It didn't draw a lot of attention, but a new Maple bond deal this week from the African Development Bank (AFDB), with a 4.85-per-cent coupon maturing July 24, 2012, met solid investor demand and was increased to $400-million from the originally announced $300-million. Rated triple-A and priced at 30 basis points over Canada five-year bonds, it was excellent value and investors knew it.
That's not remarkable in itself, as we get drive-by Maple deals from other supra-national agencies regularly, but the AFDB issue was interesting for some other reasons.
The African Development Bank is supported by a group of governments - 53 African countries and 24 in the rest of the world, including Canada. There are many such supra-nationals, many of them active in the Maple market. What was different about this one was the effort the issuer made to get it right.
Often, it seems to me, a Maple issuer comes to the market with little more than a "hey, we're triple-A, at a spread over Canada bonds, buy us," and investors obligingly strap it on. Generally, Maple deals get done when the issuer can swap the Canadian dollar proceeds back to its home currency a couple of basis points cheaper than it could borrow in its domestic market. (While many African countries don't even have domestic capital markets yet, AFDB is encouraging their development by doing local currency deals, five of them so far, in four countries.)
Usually Maples are private placements with a Canadian wrap, or done under a euro medium-term note or global prospectus filing, and can thus be sold only to qualified investors. Because even some qualified domestic investors don't buy private placements, the distribution of a Maple issue isn't always as broad as it could otherwise be.
Some Maple borrowers have exempt issuer status in Canada and so can issue without a prospectus and anyone can buy the deal. AFDB is an exempt issuer, but still took the unique approach of getting the deal approved by all but two (Prince Edward Island and Newfoundland) of our many provincial securities commissions. Any time you see an issuer willing to navigate through the morass of overlapping Canadian securities regulatory regimes, you know they are serious about wanting to access this market.
AFDB has been looking at Canada ever since the foreign content restrictions were eliminated a few years ago. They are a regular issuer in global capital markets, borrowing about $1-billion (U.S.) to $1.5-billion a year, and they've done deals in yen and Australian dollars as well as U.S. dollars. Besides, Canada is a big supporter and important member of the AFDB, and the bank welcomed the opportunity to issue here.
So, back in May, AFDB did a cross-Canada road show to tell their story to Canadian institutional investors.
Most African countries do more trade with Europe than they do with each other, which can't be easy, given Europe's farm subsidies and tariff barriers to exports from the Third World. This is because there are barriers to trade between African countries, and not just stupid red-tape barriers like we have here between provinces, either, but real barriers, such as having no bridge across a river that is the border between two countries.
The AFDB focuses its efforts in two main areas: 1) financing infrastructure, especially where it can foster trade between African nations, and 2) developing a private sector, both by lending to companies and funding microcredit to entrepreneurs, and by working to create a business-friendly environment. Both of these are crucial for generating sustainable development.
Now Africa, surprising as it may seem, is not the economic basket case that you might think from watching the panoply of bad news in the media every day. Africa's economy has grown by 5 per cent a year every year for the past five, so investors are interested.
After a two-year process, AFDB was ready to come to the Maple market when suddenly, volatility returned to credit markets. Spreads of triple-A Maple paper over provincial bonds went from single to double digits in the past month alone, making a deal from a new issuer something of a challenge, so full marks to Merrill Lynch and TD Securities (the book runners), joint lead National Bank Financial and co-managers Scotia Capital and HSBC for rising to the occasion. The deal was priced at an attractive level for investors and drew enough interest to be upsized.
So, happy investors, a strong five-dealer syndicate to provide good aftermarket liquidity, and an issuer that took the time to build a solid foundation for repeat business: that's what I call a nice deal. Plus, with this issue, the Canadian bond market did more to help Africa in a couple of hours than a decade's worth of feel-good rock concerts.