Landmark transaction, largest Social bond transaction to date in capital markets



Abidjan, Côte d&#8217;Ivoire, 27 March 2020 &#8211; The African Development Bank (AAA) has raised an exceptional $3 billion in a three-year bond to help alleviate the economic and social impact the Covid-19 pandemic will have on livelihoods and Africa’s economies.  



The Fight Covid-19
Social bond, with a three-year maturity, garnered interest from central banks
and official institutions, bank treasuries, and asset managers including
Socially Responsible Investors, with bids exceeding $4.6 billion. This is the
largest Social Bond ever launched in international capital markets to date, and
the largest US Dollar benchmark ever issued by the Bank. It will pay an
interest rate of 0.75%. 



The African
Development Bank Group is moving to provide flexible responses aimed at
lessening the severe economic and social impact of this pandemic on its
regional member countries and Africa’s private sector.



“These
are critical times for Africa as it addresses the challenges resulting from the
Coronavirus. The African Development Bank is taking bold measures to support
African countries. This $3 billion Covid-19 bond issuance is the first part of
our comprehensive response that will soon be announced. This is indeed the
largest social bond transaction to date in capital markets. We are here for
Africa, and we will provide significant rapid support for countries,” said
Dr.&nbsp;Akinwumi Adesina,&nbsp;President of the African Development Bank Group.



The order book
for this record-breaking bond highlights the scale of investor support, which
the African Development Bank enjoys, said the arrangers.



“As the Covid-19
outbreak is dangerously threatening Africa, the African Development Bank lives
up to its huge responsibilities and deploys funds to assist and prepare the
African population, through the financing of access to health and to all other
essential goods, services and infrastructure,” said Tanguy Claquin, Head of
Sustainable Banking, Crédit Agricole CIB.



Coronavirus
cases were slow to arrive in Africa, but the virus is spreading quickly and has
infected nearly 3,000 people across 45 countries, placing strain on already
fragile health systems.&nbsp;



It is estimated
that the continent will require many billions of dollars to cushion the impact
of the disease as many countries scrambled contingency measures, including
commercial lockdowns in desperate efforts to contain it. Globally, factories
have been closed and workers sent home, disrupting supply chains, trade,
travel, and driving many economies toward recession.&nbsp;



Commenting on
the landmark transaction, George Sager, Executive Director, SSA Syndicate,
Goldman Sachs said: “In a time of unprecedented market volatility, the African
Development Bank has been able to brave the capital markets in order to secure
invaluable funding to help the efforts of the African



continent&#8217;s
fight against Covid-19. Not only that, but in the process, delivering their
largest ever USD benchmark. A truly remarkable outcome both in terms of its
purpose but also in terms of a USD financing”.



The Bank
established its Social Bond framework in 2017 and raised the equivalent of &nbsp;$2 billion through issuances denominated in
Euro and Norwegian krone. In 2018 the Bank was designated by financial markets,
‘Second most impressive social or sustainability bond issuer” at the Global
Capital SRI Awards.



“We are thankful
for the exceptional level of interest the Fight Covid-19 Social Bond has raised
across the world, as the African Development Bank moves towards lessening the
social and economic impact of the pandemic on a continent already severely constrained.
Our Social bond program enables us to highlight our strong development mandate
to the investor community, allowing them to play a part in improving the lives
of the people of Africa. This was an exceptional outcome for an exceptional
cause,” said Hassatou Diop N’Sele, Treasurer, African Development Bank.



Fight Covid-19 was allocated to central banks and official institutions (53%), bank treasuries (27%) and asset managers (20%). Final bond distribution statistics were as follows: Europe (37%), Americas (36%), Asia (17%) Africa (8%,) and Middle-East (1%).



Press Release by the African Development Bank

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What You Need To Know About AfDB’s $3 billion “Fight COVID-19” Social Bond

When you think about entrepreneurs, most would think of stocks and successful initial public offerings (IPOs). However when building and growing companies, access to debt finance is even more important.
Historically, most African economies have relied on bank financing, and to a lesser extent, on the equity markets, to fund investments. Except for countries like South Africa and Nigeria, corporate bonds are almost unheard of in the region.
But bonds and bond markets are as important, if not more so, than stock markets, for the efficient allocation of a nation’s resources. In major economies, it is not uncommon for bond markets to be substantially larger than equity markets. But that’s not always the case in Africa.
Today, about half of sub-Saharan African governments have recognized credit ratings.
The bad news is that many African governments borrow little from outside sources. This, in turn, means a limited amount of government debt is available for trading on secondary markets. Don’t go looking for a deep and liquid secondary market for African debt. For businesses trying to issue bonds, this is a problem because a government-bond market is such that it sets interest rate benchmarks for corporate bonds. This is why some countries issue sovereign bonds to replace maturing ones—even when the funds aren’t needed—to maintain benchmarks across the yield curve.
Yet, to have a corporate bond market, companies need to issue bonds. In many African countries, companies have traditionally relied on bank loan financing; international donor financing and in recent years financing from the Chinese.
It will take some persuasion to change that. Today, even if a corporate bond option existed, African companies would still head for the bank or ask its friends in Beijing for money.
Why? In short: cheap money. Companies can borrow at low, government-determined interest rates, irrespective of the risk of the loans. The risk is assumed by the government, which must periodically bail out banks by taking over their non-performing loans. Companies are further encouraged to seek bank financing as state-controlled banks almost always automatically roll over maturing loans at low rates. This is of course a classic case of moral hazard. Costs and risks are absorbed by state-owned banks, which ultimately pass them on to the government.
All of the above makes a convincing argument for the development of an African corporate bond market. Such a market would serve several functions: first, it would enable companies to raise funds even if they are not favored customers of the banks. Africa has some of the world’s most entrepreneurial economies but entrepreneurs aren’t usually well-connected. So, even as new companies are constantly being established, and many have succeeded and created jobs, they tend to be, and stay, small because they lack access to funding for further growth. A corporate bond market could remove this constraint and enable Africa to create more world-class companies and, even more importantly, jobs for tens of millions of people.
Secondly, it allows for fewer systemic risks. Typically, bank loans are of short to medium-term, and therefore need to be rolled over to cover the life of the project funded. This lends an air of uncertainty to business planning. Worse still, loans can be called in before schedule, leaving companies in dire financial predicaments.
Recourse to bond financing would eliminate any mismatch between the lifetime of assets and the duration of liabilities.
Thirdly, as the number of African pension funds, social security funds and insurance funds proliferate, bond markets are key to ensuring that these funds can match their future payment obligations with assured future income. Without a long-term bond market, such funds, increasingly important to Africa, will be at risk.
A well-regulated corporate bond market open to private companies can fund the jobs Africa needs for social stability. Together, government and corporate bond markets can stabilize Africa’s financial landscape by properly matching assets to liabilities and at the same time provide risk capital to entrepreneurs who build businesses, employ people and create economic growth.
Developing African bond markets will unlock Africa’s huge medium-term growth potential.

Tag: African economies

FORBES AFRICA SOCIAL MEDIA

What You Need To Know About AfDB’s $3 billion “Fight COVID-19” Social Bond

Why Africa Needs A Bond Market