AfDB Issues First-Ever SOFR-linked Transaction in Green Bond Market
By Charles Ajunwa
The African Development Bank has been rated Aaa/AAA/AAA by Moody’s/S&P/Fitch (all stable) successfully priced a dual-tranche US$ 500 million three-year and US$ 100 million two-year SOFR-linked Green bond, becoming the first issuer to bring to the market a SOFR-linked Green Bond transaction.
The fixed rate tranche, oversubscribed within three hours of formal book opening with the support from high-quality green investors, was priced at mid-swaps (MS) flat, in line with Initial Price Thoughts (IPTs) and providing a very limited new issue premium. The SOFR-linked tranche, the result of a green reverse enquiry , priced at SOFR + 32 basis points (bps) and was placed almost entirely in the hands of green-dedicated investors.
Building on the Bank’s ten-Year Strategy for 2013-2022, whose overarching objective is to promote inclusive and sustainable growth by supporting African countries transition to “green growth”, the Bank established a Green Bond Framework in 2013 with the goal of supporting the Bank’s commitments towards climate change mitigation and adaptation. This 7th Green Bond under the Bank’s Green Bond Framework and 3rd in USD benchmark format, highlights the Bank’s consistent effort to fully play its role as one of the main actors of climate finance in relevant sectors such as renewable energy, energy efficiency, clean transportation, biosphere conservation and sustainable water and wastewater management.
The transaction was announced on Monday 26 November 2018 at 3p.m. London time, with IPTs for the US$ 500 million three-year tranche released at MS flat area. Strong interest from real money accounts and central banks started flowing into the books from the outset.
with indications of interest exceeding US$ 400 million (excluding Joint-Lead Managers (JLM) interest) the next morning. Books officially opened at 08:25a.m. London time on Tuesday 27 November for both tranches, with price guidance of MS flat bps area for the fixed rate tranche and SOFR + 32 bps area for the floating rate tranche. Books closed at 1:30p.m. , London time, in excess of US$ 590 million (excluding JLM interest) for the fixed rate tranche. Soon after the transaction was launched with US$ 500 million size and the spread set in line with IPTs at MS flat. The SOFR-linked tranche was set with US$ 100 million size at SOFR + 32 bps.
There was very strong support for the transaction from green dedicated portfolios but also from investors who integrate Environmental, Social and Governance (ESG) considerations in their investment strategies. The participation of such investors reflects The African Development Bank’s solid green framework and the high quality of its impact reporting.
The final order book included more than 40 investors across both tranches. In the fixed rate tranche, central banks and official institutions took the lion’s share of the transaction with 61%, while asset managers took 24%, pension and insurance companies 12% and bank treasuries 3%. By geography, Europe led with 39%, the Americas followed with 28%, Asia with 26% and Africa and the Middle-East with 7%. In the SOFR-linked tranche, central banks and official institutions were 65%, pension and insurance companies 23% and asset managers 12%, while by geography, 91% went to Americas and 9% to Europe.
Commenting on this development, Chief Investment Officer, Office of the City Treasurer, City of Chicago, Jabari Porter, said “The City of Chicago Treasurer’s office is proud to be the lead-order on this cutting-edge transaction with the African Development Bank. This deal is the first ever SOFR-linked Green Bond transaction and we believe it represents the future of responsible investing. By investing in this issue, the City brings together two of the most innovative trends in Fixed Income: the transition from LIBOR to SOFR as the next global benchmark, and the continued focus on channeling global capital to ESG and Green projects all while working with an issuer of the highest credit quality and scope of mission. It is a privilege to be a thought-leader in this space, to help draw attention to the trends which we believe will shape investing for the future, and to do so with the best interests and proper stewardship of the City’s assets in focus.”
While Head of Responsible Investing, Global Fixed Income at Blackrock, Ashley Schulten, said “AFDB’s green bonds enable our clients to invest in high-quality renewable energy projects like solar and wind farms in Africa through a familiar SSA fixed income offering. The global climate benefit of this type of infrastructure build is significant and drives at the spirit of what the green bond market was built to accomplish.”
Another investor Treasurer of IFAD, Domenico Nardelli, said: “IFAD is pleased to participate in this issue, which contributes to exploring an alternative for setting a reference interest rate.”
Treasurer of the African Development Bank Group, Hassatou N’Sele, said “We are delighted with the success of our 7th Green Bond transaction, highlighting our continued commitment to addressing the devastating effects of climate change in Africa. A partnership with a dedicated Socially Responsible Investor enabled us to launch the first ever SOFR-linked transaction in the green bond market. We will continue to try to break new ground to fulfill our mandate in Africa.”