Delivering the next generation of onshore local currency bonds

Infrastructure project development remains a priority for enabling wider sustainable economic and social advancement in lower income countries across Africa and Asia.

However, the infrastructure financing required to resolve the existing infrastructure deficit is approximately up to USD 170 billion per year in Africa^[1] and USD 1.7 trillion per year in Developing Asia^[2]. In many cases, government funding alone is not sufficient; hence it is critical that impact investors and the private sector step in and support projects through various financing structures.

Over the last two years, the COVID-19 pandemic has underscored the need for critical infrastructure in the renewable energy, food production and affordable accommodation sectors; and the role which digital infrastructure plays to connect people and keep economies running. The global effects of the pandemic have also highlighted gaps which have led to supply chain disruptions, affecting inter alia equipment suppliers, food and agribusiness and the student accommodation sector.

Potential of infrastructure bonds

Infrastructure bonds are one of the financing instruments that can help support the investment shortfall in lower income countries across Africa and Asia. The nascent but growing bond markets, and particularly the market for green bonds, in many of those countries are increasingly being looked at as a new avenue for attracting institutional investors and guarantors to finance local infrastructure companies and developers. Companies that have exhausted traditional banking facilities for their business needs have been looking for alternative sources of longer-term funding.

The bond market provides a source of alternative long-term financing and supports the crowding in of private institutional investors such as pension and insurance funds. Traditionally, institutional investors are more likely to invest in government securities as a ‘safe haven’ especially given their stringent investment requirements. The long-term credit solutions of GuarantCo, a Private Infrastructure Development Group (PIDG) company, provide an important catalyst for increasing the participation of local banks and institutional investors by offering local currency financing for capital intensive industries such as infrastructure that require sustainable financing with longer maturity profiles. Bond guarantees have played a key role in supporting companies seeking to leverage the bond market and gain access to a different class of investor.

As the capital markets of local economies in lower income countries across Africa and Asia develop, the use of bond instruments also benefits the issuers as they can build their credit reputation through credit ratings for the bond issuance which can then provide listing opportunities on international exchanges. This provides wider access to larger pools of capital via international markets whilst high-quality issuers also present a more attractive and liquid investment for bondholders seeking to invest in listed-bond instruments.

Furthermore, Environmental, Social, and Governance (ESG) factors have increasingly become a focus for investors in their investment decisions as a result of the emergence of sustainable financing instruments in more developed markets. ESG factors are now important considerations in decisions among infrastructure developers and companies whilst it is now generally accepted that green investments are key to a resilient and sustainable recovery and growth for countries in the years ahead. Bond instruments fit well with the growing importance of ESG considerations, which are being integrated into bond issuances and externally verified against industry-accepted standards, such as those published by the International Capital Market Association (ICMA) and Climate Bond Initiative (CBI), to ensure rigorous ESG compliance.

Making it happen

An example of this was achieved in 2021, in Bangladesh when GuarantCo provided a BDT 2.1 billion (USD 25 million equivalent) 100 percent bond guarantee to enable MetLife Bangladesh, a leading insurance company, to be the sole investor in a seven-year fixed bond issued by PRAN Agro Limited (PRAN Agro). The proceeds from the bond, guaranteed by GuarantCo, have enabled PRAN Agro’s expansion plans including land development, construction, storage facilities and processing machinery. This transaction was key to developing the Bangladeshi capital markets as it was the first domestic bond backed by a development financial institution in Bangladesh and the first to be subscribed by an institutional insurance investor. This bond financing also helps support local farmers and contributes to food security which was important given the pandemic impact on food production as well as job security given the Government of Bangladesh’s plans to increase its agricultural output and diversify exports by increasing the country’s agricultural exports.

In 2019, GuarantCo supported a certified green bond transaction in Kenya with strong credentials, where it provided a partial credit guarantee to investors in Acorn Holding’s ^[3] (Acorn) KES 4.3 billion (USD 43 million equivalent) note programme, covering 50 percent of principal and interest to fund the construction of accommodation for 5,000 students in Nairobi. The note programme is the first ever to achieve green certification in Kenya, ensuring a genuine contribution to reducing carbon emissions. Moreover, it has also been distinguished as having achieved several other firsts in the regional market. These include being rated B1 by Moody’s (higher than the sovereign bond rating); recognition as the first deferred drawdown project loan note in Kenya; the first non-governmental green bond rated by Moody’s in Africa; the first corporate green bond to be listed on the Nairobi Securities Exchange and the first local currency corporate bond from Kenya to list on the International Securities Market (ISM) of the London Stock Exchange, during an event attended by President Uhuru Kenyatta and his government. Following this initial transaction in 2021, GuarantCo increased its exposure by providing Acorn with a guarantee for 50 percent of the principal and interest of the KES 1.4 billion (USD 12.9 million) required for the upsizing of the note programme to support additional green-certified student accommodation in Nairobi^[4]. Other PIDG companies that played a significant role in providing financing to Acorn included the Emerging Africa Infrastructure Fund (EAIF)^[5] which participated as an anchor investor in the note programme in 2019 whilst InfraCo Africa participated as an investor in Acorn’s Real Estate Investment Trusts (REIT), Development and Income REITs, in February 2021^[6].

Those two case studies are examples of pathfinder bond transactions to support the development of local capital markets. By mobilising local banks, insurance companies and pension funds to invest in project and corporate bonds, GuarantCo has played an instrumental role in providing long-term, local currency credit solutions and encouraged private investors to participate and take a stake in the local capital markets in which the company operates, thereby also allowing diversification of its investments from traditional government securities. As local capital markets in these countries continue to develop and mature, there will be increased potential to attract a larger pool of capital via offshore bond instruments from international investors via listing on international and regional exchanges. These bond markets will provide additional liquidity allowing access to long-term funding for infrastructure developers operating in lower income markets across Africa and Asia.

^[1] https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2018AEO/African_Economic_Outlook_2018_-_EN_Chapter3.pdf
^[2] https://www.adb.org/publications/asia-infrastructure-needs
^[3] Press Release: https://guarantco.com/2020/london-stock-exchange-welcomes-its-first-kenya-shilling-corporate-bond-on-the-ism-acorn-holdings-guaranteed-by-guarantco-to-finance-clean-safe-affordable-and-green-certified-accommodation-for-50/
^[4] https://guarantco.com/our-portfolio/acorn-ii/
^[5] https://www.eaif.com/nairobi-student-accommodation-note-is-first-affordable-housing-transaction-for-the-eaif/
^[6] https://infracoafrica.com/acorn-holdings-official-launch-of-the-acorn-student-accommodation-reits/