest revenue in FY14 (8% - FY13). IBRD holds liquid assets as insurance against disruptions in access to the capital markets. In line with this purpose, its investment objective prioritizes principal protection by restricting its liquid assets to high-quality investments.

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Figure 9: Net Interest Revenue

In billions of U.S. dollars

Net Income

IBRD had a net loss of $978 million in FY14 compared to net income of $218 million in FY13 (Table 2). The major differences between the years are explained below:

Table 2: Condensed Statement of Income

In millions of U.S. dollars

FY14 versus FY13

The decrease of $1,196 million in net income in FY14 is explained by the following:

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FY13 versus FY12

The increase of $894 million in net income in FY13 is explained by the following:

Offset partly by:

Table 3: Net Non-Interest Expenses

In millions of U.S. dollars

Income Allocation

Management recommends distributions out of net income to augment reserves and support developmental activities at the end of each fiscal year. Net income allocation decisions are based on allocable income, which is derived by adjusting the reported net income to exclude certain items, in order to arrive at amounts realized during the year and available for use (Table 4).

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With the Board’s approval, the following adjustments were made to reported net income to arrive at allocable income:

Management believes the allocation decision should be based on IBRD’s administrative budget allocation as it defines the appropriate pension expense for the purpose of income allocation. As a result, PEBP and PCRF investment income are excluded from the allocation decision, since this income is only available to meet the needs of the pension plans.

Table 4: Income Allocation

In millions of U.S. dollars

Allocable income in FY14 was $769 million. Of this amount, on August 7, 2014, the Executive Directors recommended that the Board of Governors transfer $635 million to IDA and $134 million to Surplus.

Allocable income in FY13 was $968 million. Of this amount, the Executive Directors approved an allocation of $147 million to the General Reserve, and the Board of Governors approved the transfer of $621 million to IDA and $200 million to Surplus. The transfer to IDA was made on October 16, 2013.

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SECTION III: LENDING ACTIVITIES

All of IBRD’s loans are made to, or guaranteed by, member countries. IBRD may also grant loans to IFC, without any guarantee. IBRD does not currently sell its loans, nor does Management believe there is a market for loans comparable to those made by IBRD.

IBRD borrowers include middle-income and creditworthy lower-income countries. Effective July 1, 2014, countries with 2013 per capita Gross National Income of $1,215 or more are eligible to borrow from IBRD. Low-income countries are also eligible to receive concessional loans and grants from IDA. Since 1946, IBRD has extended, net of cumulative cancellations, approximately $536 billion in loans.

During FY14, IBRD implemented several measures to enhance its ability to support client countries. These included revised loan terms, lowering the minimum equity-to-loans ratio to 20% to reflect improvements in portfolio credit quality, and raising the SBL for certain borrowers (Section VIII).

Lending commitments (including guarantees) increased in FY14 relative to the year earlier by 22% (Figure 10), the largest annual gain in 14 years (excluding the global financial crisis years of FY09-10). Annual commitments averaged $13.5 billion in the three years preceding the global financial crisis, peaked in FY10 at $44.2 billion, and have declined since bottoming out at $15.2 billion in FY13. Commitments rose in FY14 to $18.6 billion led by lending to Brazil, India, and China.

Gross disbursements reached $18.8 billion for FY14, compared with $16.0 billion in FY13, led mainly by higher disbursements under development policy loans. Gross disbursements for development policy loans in FY14 were 64% higher than in FY13, due to higher lending to the Europe and Central Asia and Latin America and the Caribbean regions.

Figure 10: Commitments and Gross Disbursements

In billions of U.S. dollars

During FY10-14, the Latin America and the Caribbean and Europe and Central Asia regions, combined, accounted for the largest share of commitments (Figure 11).

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Figure 11: Commitments by Region

In billions of U.S. dollars

Under IBRD’s Articles of Agreement (the Articles), as applied, total outstanding IBRD loans outstanding, including participation in loans and callable guarantees, may not exceed the statutory lending limit of $260 billion. As of June 30, 2014, outstanding loans and callable guarantees totaled $154 billion, or 59% of the statutory lending limit.

