In a significant move aimed at bolstering funding for developing economies, the African Development Bank (AfDB) is poised to issue the first-ever perpetual hybrid notes from a multilateral development bank. This innovative financial instrument, as revealed in an investor presentation obtained by Bloomberg News, introduces a novel mechanism that could reshape funding dynamics for developmental projects.
The dollar-denominated perpetual hybrid notes will incorporate a groundbreaking feature: a permanent principal writedown clause. This clause allows for the potential erasure of the notes’ value if shareholders are compelled to inject fresh capital into the bank during periods of financial turmoil. Furthermore, interest coupon payments may be suspended if the AfDB’s capital falls to critically low levels.
Beyond their unconventional financial structure, these hybrid notes will be designated as sustainable instruments, directing the allocated funds towards environmentally friendly and socially impactful projects, according to the presentation. This initiative aligns with the broader global push towards sustainable financing solutions.
This groundbreaking endeavor follows a report released by the Group of 20 (G20) in July, which explored measures to enhance the lending capacity of multilateral development banks (MDBs) by an estimated $200 billion over the next decade.
Eric Pelofsky, Vice President at the President’s Office of The Rockefeller Foundation, a supporter of the G20’s review of the MDB’s Capital Adequacy Framework, commented on this development, saying, “Most of the MDBs are looking at hybrid and other forms of innovative finance. We need more and better quality—lower cost and longer tenure—capital from each of the banks if we want to meet the needs that are out there.”
To bring this initiative to fruition, BNP Paribas SA and Goldman Sachs Group Inc. have been appointed as structuring agents for the issuance. Alongside them, Bank of America Corp. and Barclays Plc will organize investor meetings, commencing on Friday, September 15. However, due to the confidential nature of the matter, the person familiar with the proceedings, who requested anonymity, emphasized that they are not authorized to speak about it.
As of now, representatives from the African Development Bank, Goldman Sachs, BNP Paribas, Bank of America, and Barclays have refrained from providing official comments on the matter. It is anticipated that the notes will receive a rating of AA- from S&P Global Ratings, which is three notches below AfDB’s senior debt score, as indicated in the presentation.
This groundbreaking move by the African Development Bank signals a shift towards innovative financial instruments that hold the potential to significantly impact the landscape of sustainable development financing. As investor interest and discussions surrounding these hybrid notes intensify, the international community will be closely watching how this pioneering initiative unfolds, with the hopes of fostering economic growth and sustainable progress in developing economies.
Photo Source: Google
By: Delino Gayweh
Serrari Financial Analyst
September 14, 2023
