Developing local currency guarantors to support the development of local capital markets: InfraCredit Nigeria and beyond

GuarantCo and the Nigeria Sovereign Investment Authority (NSIA) established the Nigerian Infrastructure Credit Enhancement Facility (InfraCredit) in 2017 to act as a market champion for the development of the local debt capital markets and to mobilise long-term investment from local institutional investors e.g. pension funds, insurance companies, and finance infrastructure projects in Nigeria in local currency.

As at September 2020, InfraCredit, through its guarantees, has facilitated three energy infrastructure companies’ first-time access to local currency finance from the domestic bond market totalling for NGN 31.5 billion, approximately USD 83 million. InfraCredit’s guarantees have also enabled these energy infrastructure companies to increase the tenor of their borrowings significantly to up to 15 years in comparison with the up to 7 years available in Nigerian markets, making the financing more suited to their requirements, and in the process making the infrastructure more affordable. The issues were oversubscribed by as much as 60 percent, signifying the potential and investor appetite for additional InfraCredit- guaranteed infrastructure bond issuances.

In addition to providing guarantees for these three energy infrastructure companies, InfraCredit runs a capacity building programme for local institutional investors in Nigeria. The programme provides trainings, roundtables, as well as co-due diligence programmes, which have been held for all three companies. Investors are guided through the investment process to help them understand how to evaluate the credit risk of investee companies in the infrastructure sector which was a new asset class for many of Nigeria’s institutional investors.

InfraCredit investments and capacity building work aims to transform the Nigerian infrastructure capital market well beyond these specific investments, building confidence to unlock the domestic bond market at scale. In March 2020, Axxela Limited, a private sector-led developer of natural gas distribution in Nigeria, issued a Series 1 NGN 10 billion 7-year Fixed Rate Senior Secured Bond Issue, as part of NGN 50 billion Bond Issuance Programme. The series 1 bonds were issued by Axxela Funding 1 PLC: a special purpose funding vehicle and wholly owned subsidiary of Axxela Limited with no third-party credit enhancement. The NGN 10 billion issuance was 24 percent oversubscribed, and an additional 15 percent of the proposed issue size was accepted by Axxela, bringing the total proceeds to NGN 11.5 billion. Axxela Limited was assigned a BBB+ long-term rating, with stable outlook, by GCR and BBB+ long-term rating, with positive outlook, by Agusto & Co.

The success of Axxela Limited’s bond issuance suggests that there is a wider positive impact of InfraCredit’s contribution to deepening the Nigerian debt capital market. Institutional investors that participated in the Axxela Limited bond have attended a number of InfraCredit’s capacity building initiatives and confirmed that the programme improved their ability to appraise the credit risk of infrastructure assets which informed their decision to invest. InfraCredit’s activities in Nigeria, both through supporting transactions and through the capacity building programme, have therefore led to an increased risk appetite for institutional investors who have demonstrated their ability to invest in energy bonds without credit enhancement. A survey of common investors in both Axxela and InfraCredit-guaranteed bonds revealed that attending the infrastructure capacity building programme contributed immensely to their ability to assess the risk of the infrastructure asset and to understand what information was useful through the due diligence process. They all attributed their comfort with investing in the Axxela Bond to their expertise to understand and assess the risks effectively. It is important to note that these investors have also participated in capacity building programme since its inception.

InfraCredit’s pipeline portfolio demonstrates a broad range of infrastructure assets beyond energy, spanning housing, telecoms, transportation infrastructure and others. To meet the demand, InfraCredit is expanding its capital base, with InfraCo Afirca, a sister PIDG company providing long term balance sheet capital to do so. Together with corresponding capacity building programmes, we expect InfraCredit’s future deals to support an increased appetite from institutional investors beyond energy infrastructure deals. In line with the goals of the Paris Agreement, InfraCredit commits to support transactions that support the transition to climate resilient and low carbon infrastructure.

GuarantCo, a Private Infrastructure Development Group (PIDG) company, is funded by public sector donor capital. Each USD 1 of public sector donor capital invested in GuarantCo can be leveraged and deployed three times in GuarantCo investments to attract private capital. The contingent capital, a form of guarantee, that GuarantCo provided to InfraCredit Nigeria can in turn be leveraged up to 7.5 times. As a result, public sector capital invested in GuarantCo can be leveraged up to 22.5 times through this structure. On this scale, guarantees can be truly transformational for local capital markets as InfraCredit Nigeria is proving. PIDG is actively working to build further versions of InfraCredits in other lower income countries across Africa and Asia to act as market champions.

Modeyin Ekundayo, Chief Investment Officer, NLPC PFA.

“InfraCredit’s Infrastructure Capacity Building Programme is a very welcome development. I have now begun to take some risk areas very seriously and assess them accordingly.”