All loans are approved by the Board. The process of identifying and appraising a project, and approving and disbursing a loan, can often take several years. However IBRD has shortened the preparation and approval cycle for countries in emergency situations (e.g., natural disasters) and in crises (e.g., food, fuel, and global economic crises).

Loan disbursements must meet the requirements set out in loan agreements. During implementation of IBRD-supported operations, IBRD staff reviews progress, monitors compliance with IBRD policies, and helps resolve any problems that may arise. The Independent Evaluation Group, an IBRD unit whose director reports to the Board, evaluates the extent to which operations have met their major objectives.

Lending Instruments

Most of IBRD’s lending generally falls under two categories: investment project financing and development policy operations. A third lending instrument, Program-for-Results, was introduced in January 2012². To date, however, this instrument has only been selected for a small number of loan commitments (Figure 12).

Investment Project Financing

Investment project financing³ is generally used to finance goods, works, and services in support of economic and social development projects and programs across a broad range of sectors; including agriculture, urban development, rural infrastructure, education and health. Such lending typically disburses over 5-10 years. FY14 commitments under this lending instrument amounted to $10.1 billion (compared with $8.1 billion in FY13).

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Development Policy Operations

Development policy operations provide quick-disbursing funds to support government policy and institutional reforms, including social and structural reforms. They typically disburse over 1-3 years. FY14 commitments under this lending instrument totaled $8.0 billion (compared with $7.1 billion in FY13).

Figure 12: Commitments by Instrument

In FY14, IBRD’s commitments for investment project financing accounted for 55% of total IBRD commitments, development policy operations 43%, and Program-for-Results 2%. (FY13: 53%, 46%, and 1%, respectively.)

Currently Available Lending Products

IBRD does not differentiate between the credit quality of member countries eligible for loans; loans for all eligible members are subject to the same pricing. As of June 30, 2014, 85 member countries were eligible to borrow from IBRD.

IBRD Flexible Loans (IFLs)

IFLs allow borrowers to customize their repayment terms (i.e., grace period, repayment period, and amortization profile) to meet their debt management or project needs. The IFL offers two types of loan terms: variable-spread terms and fixed-spread terms. See Table 5 for details of loan terms for IFL loans.

IFLs include options to manage the currency and/or interest rate risk over the life of the loan. The outstanding balance of loans for which currency or interest rate conversions have been exercised as of June 30, 2014, was $28.0 billion (versus $27.8 billion on June 30, 2013). IFLs may be denominated in the currency or currencies chosen by the borrower, as long as IBRD can efficiently intermediate in that currency. Through the use of currency conversions, some borrowing member countries have converted their IBRD loans into domestic currencies to reduce their foreign currency exposure for projects or programs that do not generate foreign currency revenue. These local currency loans may carry fixed or variable-spread terms. The balance of such loans outstanding as of June 30, 2014, was $2.6 billion (compared to $1.7 billion on June 30, 2013).

The spread on IBRD’s IFLs has four components: contractual lending spread, maturity premium, market risk premium, and funding cost margin. The contractual lending spread and maturity premium, which apply to all IFLs, are subject to the Board’s annual pricing review. For fixed-spread IFLs, the projected funding cost margin and the market risk premium are set by Management to ensure that they reflect evolving and underlying market conditions, and are communicated to the Board at least quarterly.

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Table 5: Loan Terms Available Through June 30, 2014

Basis points, unless otherwise noted

The ability to provide long-term financing distinguishes development banks from other sources of funding for member countries. Since IBRD introduced maturity-based pricing in 2010, most countries continue to choose loans in the longest maturity category despite a higher maturity premium, highlighting the value of longer maturities to member countries.

