21 hours ago
Togo 20-year loan overcomes African freeze: IFR
Overcoming challenging conditions for sub-Saharan Africa sovereigns in public bond markets, sub-investment-grade Togo has used credit enhancement from Lloyd's of London insurers and the African Development Bank's concessional lending arm to raise 20-year funding.
The West African country's €200m sustainable loan from Deutsche Bank and UK insurer Legal & General, with AfDB as lead arranger, was the first deal under the sustainable financing framework that the sovereign put in place in October.
Proceeds will go to eligible green and social projects in areas such as climate adaptation, biodiversity preservation, sustainable agriculture, access to clean energy and pollution control.
The facility, which has a five-year grace period and a partial guarantee from the African Development Fund, continues a trend that saw neighbouring Benin close a €507m guaranteed loan in January, also with Deutsche Bank.
Benin's 15-year amortising facility has €200m of first-loss protection from the World Bank's International Development Association – IDA's inaugural deal under its new guarantee platform – with the remaining principal and interest covered by African Trade and Investment Development Insurance.
Togo's deal also followed a trade finance loan in February from Societe Generale. The World Bank's Multilateral Investment Guarantee Agency provided a €146.4m 95% guarantee on non-payment for three years.
Credit enhancement
'Private capital mobilisation through investment-grade guarantees and credit insurance is increasingly relevant [for African and other lower-rated sovereigns],' said Gaetan Cochard, director at Global Sovereign Advisory, financial adviser to Togo.
'If you can crowd in private capital in addition to existing concessional resources, then you are able to multiply funding capability and impact. That's a very big game changer, not only for Togo but for all sovereigns accessing these types of guarantees.'
The adviser highlighted the deal's benefits for Togo. 'It's a 20-year maturity and Togo and its regional peers don't have that type of borrowing opportunity from private lenders. So the guarantee really had additionality,' said Clemence Ancelin, associate at GSA.
S&P upgraded the sovereign to B+ in April.
Besides enhancing the sustainability of Togo's debt and rebalancing its portfolio by increasing the small share of external commercial debt, the loan helps fund its sustainable priorities at a 'particularly attractive' rate, Ancelin said.
L&G's share of the loan made the UK insurer the first non-bank lender to work with ADF.
It also carried principal and interest insurance from Mosaic Insurance and MS Amlin, which they provided through their Lloyd's syndicates.
'As institutional investors have been publicly involved in debt-for-nature swaps and other long-term EM credit-enhanced transactions, it made sense to try and create a structure for Togo that could be interesting for [them],' said Simon Bessant, global head of insurance and business development at Texel Group.
Texel arranged the deal's non-payment insurance, providing 'a creative way of allowing L&G to invest in an asset which had to have an investment-grade exposure and maintain consistent cashflow', Bessant said.
'This shows how insurers and asset managers can work together to close the infrastructure financing gap,' said Nick Oxley, lead underwriter for credit and political risk at MS Amlin.
'We believe these transactions and innovative financing methods are combatting the historic risk-return misperception [over EM]; and demonstrating the compelling investment opportunity for commercial institutional investors to contribute to global sustainable development with investment-grade credit risk,' said Jake Harper, senior investment manager, asset management at L&G.
The loan was made on behalf of L&G's institutional retirement business, a spokeswoman said. It does not form part of its new nature and social outcomes strategy.
The insurer has now committed almost US$500m to sovereign use-of-proceeds loans in Africa, including social infrastructure and renewable energy deals in Ivory Coast and Senegal, respectively, and a separate deal under the nature strategy.
Deutsche was not involved in those transactions.
The bank would not comment on whether it had also insured its exposure to Togo.
ADF also brought in what AfDB chief financial officer Hassatou N'Sele described as 'highly rated credit insurance partners' to cover its guarantee.
More to come
More African sovereigns could follow Togo and Benin's lead. 'It's a superb solution and should be part of the strategy of all sovereigns who aim to optimise access to commercial funding in current markets or want to have an efficient debt management,' said Cochard.
'The long-dated and sustainably priced structure that was achieved from this transaction would surely be attractive to other EM issuers looking for a bond-like product,' added Bessant.
Lenders have the twin comfort of ADF monitoring the deal and its use of proceeds being governed by a sustainable financing framework, he said.
'You have a lot of additional reporting that is clearly supportive of a transparent borrowing, infrastructure and sustainable development goal that has been achieved by [the] transaction. It is not just budgetary lending with opaque use of proceeds and refinancing risk at maturity.'
Source:
