The African Development Bank’s (AfDB) inaugural sustainable USD 750m 5.75% perpetual NC10.5 hybrid bond trade is set to pave the way for other multilateral development banks (MDBs) to follow suit, as they seek new avenues to boost their lending capacity.

This novel transaction, spurred by the G20’s call for MDBs to leverage their balance sheet more effectively, will be the first of several hybrid bond issuances for the AfDB, with the next one likely in 2025, according to Keith Werner, the AfDB’s manager of capital markets and financial operations.

Over the years, the AfDB could issue up to USD 5bn of these instruments, which is the maximum possible to ensure the bank continues to receive 100% equity credit for its hybrid issuance from ratings agencies, Werner said.

Outside of the hybrid space, a euro-denominated bond is the AfDB’s likely next benchmark bond issue, as part of its USD 6.5bn total funding programme for 2024, Werner continued.

Earlier this month, the bank priced a USD 2bn 4.125% three-year social bond.

New asset class

Books for the AfDB’s 5.75% perpetual NC10.5 sustainable bond peaked at USD 6bn with interest from over 275 investors, but ended up at USD 5.1bn after pricing tightened from initial thoughts of 6.375% to 5.75% at launch.

This was the largest orderbook ever achieved in a bond issue by AfDB, both by volume and by number of investors, Werner said.

Hedge funds and specialised funds took up the lion’s share of the new paper at 54.8%, followed by asset managers with 27.8%.

A long roadshow, which began in September, allowed the bank to meet various types of investors.

In the end, most of the demand came from emerging market and credit funds, a more natural hybrid investor-base, but SSA (sovereign, supranational and agency) investors, who are more traditional MDB buyers, also took up a decent component of the notes, according to Benjamin de Forton, senior marketer for SSA Debt Capital Market Origination at BNP Paribas, one of the transaction’s structuring arrangers.

“As we are going to see more transactions, especially from the AfDB, we would expect the SSA component of the book to increase,” he continued.

While the new notes are slated to have an AA- rating, Jefferies analysts said in a research note on 30 January that investors might view them as closer to single-A, given the “deeply subordinate status” of the notes.

The bond is junior to all other AfDB obligations, and the bank can choose to cancel interest payments at its own discretion, although doing so would prevent it from making any payments or distribution to its members.

The principal of the notes can also be permanently written down in the event of a call made by AfDB on its callable capital, but this has never occurred so far.

The bond becomes callable from August 2034. If the AfDB does not call the notes, the coupon resets every five years at a rate of five-year Constant Maturity Treasury plus the initial margin of 157.5bps.

The road ahead

The AfDB has done a lot of the groundwork for other MDBs to follow, because ratings agencies have now formulated their methodologies for these types of issuances, according to Gilles Renaudiere, Head of Capital Structuring in EMEA at BNP Paribas.

“The lead time for a new transaction by another MDB would be considerably shorter, most of the heavy lifting has been done by the AfDB,” Renaudiere said.

For those institutions with a triple-A rating, AfDB has shown that achievable coupons are somewhat inside what other MDBs were expecting a year ago, he continued.

“I wouldn’t be surprised if some of these institutions will now reassess and look at the potential of these transactions,” Renaudiere said.

The World Bank has already said it would look at hybrid bond issuances, and further down the ratings scale, the West African Development Bank (BOAD) may also attempt another public market sale, after pulling a hybrid bond deal in May 2022 amid volatile market conditions.

“The purpose [of the AfDB transaction] is to leverage its lending capacity on sustainable projects in Africa,” BNP’s de Forton said. “This was recommended by the G20 as a useful tool for the capital management of MDBs, so it’s clear that more will follow. And we have proven that there is demand for this.”

BNP Paribas and Goldman Sachs International acted joint structuring agents on the AfDB deal, with Barclays and Bank of America Securities joining them as joint bookrunners.

The AfDB is rated AAA by S&P Global Ratings and Aaa by Moody’s.