To increase its lending capacity and to provide borrowers with an option for longer maturities, effective July 1, 2014, IBRD extended the final maturity from 30 years to 35 years, and increased the maximum weighted average maturity from 18 years to 20 years for IFLs. At the same time, IBRD revised the maturity premium schedule as summarized in Table 6. All loans for which the invitation to negotiate falls on or after July 1, 2014, or are approved after September 30, 2014, will be subject to the revised maturity premium schedule. The extended maximum maturity will broaden the range of choices for borrowers, particularly with respect to funding infrastructure projects.

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Table 6: Maturity Premium

Basis points

In addition, effective July 1, 2014, IBRD restored a commitment charge of 25 basis points on undisbursed balances for all loans (other than those that include a deferred drawdown option) where the invitation to negotiate falls on or after July 1, 2014, or the loans are approved after September 30, 2014. IBRD historically charged a net commitment fee until FY07, when the commitment fee of 25 basis points was discontinued.

Box 2 below provides details on other lending products offered by IBRD:

Discontinued Lending Products

IBRD’s loan portfolio includes a number of lending products whose terms are no longer available for new commitments. These products include currency pool loans and fixed rate single currency loans. As of June 30, 2014, loans outstanding of approximately $1 billion carried terms that are no longer offered.

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Waivers

Loan terms offered prior to September 28, 2007, included a partial waiver of interest and commitment charges on eligible loans. Such waivers are approved annually by the Board. For FY15, the Board has approved the same waiver rates as in FY14 for all eligible borrowers with eligible loans.

Figure 13 illustrates a breakdown of IBRD’s loans outstanding and undisbursed balances by loan terms, as well as loans outstanding by currency composition.

Figure 13: Loan Portfolio

In millions of U.S. dollars

Figure 13a. Loans Outstanding by Loan Terms

Figure 13b. Undisbursed Balances by Loan Terms

Figure 13c. Loans Outstanding by Currency

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SECTION IV: OTHER DEVELOPMENT ACTIVITIES

IBRD offers products and services other than lending to its borrowing member countries, and to affiliated and non-affiliated organizations, to help them meet their development goals. These include financial guarantees, grants, Board of Governors-approved transfers, as well as externally-funded assistance and treasury activities.

Guarantees

IBRD guarantees facilitate the mobilization of private financing for commercial lenders contemplating investment in projects in developing countries. IBRD backstops the risks that it is uniquely able to bear, given its experience in developing countries and its relationships with governments. IBRD guarantees cover loan-related debt service defaults caused by governments, and, from July 1, 2014 on, will also cover payment default on non-loan related government payment obligations. IBRD guarantees are partial so that risks covered are shared between IBRD and private lenders (Box 3).

Investors view IBRD’s presence in transactions as a stabilizing factor because of its long-term relationship with countries and the policy support it provides to their governments. Guarantees are especially helpful in catalyzing private financing for emerging countries. By guaranteeing investments in all eligible borrowing member countries, IBRD helps expand job and income opportunities for all countries, and thus contributes to the WBG’s overall goal of reducing poverty.

IBRD guarantees can also be offered on securities issued by entities eligible for IBRD loans and, in exceptional cases, offered in countries that are only eligible to borrow from IDA. IBRD applies the same country creditworthiness and project evaluation criteria to guarantees as it applies to loans. Each guarantee requires the counter-guarantee of the member government.

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IBRD’s exposure on its guarantees, measured by discounting each guaranteed amount from its first call date was $1.7 billion as of June 30, 2014, roughly the same as a year earlier (Table 7).

Table 7: Guarantee Exposure

In million U.S. dollars

Grants

Grant-Making Facilities (GMFs) have supported activities critical to development and complementary to IBRD’s work. These activities are increasingly being integrated into IBRD’s overall operations, and most of these facilities as a separate funding mechanism will be phased out over the next three years. In FY14, IBRD deployed $162 million under this program, compared with $147 million in FY13.

Board of Governors-Approved Transfers

In accordance with IBRD’s Articles, the Board of Governors may exercise its reserved power to approve transfers to other entities for development purposes. During FY14 and FY13, in addition to allocations made to IDA (Section II), the Board of Governors approved transfers of $55 million in each year by the way of grants from Surplus to the Trust Fund for Gaza and the West Bank.

