AfDB hybrid capital note could launch before end-November

The African Development Bank (AfDB) could launch its debut hybrid capital note, sized between $500 million and $1 billion, before the end of the month if market conditions are right, the bank’s acting treasurer said. AfDB is set to become to first multilateral lender to issue a perpetual hybrid note – a deeply subordinated, debt-like equity instrument that will have a lower credit rating than the lender’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,” the bank’s acting treasurer Omar Sefiani told Reuters in an interview.

Sefiani said the note could be issued before end-November if financial market conditions continue to improve and before investors start to close their books for the year in December. Alternatively, the debut could be in 2024. The G20 Group of Nations has urged multilateral lenders to explore hybrid financing structures to try to maximise their balance sheet and boost funding to help developing economies cope with multiple crises, including adapting to climate change. The terms of the hybrid note allow for a permanent principal writedown if the AfDB faces stress and needs its shareholders to boost its capital, while coupon payments also can be skipped, according to an investor presentation from September.

“You get a fixed coupon and your principal is fixed as well, so that looks a bit like a bond. But, at same time, you need to have some loss absorption capacity,” Sefiani said. When you dig into the scenarios under which we would stop paying the coupon or have a principal writedown, quite quickly you can see that they are extreme events. So it’s possible, but it’s unlikely and hence the high (credit) rating.” S&P Global gave the upcoming notes an AA-minus credit rating compared to the bank’s AAA rating. Sefiani said the bank has the capacity to issue $4-$5 billion of hybrid capital bonds, but would be “progressive” in issuance, with one or two transactions per year depending on the success of the first one. From January to end-October, the AfDB issued $4.5 billion in traditional bonds with another $2 billion expected before year-end, Sefiani added.