The African Development Bank (AfDB) has reviewed its lending strategy by introducing the use of A/B loans.
The bank hopes that the move will help mobilise financing from the private sector as well as encourage increased foreign direct investment in Africa, particularly as liquidity among commercial banks in Europe has started to dry up.
“It makes sense to do what the other IFIs have been doing for many years which is to have a strategy not solely based on lending, but based on a combination of lending and resource mobilisation,” explains Simon Jackson, head of syndication and co-financing at the development bank.
“Commercial banks use the syndications market to maximise income from finite capital resources; we are doing the same thing but rather seeking to maximise the developmental impact of our operations,” he adds.
With the eurozone crisis sapping the lending capacity of the European banks in particular, the role of DFIs to encourage lending and investment into Africa is growing.
“Lending in the emerging markets fell off in 2007-08 and the IFIs and DFIs had to take up a lot of the slack. Once again we are in murky waters and no one knows what the risk and funding appetite is going to be like in the next year or two,” Jackson comments.
The bank has already closed its first A/B loan in late October for South Africa’s Transnet.
The transportation company secured a total of US$810mn split into an A tranche of US$400mn from AfDB and US$410mn provided by a syndicate of commercial banks comprising SMBC (agent), Bank of China, Mizuho, BTMU and HSBC.
The A loan carries a tenor of 10 years while the commercial bank loan has a tenor of seven years.
“Seven years is at least a couple of years longer than might be otherwise available in the commercial market. It would be challenging to do seven years in US dollars for a conventional corporate facility in South Africa right now,” observes Jackson.
The financing will support Transnet’s refurbishment programme.
The A/B loan structure is something regularly used by other DFIs such as the EBRD or the IFC.
The structure works whereby the development bank keeps a portion of the loan on its own account and sells participations in the remaining portion to participants from the commercial bank market.
Participants in the transaction all benefit from the development bank’s preferred creditor status.