Africa's principal funding institution is on a high, following a hard-earned upgrade and its biggest dollar global deal yet. AfDB treasurer Arunma Oteh looks back on the bank's achievements of 2003 with Rosie Irving.
The African Development Bank has had a satisfying year on the ratings front: after eight years of being rated AA+ by Standard & Poor's (S&P), it received an upgrade to AAA in July, thereby achieving a full house of top marks from all three agencies.
On top of this, it has almost reached its funding target of $3bn. And part of that $3bn was the bank's biggest dollar global yet: a five year $1bn issue led by Goldman Sachs, HSBC and Lehman Brothers.
AfDB was given its upgrade in the middle of pricing this issue, taking both borrower and bankers by surprise. "The decision demonstrates S&P's appreciation of the strength of AfDB's financial condition," says AfDB treasurer Arunma Oteh. "It also recognises the strength and breadth of the explicit shareholder support that we enjoy."
Oteh agrees that 2003 has been a great year for AfDB so far. "With the Standard & Poor's upgrade, the bank now enjoys the highest possible ratings from all the major rating agencies, including Moody's, Fitch and JCR."
Along with the upgrade, the bank's US$1bn global transaction has broadened investor appreciation of the development bank's strong credit story. For example, North American investors took more than 50% of the bonds, compared with just 18% of the bank's 2002 global transaction.
AfDB has three primary objectives to its funding strategy: to raise resources at the best possible funding levels; to broaden investor understanding of its credit story; and to diversify funding sources. "We have achieved all this," says Oteh. "The cornerstone of our strategy is to be responsive to investor demand by using this three-prong approach.
"Consciously, we feel that being responsive allows us on a long term basis to fulfill our funding target, since investor demand generally drives the market. We therefore take time to assess markets and investor appetite to ensure our funding activities adequately respond to investor demand."
Looking at more
Oteh says that although AfDB is well known for raising funds through Japanese private placement deals - the Japanese market allows it to achieve aggressive funding levels - it is keen to diversify.
"The $1bn global deal in July was an example of this," says Oteh. "We were encouraged by our debut $500m global deal via BNP Paribas and Daiwa in July 2002 so we returned this year to the deepest market and captured a breadth of investors which gave the bank visibility."
Not only did the global serve to broaden its base of investors in North America, but it also revealed a concentration of buyers in Switzerland. Indeed, distribution levels revealed that Swiss investors took 10% of the bond. This gave Oteh and her colleagues the idea of returning in March to a market that the bank had not visited for 13 years.
AfDB was welcomed with open arms, and managed to easily sell a Sfr300m bond via BNP Paribas and UBS. The rarity value and diversification play appealed to investors and allowed the bank extended the maturity from three years to five years.
Hong Kong dollar, Singapore dollar and Uridashi Australian dollar deals were also launched in response to investor demand. The bank is also looking at the Kangaroo bond market, although there are no immediate plans to issue as yet.
Oteh has also noticed a change in spread performance over the past year. From January up to mid-year, the bond markets rallied, particularly for the high quality issuers, mainly as a result of geo-political developments.
During the rally, AfDB looked at maturities and found that five years for its dollar global was the most solid point of the curve to capture investor interest. "Swap spreads were also evolving in our favour and we realised that with a five year maturity we could achieve our funding objectives," she says.
Funding conditions, too, have changed during 2003 - especially in the Japanese yen market where investor demand has dropped off slightly. "The Japanese structured private placement market is driven by yield levels, so demand in 2003 appears to have declined slightly while many issuers now fund themselves in this market," says Oteh.
The bank is very active in the swap market - its swap portfolio is the same size as its underlying portfolio - giving it the chance to separate the decision on which of those markets it borrows from and which currencies it taps. "We can focus on borrowing in markets where our name is appreciated, while still raising funds in the currencies and using interest rate structures that match our asset and liability management objectives," says Oteh.
Finding the right banks is particularly critical to AfDB. It says it values its coverage: the banks that understand AfDB the best are the most likely to be invited to work on its fund-raising.
"Because we are a triple-A institution working in Africa it is important for banks, as they present us to investors, to clearly understand and promote what drives the strength of our credit - a strong financial condition and shareholder support," says Oteh.
"Expertise in the supranational sector including their placement and distribution capacity is also important to us. In addition, we expect them to consistently support a transaction throughout its life - this promotes liquidity and ensures that investors remain comfortable with our transactions."