The African Development Bank (AfDB) is poised to unveil its first-ever hybrid capital note, with a targeted size ranging from $500 million to $1 billion.
The bank’s acting treasurer, Omar Sefiani, revealed that the eagerly anticipated launch could occur before the close of November, contingent on favorable market conditions.
This initiative according to Reuters positions AfDB as the pioneer multilateral lender to issue a perpetual hybrid note, characterized as a deeply subordinated, debt-like equity instrument, carrying a credit rating lower than the institution’s AAA-rated bonds.
“We’ve been ready to issue since the end of September… Unfortunately, market conditions have not been ideal, and for us, it’s very important to get this transaction done right. It sets the tone for the following transactions,” remarked Sefiani.
Sefiani emphasized that the note might see issuance before the end of November if financial market conditions continue to improve. However, the alternative timeline extends to 2024 if necessary, considering the year-end book closures by investors in December.
The G20 Group of Nations has urged multilateral lenders to explore hybrid financing structures, aiming to maximize their balance sheets and bolster funding to assist developing economies in navigating various crises, including those associated with climate change.
The terms of the hybrid note permit a permanent principal writedown in the event of AfDB facing stress and requiring shareholders to augment its capital. Additionally, coupon payments can be skipped, offering a level of flexibility, as outlined in an investor presentation from September.
Sefiani clarified, “You get a fixed coupon and your principal is fixed as well, so that looks a bit like a bond. But, at the same time, you need to have some loss absorption capacity.” He added that the scenarios under which coupon payments might cease or a principal writedown occurs are extreme events, making such outcomes unlikely and justifying the high credit rating.
S&P Global has assigned an AA-minus credit rating to the upcoming notes, deviating from the bank’s AAA rating.
While expressing the bank’s capacity to issue $4-$5 billion of hybrid capital bonds, Sefiani emphasized a “progressive” approach to issuance, envisioning one or two transactions per year based on the success of the inaugural one.
Notably, from January to end-October, AfDB issued $4.5 billion in traditional bonds, with an additional $2 billion expected before the close of the year.