The African Development Bank has become the first supranational bank to use a securitization sold to private investors to free up balance sheet capacity. The deal, four years in the making, demonstrates a new technique that could expand development banks’ firepower to promote development.
In the synthetic securitization, a fund managed by Mariner Investment Group, a New York hedge fund, and Africa50, the infrastructure fund set up by African governments, have taken a $152.5m mezzanine slice of risk on a $1bn portfolio of about 40 loans to banks, project finance vehicles and companies, for a yield of 10.625%.
The European Commission has taken the next $100m of risk above that, leaving AfDB with the 2% first loss risk and the top 73% senior layer.
“It’s a road well trodden by commercial banks, but has never really been a model for multilaterals,” said Tim Turner, chief risk officer at the AfDB in Abidjan. “We finance 20 year loans to maturity. But that business model is predicated on a continuous supply of fresh capital from donors. The shareholder community is finding it increasingly challenging to stump up the required capital.”
Conscious of the urgency of stepping up development finance to meet the Paris Agreement commitments and Sustainable Development Goals — while national governments are unlikely to dole out large capital increases — the G20 has been pushing MDBs to make the capital they have go further. There have been some quick wins, but little progress in moving the MDBs to a more active management of their balance sheets — the originate to distribute model used by commercial banks.
The AfDB’s deal is a breakthrough in that direction. Over many months, the AfDB, Mariner and arranger Mizuho found a portfolio and structure that worked for all parties. A crucial part was convincing the rating agencies, which govern the bank’s crucial triple-A rating, to give enough capital relief for the transaction to make it worthwhile.
The AfDB has been able to cut by 65% the capital it must hold against the assets, creating capacity to make another $650m of loans. Yet it has only given up 42% of the portfolio yield.
As a condition of its guarantee, the EC has asked the AfDB to reinvest all the freed-up capital in renewable energy. Even without that promise, the deal’s power to expand the AfDB’s lending capacity made it an impact investment, in the eyes of Mariner’s 19 end investors.
“Almost anything AfDB could do in Africa would generate very significant impact,” said Andrew Hohns, CEO of Mariner Infrastructure Investment Management in New York.
The AfDB and other MDBs are working on follow-up deals and Hohns believes there could be five to eight in the next two years.
Notice: The AfDB, Mariner, European Commission, Africa50 and Mizuho will be holding a public meeting, Workshopping Room2Run, exploring the deal and the potential for optimising MDB balance sheets through securitization at the Laguna Resort, next to the Bali International Convention Centre, on Saturday October 13, at 8am to 9.30am. Breakfast is served at 7.30am. Please RSVP to amorphett@marinercapital.com