Externally Funded Activities

Externally funded activities include the following types of services: reimbursable advisory services, trust fund activity, externally financed outputs, the AMC, and research and training.

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Reimbursable Advisory Services

IBRD provides technical assistance and other advisory services to its member countries, both in connection with, and independent of, lending operations in response to borrowers’ increasing demand for strategic advice, knowledge transfer, and capacity building. Such assistance includes assigning qualified professionals to survey developmental opportunities in member countries; analyzing their fiscal, economic, and developmental environments; assisting member countries in devising coordinated development programs; and in improving their asset and liability management techniques.

While most of IBRD’s advisory services are financed by its own budget or donor contributions (e.g., trust funds), clients may also pay for such services through Reimbursable Advisory Services (RAS). RAS allow IBRD to provide advisory services that the client demands but which cannot be funded by IBRD in full within its existing budget envelope. In recent years, RAS has developed into an increasingly important way for IBRD to meet additional client demands. In FY14, IBRD had $39 million of revenue related to RAS, compared with $30 million in FY13 (Figure 14).

Figure 14: Trends in RAS Revenues, FY08 - FY14

In millions of U.S. dollars

Trust Fund Activity

IBRD’s trust fund portfolio provides flexible and customized development solutions that serve member recipients and donors alike. IBRD’s roles and responsibilities in managing trust funds depend on the type of fund, outlined as follows:

IBRD Executed Trust Funds:    IBRD, alone or jointly with one or more of its affiliated organizations, manages the funds and implements or supervises the activities financed.

Financial Intermediary Funds (FIFs):    IBRD, as trustee, administrator, or treasury manager, provides an agreed set of financial and administrative services, including managing donor contributions.

During FY14, IBRD recorded $56 million (compared to $59 million in FY13) as revenue for the administration of its trust fund portfolio. IBRD, as an executing agency, disbursed $409 million (compared to $357 million in FY13) of trust fund program funds (see Notes to Financial Statements: Note I-Management of External Funds and Other Services).

Externally Financed Outputs (EFOs)

IBRD offers donors the ability to contribute to its projects and programs. Contributions for EFOs are recorded as restricted income when received. The restriction is released once the funds are used for the purposes specified by donors. During FY14, IBRD had $23 million of income, roughly the same as in FY13.

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Advance Market Commitment (AMC)

AMC is a multilateral initiative to accelerate the creation of a market and sustainable production capacity for pneumococcal vaccines for developing countries. IBRD provides a financial platform for AMC by holding donor-pledged assets as an intermediary agent and passing them on to the Global Alliance for Vaccines and Immunization (GAVI) when appropriate conditions are met. Moreover, should a donor fail to pay, or delay paying, any amounts due, IBRD has committed to pay from its own funds any amounts due and payable by the donor, to the extent there is a shortfall in total donor funds received. The amount of the exposure is discussed under the guarantee program (see Notes to Financial Statements: Note I-Management of External Funds and Other Services).

Research and Training

IBRD, through the World Bank Institute and its partners, offers courses and other training related to economic policy development and administration for staff of its developing member country governments and organizations that work closely with IBRD.

Treasury Client Services

IBRD plays an active role in designing financial products and structuring transactions to help clients mobilize resources for development projects and mitigate the financial effects of market volatility and natural disasters. IBRD also provides advisory services in public debt, asset, and commodity risk management to help governments, official sector institutions, and development organizations, build institutional capacity to protect and expand financial resources.

Managing Financial Risks for Clients

IBRD helps member countries build resilience to shocks by facilitating access to risk management solutions to mitigate the financial effects of currency, interest rate, and commodity price volatility; natural disasters; and extreme weather events. Financial solutions can include currency, interest rate, and commodity-price hedging transactions and such approaches to disaster risk financing as catastrophe swaps, insurance-linked options, multi-peril catastrophe bonds, and regional pooling facilities. In FY14, IBRD launched the Capital-at-Risk Notes Program, to offer clients an efficient way of accessing capital markets for development solutions, such as hedging natural disaster risk.

