Why The AfDB Listed Its USD 3 Bn COVID-19 Bond On The London Stock Exchange

Last month, Africa’s premier development bank raised an unusual USD 3 Bn COVID-19 bond to help African livelihoods and economies. The African Development Bank (AfDB) took things further by listing the oversubscribed financial facility on the London Stock Exchange.

Bonding For A Pandemic

The advent of another global pandemic as serious as coronavirus has presented a litany of critical challenges for the global economy.

One of the top priorities now are novel ways to access capital. To alleviate strains in supply chains, provide healthcare and research new technologies and medicines, these capitals are essential.

Social bonds such as that of the AfDB can help in these regards, just as the IFC has illustrated in a descriptive document on case studies. In response to the renewed interest, ICMA published a Q&A document which addresses topics related to social bonds and COVID-19.

As the crisis is still unfolding, it is likely that more supranational organisations, sovereigns and corporate issuers will follow suit in the coming months.

Governments and central banks around the globe are exhausting their policy toolkits to address the economic repercussions of the pandemic. However, monetary and fiscal stimulus alone may not be enough to deal with the crisis, which is where the capital markets come in with social bonds.

These bonds have become a way to mobilize private capital for public good. In semblance to conventional bonds, social bonds have fixed returns for investors, but they use proceeds for social causes alone. This can be likened to green bonds which are specifically for environmental projects.

As fears rise around the world of dwindling central bank ammunition and ballooning debt-to-GDP ratios, social bonds are poised to play a crucial role in the fight against the coronavirus and its effects.

Unlike Some

The USD 3 Bn is the AfDB’s largest social bond till date, and also the biggest in the capital markets. The three-year maturity bond, which available through the Sustainable Bond Market, initially attracted USD 4.6 Bn of interest in the book.

Dubbed Fight COVID-19 Social Bond, it was, as opposed to a conventional bond, issue under the AfDB’s Social Bond framework. The framework, established in 2017, is aligned to the Social Bond Principle (SBPs).

Typically, SBPs promote integrity in the Social Bond market through guidelines that recommend transparency, disclosure, and reporting. They are to be used by market participants and are tailored to drive the provision of information needed to increase capital allocation to social projects.

According to the Bank, the proceeds of the bond will finance eligible social projects that will have strong impacts, inclusive of which could be the creation of jobs and poverty alleviation. Projects naturally part of the Social Bond portfolio will also be funded.

Specifically, the AfDB made this issuance in response to the outbreak of the novel coronavirus, creating a channel through which it will assist in the reduction of the severe economic and social impact of its regional member countries.

The Bond’s goal is to help Africa meet the cost and speed of their various responses to the pandemic. The projects to be finance will have strong impact on the livelihoods of Africans, through the boost of healthcare access, and provision of sanitation, among others.

Going On London Stock Exchange

Hassatou Diop N’Sele, Treasurer of the AfDB Group, said the Bond is typically listed on the Luxembourg Stock Exchange, but the Bank decided to apply it for another listing on the London Stock Exchange.

“The purpose for the dual listing is to increase the landmark Bond’s visibility and resultedly attract more new investors to our future issuances in the capital markets,” he told WeeTracker.

N’sele also said that given the current virus outbreak in the continent, the listing fees on both the LuxSE and the LSE were waived for social and sustainability COVID-19 response bonds eligible for listing on both exchanges.

“The Bank’s Fight COVID-19 Social Bond was eligible for these waivers and listings on these exchanges, and was therefore came at no costs for the institution”.

Here, it is important to note that the AfDB is not the only body to have issued a coronavirus-fighting bond. Several market players like the International Finance Corporation’s (IFC) and the Nordic Investment Bank have issued bonds and leveraged the capital market to ensure a quick source of finance and liquidity.

In China, for instance, about 25 companies have issued ‘virus control’ bonds and 20 others intend are to follow suit. Overall, 44 percent will be allocated to disease control, the manufacture of medical equipment, hospital construction and donations, with the rest going to refinancing.

Necessary Execution

Issuing a social bond can be attached to two primary reasons. The first, is that it can convey a powerful message, demonstrating that the issuers considers a particular problem as a priority. The funding stream will not be cut in the future and money cannot be used for other purposes elsewhere.

A social bond demarcates a certain amount of funding for a purpose, and allows the issuer to present it as a separate, non-fungible item on the balance sheet or  budget. It sends a clear message that a specified amount of funding is committed to the defined purpose.

Secondly, a social bond allows the issuer to appeal to a broader range of investors, not excluding those who are focused on ESG considerations. Such investors have grown over the years to become a substantial capital source across the world.

In 2018, signatories to the UN-sponsored “Principles for Responsible Business” had USD 80 Tn in assets under management. Access to such a broader range of potential investors can bring advantages in terms of pricing and liquidity.

Importantly: social bonds are different from social impact bonds—contracts typically structured with a public body where the payment depends on certain outcomes. For instance, the world’s first-ever social impact bond was issued in 2010 to prevent reoffending in a prison in the United Kingdom.

In contrast, the term ‘social bond’ refers to a fixed-income instrument, and as such attracts a different investor base.

Benefits

The AfDB confirmed to WeeTracker that it listed the bond with the assistance of the joint-lead managers mandated on the transaction: BAML, Credit Agricole, Citi, Goldman Sachs and TD Securities.

Being that the London Stock Exchange is the third-largest of its kind in the world, with a market cap of USD 4.6 Tn, it provides AfDB with the needed unparalleled access to institutional investors around the world.

These investors, would in turn, uncover more price discovery and potentially lower the costs of borrowing for the Bank, its African member countries and the continent’s private sectors.

The listing aligns with the previous partnerships the Bank and LSE, including the AfDB’s participation on the Board of the LSE Africa Advisory Group. The Bank also collaborated with the exchange on the Companies That Inspire Africa report.

As the primary effort to combat the virus crisis, the Bank approved the COVID-19 Rapid Response Facility (CRF) on April 8, 2020, to provide a flexible range of support to member countries.

The economic effects of coronavirus will be felt in Africa through reduce trade, hampered financial flows and dried up supply chains even as the region risks falling into a recession. The lockdown in advanced economies will reduce tourism and result in a decline for commodity prices.

All of this, inexorably, further reduces Africa’s capability to respond to the basic needs of the population at this critical time. So providing the bond and executing a dual listing for it could go a long way in helping the continent heal from the effects of the crisis.

Featured Image by Ishant Mishra