The African Development Bank (AfDB) has made history by issuing the first hybrid capital note by a multilateral development bank, raising $750 million to boost its lending capacity and support sustainable development in Africa.
The AfDB, which is headquartered in Abidjan, Ivory Coast, is a financial provider to African governments and private companies investing in the continent. The bank’s mission is to contribute to the economic and social progress of its 54 regional member countries.
The hybrid capital note is a type of debt instrument that has some features of equity, such as being perpetual and having the possibility of deferring interest payments. This means that the note can strengthen the bank’s capital base and enhance its credit rating, allowing it to borrow more cheaply and lend more to its clients.
The note, which has a coupon of 5.75%, was priced tighter than the initial guidance of 6.375%, reflecting strong demand from investors. The note can be redeemed by investors after 10.5 years or every five years thereafter. It has a lower credit rating than the bank’s AAA-rated bonds and is rated AA-minus by S&P Global.
“This is not a one-off transaction, it is one of many more transactions to come,” said Hassatou N’Sele, VP of Finance, and Chief Financial Officer for the AfDB Group, declining to give more details on future issuance plans.
“We are establishing hybrid capital issued by AAA-rated multilateral development banks as a new asset class … Other MDBs have indicated an interest in exploring hybrid capital.”
The AfDB’s move follows the call by the G20 group of major economies for multilateral lenders to explore hybrid financing structures, to try to maximize their balance sheets and to increase funding to help developing economies with crises including climate change.
The G20 issued a set of principles in October 2023 to scale up blended finance, which is the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries.
The AfDB is a pioneer in blended finance, having launched several initiatives and platforms to leverage public and private funds for projects that support the Sustainable Development Goals (SDGs) and the Paris Agreement on climate change.
The bank’s acting treasurer told Reuters in November 2023 that the bank can issue $4 billion-$5 billion of hybrid capital bonds, but would be “progressive” with one or two transactions per year.
The terms of the hybrid note allow for a permanent principal writedown if the AfDB faces stress and needs shareholders to increase its capital, while coupon payments also can be skipped.
The note was structured and coordinated by BNP Paribas and Goldman Sachs International, while Barclays and BofA Securities joined as bookrunners. The transaction attracted a broad range of investors from private banks to asset managers and specialist credit funds.
“It was a big learning curve for all parties involved and that includes the investor side as well – investors had to go away and decide how to price this risk,” said Damian Saunders, FIG Syndicate at BNP Paribas.
The hybrid capital note is a milestone for the AfDB and the development finance sector, as it demonstrates the bank’s innovation and leadership in mobilizing resources for Africa’s transformation. The note also offers investors a unique opportunity to support the bank’s mission and benefit from its strong financial profile.
Source: Reuters