During FY14, IBRD intermediated the following risk management transactions for clients:

IBRD’s risk mitigation of these derivative transactions are discussed further in Section VIII.

Asset Management

The Reserves Advisory and Management Program (RAMP) provides capacity building to support the sound management of official sector assets. Clients include central banks, sovereign wealth funds, national pension funds and supranational organizations. The primary objective of RAMP is to help clients upgrade their asset management capabilities including portfolio and risk management, operational infrastructure, and human

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resources capacity. Under most of these arrangements, IBRD is responsible for managing assets on behalf of these institutions, and in return receives a fee based on the average value of the portfolios. The fees are used to provide training and capacity building services. At June 30, 2014, the assets managed for RAMP under these agreements had a value of $18.4 billion ($17.9 billion on June 30, 2013). In addition to RAMP, Treasury also invests and manages investments on behalf of IDA, MIGA and trust funds. These funds are not included in the assets of IBRD.

As noted in the discussion of Trust Fund Activities above, IBRD, alone or jointly with one or more of its affiliated organizations, administers on behalf of donors, including members, their agencies and other entities, funds restricted for specific uses, in accordance with administration agreements with donors. These funds are held in trust and, except for undisbursed third-party contributions made to IBRD-executed trust funds, are not included on IBRD’s balance sheet.

The cash and investment assets held in trust by IBRD as administrator and trustee in FY14 totaled $22.5 billion, of which $145 million (compared to $161 million in FY13) relates to IBRD contributions to these trust funds (Table 8).

Table 8: Cash and Investment Assets Held in Trust

In millions of U.S dollars

SECTION V: INVESTMENT ACTIVITIES

IBRD holds investments that aim to strike the right balance between safety and yield and that enhance its capacity to carry out development activities. As of June 30, 2014, IBRD’s investment portfolio consisted mainly of the liquid asset portfolio.

Liquid Asset Portfolio

This portfolio is composed largely of assets denominated in, or hedged into, U.S. dollars, with net exposure to short-term interest rates. The portfolio has an average duration of less than three months, and the debt funding these liquid assets has a similar currency and duration profile. This is a direct result of IBRD’s exchange-rate and interest-rate-risk-management policies (Section VIII), combined with appropriate investment guidelines. In addition to monitoring gross investment returns relative to their benchmarks, IBRD also monitors overall investment earnings net of funding cost (Section II).

This portfolio is managed with the goal of prioritizing principal protection and thus ensuring sufficient cash flow to meet all of IBRD’s financial commitments. IBRD seeks a reasonable return on this portfolio using prudent asset- and risk-management techniques (Section VIII).

IBRD’s liquid assets are held mainly in highly rated, fixed-income instruments. These include government and agency obligations, time deposits, and other unconditional obligations of banks and financial institutions. IBRD also holds currency and interest rate derivatives (including currency forward contracts); asset-backed securities (including mortgage-backed securities), and futures, options, and swaption contracts. IBRD invests only in exchange-traded options and futures (Figure 15).

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Figure 15: Liquid Asset Portfolio by Asset Class

In millions of U.S. dollars

The portfolio is held in three sub-portfolios: stable, operational, and discretionary, each with different risk profiles and performance guidelines (Figure 16). The discretionary portfolio was liquidated in FY14 and the proceeds transferred to the operational portfolio, until such time as the additional flexibility it provides is needed.

Figure 16: Liquid Asset Portfolio Composition

In millions of U.S. dollars

As of June 30, 2014, the liquid asset portfolio totaled $41.6 billion, $9 billion above a year earlier, reflecting the impact of increased borrowing activities in anticipation of large loan disbursements in early FY15 and higher projected debt service costs for the coming year.

The financial returns of IBRD’s liquid asset portfolio in FY14 decreased from those in FY13 primarily due to unrealized mark-to-market losses on a debt investment in a security issued by an Austrian bank, Hypo, Alpe-Adria, fully guaranteed by the state of Carinthia (Table 9).

