The deal was arranged and managed by Goldman Sachs. The US bank created extendible (or X) notes in 1998. These are floating rate notes whose structure is a hybrid of conventional fixed-term bonds and commercial paper (CP).
They are attractive to both borrower and investor because of their flexible nature. In essence, they give the issuer or the holder the right to terminate or to extend the maturity of the note at a pre-specified interest rate on one or more exercise dates.
CAF's X-note issue has a 13-month initial maturity, quarterly extensions decided by investors, and potentially a five-year final maturity. The interest payments are pre-set at a yearly basis, so in year one the rate is Libor+15bp; in year two Libor+17.5bp; in year three Libor+20bp; in year four Libor+22.5bp; and in year five Libor+25bp.
One of the big attractions for CAF is that these payments represent substantial savings over equivalent term debt. In fact, the multilateral will obtain 30bp of savings if the X-notes are outstanding for five years. As most of CAF's lending to the Andean region is short term, it was important to the multilateral that it could raise short-duration funding at relatively low costs.
Another attraction is that the deal allowed the institution to access a new investor base. "CAF used the X-note issue to expand its money market investor base beyond those investors who participate in its $400 million CP programme," says Chris Canavan, head of Latin American debt capital markets at Goldman Sachs. In total, a handful of investors participated – a sufficient amount for a relatively small-sized deal.
Goldman Sachs conducted a mini-roadshow as part of the marketing programme for the X-notes. "We facilitated several investor calls with CAF management in order to educate new investors on the CAF credit story," says Canavan. Despite CAF's presence in the CP market, it is not widely known.
"CAF doesn't fit any conventional model, therefore people needed to be open-minded when looking at the credit," adds Canavan. "Its portfolio is made up entirely of loans to the Andean region, but it has an A2/A rating. That is testimony to the board's very sound financial management."
CAF has five principal shareholders in the region: Bolivia, Colombia, Ecuador, Peru and Venezuela. It also has 11 extra-regional partners. The bank's mission is to strengthen and help integrate the region. It formally began operations in 1970 and is now one of Latin America's most influential institutions.
Issuer: Corporacion Andina de Fomento (CAF)
Date of issue: February 13, 2004
Amount: $150 million
Coupon: L+15bp in year 1 and thereafter an incremental 2.5bp every year for five years
Maturity: March 16, 2005 (initial); February 13, 2009 (potentially final)
Lead manager: Goldman Sachs