What is the best way to approach financing?
Fresh.
That’s exactly what the African Development Bank (AfDB) did with their June Uganda debt issuance.
Every quarter we like to review the Treasury side (i.e., how projects get funded in the first place) to find interesting deals.
Here’s what the AfDB did:
Amount, Tenor, Use of Proceeds
On June 14, 2022, the AfDB launched a 19 billion Uganda shilling (UGX) (US$5.1 million) 2-year bond.
The issuance is a social bond, and, in-line with the Bank’s High 5 financing priorities, net proceeds will be available for lending to projects under the Feed Africa program.
Structure, Distribution, and Pricing
While the AfDB has issued notes in Uganda since 2012; this was the first placement in 2022.
The bond is a currency-linked medium-term note, denominated in UGX, but settled in USD. (I.e., borrower receives proceeds in local currency; investor receives principal and income payments in USD.)
The entire distribution was done via a private placement to Berlin-based Capitulum Asset Management and arranged by Standard Chartered Bank.
This African ESG bond sports a 10.50% fixed-rate coupon. Yield spreads were as follows:
| AfDB UGX Social Bond versus benchmarks on issuance date (2022/06/14) | ||
| Yield | Spread | |
| AfDB UGX Social Bond of June 2024 | 10.50% | – |
| U.S. Treasuries, 2-year Constant Maturity | 3.45% | +705 bps |
| Uganda Government 14.875% of 10-May-2024 | 13.10% | -260 bps |
Sources: AfDB, FRED, Federal Reserve Bank of St. Louis, Bank of Uganda
What’s so interesting about this deal?
Firstly, while not large, it was the first-ever African frontier-market-currency-denominated ESG bond issuance by a multilateral development bank (MDB).
This is significant as there’s a question as to where the natural source of local currency financing for social bond projects in emerging, let alone frontier, markets can be found.
Why? While foreign investors may want the higher nominal yield on frontier market bonds (in this case, about 7% over Treasuries), they may not want to take on the risk of local currency depreciation.
Conversely, due to project cash flows in local currency, frontier market borrowers may not want to take on the risk of having repayments denominated in USD, EUR, JPY, etc.
MDBs can provide a bridge between the two – local currency financing on one end, repayment in major foreign currency on the other.
The successful placement of this issue can work as a financing model for other High 5 priorities at the AfDB or for comparable social bond-financed initiatives at other development banks.
Second, the deal also shows that despite tough market conditions, some creative borrowing techniques can still open up financing windows for frontier market issuers and projects.
In fact, in-country projects can even be financed through this method at lower rates than if directly sourced in the local market.
How? The AfDB is essentially lending its Aaa/AAA rating to the deal. In this case, the deal was done at a yield 2 ½% lower than comparable local government bonds.
This works for the Bank too as proceeds prior to loan disbursement on the project may be invested at higher local market rates (also providing a bit of liquidity in the local bond market).
Conclusions
The UGX deal provides a great example of how a fresh take on a difficult financing problem can lead to a successful outcome. We hope to see more deals like this coming out of the AfDB and other MDBs.
Need financial or economic analysis for your project? Then please let us know.