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Table 9: Liquid Asset Portfolio—Average Balances and Returns

In millions of U.S. dollars, except rates which are in percentages

The maturity profile of IBRD’s liquid asset portfolio reflects a high degree of liquidity, with $27.3 billion (or more than 65% of total volume) maturing within six months, of which $19.3 billion is expected to mature within one month.

Other Investments

In addition to the liquid asset portfolio, the investment portfolio also includes holdings related to AMC, PCRF, PEBP and the AFS portfolio.

As of June 30, 2014, investments from donors relating to AMC had a net carrying value of $280 million, compared with $257 million a year earlier (Notes to Financial Statements, Note I: Management of External Funds and Other Services).

The PCRF had a net carrying value of $44 million on June 30, 2014, compared with $39 million a year earlier (Section II), while the PEBP had a net carrying value of $816 million as of June 30, 2014, compared with $683 million on June 30, 2013. PEBP assets do not qualify for off-balance sheet accounting and are therefore included in IBRD’s investment portfolio. These assets are primarily invested in fixed-income and equity instruments.

In accordance with the changes made to the EMF strategy, the AFS portfolio was liquidated in FY14.

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SECTION VI: BORROWING ACTIVITIES

IBRD issues securities in the international capital markets to raise funds for its development activities. It borrows at attractive rates underpinned by its strong financial profile and shareholder support that together are the basis for its triple-A credit rating. IBRD has been acknowledged as a premier borrower and leader in global capital markets based on its history of developing new debt products, opening new markets for debt issuance, risk management products, and building up a broad and diverse global investor base of asset managers, banks, central banks, corporates, insurance companies, pension funds, and other investors. IBRD has been recognized as a pioneer and leader in the green bond market, after having developed its first green bond for institutional investors in 2008.

IBRD issues its securities both through global offerings and bond issues tailored to the needs of specific markets or investor types. Under its Articles, IBRD may borrow only with the approval of the member in whose market the funds are raised and the approval of the member in whose currency the borrowing is denominated, and only if the member agrees that the proceeds may be exchanged for the currency of any other member without restriction.

IBRD’s bonds are viewed as a safe investment, consistent with its financial strength and triple-A credit rating. IBRD uses the funds to finance development activities in middle-income countries and creditworthy low-income countries eligible to borrow from IBRD at market-based rates. IBRD has offered bonds and notes in more than 50 different currencies and has opened up new markets for international investors through its issuances in emerging-market currencies. In FY14, IBRD raised $51 billion in debt in 22 different currencies.

Funding raised in any given year is used for IBRD’s general operations, including loan disbursements, replacement of maturing debt, and prefunding for future lending activities. IBRD determines its funding requirements based on a three-year rolling horizon and funds about one-third of the projected amount in the current fiscal year.

IBRD issues short-term debt (with a maturity of one year or less), and medium- and long-term debt (with a maturity greater than one year). IBRD strategically calls its debt to reduce the cost of borrowings and may also repurchase its debt to meet such other operational or strategic needs as providing liquidity to its investors (Table 11).

Short-Term Borrowings

Discount Notes

IBRD’s short-term borrowings consist mainly of discount notes issued in U.S. dollars (Table 10). These borrowings have a weighted average maturity of approximately 100 days. The outstanding balance of discount notes as of June 30, 2014 was lower than a year earlier, as IBRD replaced short-term debt with medium-and long-term debt during the second half of the fiscal year.

Securities Lent or Sold under Repurchase Agreements

These short-term borrowings are secured mainly by highly-rated collateral in the form of securities, including government-issued debt, and have an average maturity of about six months. The FY14 average and year-end balances are lower than those a year earlier mainly due to the liquidation of the AFS portfolio during the first quarter of FY14.

Other Short-Term Borrowings

Other short-term borrowings have maturities of one year or less. The outstanding balances as of June 30, 2014 were lower than a year earlier largely because of changes in investor demand.

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Table 10: Short-Term Borrowings

In millions of U.S. dollars, except rates which are in percentages