This article is reproduced from the
INTERNATIONAL FINANCING REVIEW - SPECIAL REPORT MAY 2000
AFRICAN DEVELOPMENT BANK
Keeping a low profile in the international capital markets
The African Development Bank (AfDB) keeps a low profile in international
bond markets. And that's the way the bank's treasury department likes it.
Despite a strong Aaa/AA+ credit rating, a conservative lending policy and a
recent increase in the capital commitment it receives from its sovereign
shareholders, the AfDB prefers to avoid the limelight.
The AfDB has sold bonds publicly just twice in the past three years: a
R300m one-year deal in February 1999 and a Y5Obn 10-year Euroyen deal in
March this year. But the Bank has been an active borrower in the private
placement markets. Like other supranationals it has been particularly
active in Japan. During 1999, the AfDB raised more than US$420m selling
structured bonds to small Japanese institutions and retail investors. Deals
ranged in size from Ylbn to Yl0bn with an average maturity of 15 years.
While almost one-third of AfDB's lending commitments are denominated in yen
- a much higher percentage than most supranationals - the bank won't incur
yen liabilities until 2002, when will be forced to redeem outstanding yen
bonds. But relying on the Japanese private debt market allowed the Bank to
capture an attractive end cost of funds, averaging around Euribor minus
21bp. All the funds raised in Japan were swapped into cures or US dollars,
with the former accounting for slightly more than half the total amount
raised last year.
Despite its balance sheet advantage and high profile with Japanese
institutional investors, the AfDB's foray into the public Euroyen market
would have been impractical if it weren't for some attractive market
technicals. The cost of swapping from yen to US dollars increased
substantially during late 1999 and the early part of 2000; the rush of non-
Japanese borrowers tapping the Samurai market of late have been attempting
to fund local operations.
The AfDB circumvented the high basis change, however, by swapping the
proceeds of its bond issue at the short end of the yield curve. While the
cost of swapping between yen and dollars in the 10-year sector of the curve
was anything from 22bp to 28bp when the AfDB launched its deal, in two
years it was no more than 2bp. The reduced basis charge allowed the AfDB to
fund itself in the low teens through yen Libor.
The bank's decision to raise funds discretely does not stem from a lack of
familiarity with the public bonds markets. AfDB has several bonds
outstanding: four in US dollars, due in July 2000, 2003, 2004 and 2015; two
in French francs, due in 2006 and 2007; one in Deutsche marks, due in 2002;
and one in sterling, due to mature in 2010.
The Bank's decision to raise just US$600m in wholesale financial markets
during 1999 reflects a simple economic logic: it didn't need money. It
still doesn't. Despite having a number of deals that are due to mature
during 2000, the AfDB will have more than US$ 1.4bn in liquid assets at
year-end without refinancing or raising new funds. Those assets are held in
the form of commercial deposits, government bonds and asset-backed
securities.
Unlike last year, however, the bank is no longer constrained by what it
needs to do. For the last four years, the AfDB has maintained liquid assets
equivalent to more than the average of two years' annual debt service plus
anticipated loan dispersals excluding scheduled principal repayments -
effectively a policy hedge against the rating agencies' cautious approach
to the bank's credit standing. Until midway through last year the bank's
board of governors also set a maximum liquidity position beyond which the
bank's treasury couldn't borrow.
The problem with that system, says the bank's head of funding Danielle
Coolen-Prentice, was that it restricted the AfDB's opportunity to take
advantage of market opportunities. "We should be in a positron to take
advantages of opportunities when they arise. The best time to raise money
is often when you don't need it," she said.
In order to increase the flexibility of its fundraising, the treasury
department last year obtained board approval to substitute a formula,
taking into account ongoing and planned dispersals, for a fixed number when
calculating its liquidity balance. The result is a bank more able to take
advantage of market opportunities.
For the time being, however, the bank is likely to concentrate on two
areas. The first is to use arbitrage funding to secure the best available
end cost of funds -which is likely to mean a continued reliance on the yen
market. Barring a major market correction, the AfDB is unlikely to raise
funds in euros. While its arbitrage operations have allowed the
supranational consistently to lock-in funds at rates well through Euribor,
comparable and even better rated borrowers have been forced to pay
significantly more for direct access to the euro markets.
"We're under no political pressure to go into the euro market. So we won't
be active until it makes sense from a funding cost perspective," says
Coolen-Prentice.
The Bank is, however, trying to increase the percentage of its funding it
does in the region. The AfDB is preparing to sign a Rl0bn domestic MTN
programme. The Abidjan-based supranational plans to use the programme to
fund on-lending in Africa. The AfDB's balance sheet is denominated in US
dollars, euros and rand, with the latter making up an increasing percentage
of its lending. So far this year, the bank has planned dispersals in rand
amounting to R500m, a figure that is expected to grow over time.
The Bank plans to sign its MTN programme after its annual general meeting,
to be held in Addis Ababa, Ethiopia on June 1. Bank funding officials will
then mount a non-deal roadshow in South Africa with an inaugural issue
depending on prevailing market conditions. The AfDB issued a one-year
Eurorand deal last year but has yet to access the domestic capital markets.
Merrill Lynch is the programme arranger.
sidi sanneh
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