In January 2024, the African Development Bank (AfDB) made headlines with the launch of its inaugural USD 750 million Global Sustainable AfDB Hybrid bond, marking a significant milestone not just for the bank but also for the African continent. This historic transaction is the first-ever perpetual non-call (PERPNC) 10.5-year sustainable hybrid bond issued by a multilateral development bank. The groundbreaking deal reflects the institution’s commitment to innovative financing solutions aimed at supporting sustainable development across Africa.
AfDB Hybrid Bond: Key Features of the Hybrid Bond
Structure and Tenure: The bond is structured as a perpetual, non-call 10.5-year instrument, which means that the AfDB has the option to call (redeem) the bond after 10.5 years. If not called, the bond will remain outstanding indefinitely. This structure offers flexibility to the issuer while providing investors with a potentially attractive long-term yield.
Coupon Rate: The hybrid bond was priced at a fixed coupon rate of 7.25% for the first 10.5 years. If the bond is not called at the end of this period, the coupon will reset every five years thereafter, based on the then-prevailing U.S. Treasury yield plus an initial spread of 417.4 basis points (bps) and a step-up margin of 25 bps. This resetting mechanism ensures that the bond remains competitive in varying interest rate environments.
Sustainability Focus: The proceeds from the issuance will be earmarked for financing and refinancing green and social projects, in line with the AfDB’s commitment to sustainable development. This aligns the bond with global Environmental, Social, and Governance (ESG) standards, making it an attractive option for socially responsible investors. The transaction is issued in a Sustainable Bond format, under the Bank’s newly established Sustainable Bond Framework, and will finance a combined portfolio of eligible green and social projects. The new asset class comes in the wake of calls by the G20 for a review of Multilateral Development Banks’ (MDBs) Capital Adequacy Frameworks to find ways of boosting their lending capacity.
AfDB Hybrid Bond: Investor Demand and Market Reception
The bond issuance received an overwhelmingly positive response from the global investor community, reflecting confidence in the AfDB’s financial strength and its pivotal role in driving sustainable development in Africa. The Bank achieved a top quality and granular orderbook with over 275 investors, of which over 190 were allocated. Investor demand was very strong with a peak orderbook of over USD 6 billion.
The largest share of the allocation was taken up by Hedge / Specialised funds (54.8%), followed by Asset Managers (27.8%), Central Banks and Official Institutions (6.7%), Pension Funds / Insurance (6.6%) and Banks / Private Banks (4.1%). Demand came mainly from the UK (51.1%), followed by EMEA (26.5%), Asia (14%) and Americas (8.4%).
The Bank mandated BNP Paribas and Goldman Sachs International as Joint Structuring Agents and Barclays, BNP Paris, BofA Securities and Goldman Sachs International as Joint Bookrunners to lead manage its new Perpetual Non-call (PerpNC) 10.5-year inaugural USD Global SEC-exempt Sustainable Hybrid transaction.
African Development Bank Vice President for Finance and Chief Financial Officer Hassatou N’Sele said the move followed close monitoring of the market since the institution’s roadshow last September, to generate interest in the bond.
AfDB Hybrid Bond: Strategic Implications for the African Development Bank
The successful issuance of this hybrid bond enhances the AfDB\’s capital base, providing it with greater financial flexibility to support its development mandate. The hybrid nature of the bond, which combines debt and equity-like features, allows the AfDB to strengthen its capital without immediately diluting its equity base. This is particularly important as the bank seeks to expand its lending capacity to meet the growing infrastructure and development needs of its member countries.
Moreover, the issuance sets a precedent for other African institutions, potentially opening the door for more innovative financial instruments in the region. By leading the way in sustainable finance, the AfDB is positioning itself as a key player in the global effort to achieve the United Nations\’ Sustainable Development Goals (SDGs).
Conclusion
The African Development Bank’s inaugural hybrid bond issuance represents a bold and innovative step in the evolution of sustainable finance in Africa. By leveraging the hybrid bond structure, the AfDB has not only strengthened its financial position but also reaffirmed its commitment to driving sustainable development across the continent. For investors, this bond offers a unique opportunity to participate in Africa\’s growth story while contributing to the global sustainability agenda.
As the AfDB continues to pioneer new financial instruments, it will undoubtedly inspire other institutions in Africa and beyond to explore similar paths, ultimately leading to a more resilient and sustainable global financial system.
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