MDBs boost new financing channels
Far from relying on tried-and-tested sources of financing, multilateral development banks are increasingly looking at venturing down alternative funding avenues to cater for their significant needs in an increasingly uncertain environment
Their liquid Triple A bonds remain a staple for institutional fixed-income buyers across the world, but multilateral development banks are increasingly developing new financing channels too. This effort, which embraces securitisation, hybrid capital, outcome bonds and potentially sustainability-linked loan financing bonds too, forms part of MDBs’ response to growing political and civil society demands on the sector.
These are directed at MDBs increasing lending in support of development and transition in emerging markets. At the same time, with public capital scarce, the sector’s institutions are also under pressure to attract new sources of private sector capital.
These drivers were embodied in a 2022 report by an independent expert group commissioned by the G20 grouping of developed and developing economies. This recommended expanded use of “financial innovations”, such as securitisation and hybrid capital.
The G20 has said securitisation and other forms of risk transfer could expand MDB lending capacity by US$200bn over the next decade.
While Italy and Germany were early movers among MDB shareholder in calling for new approaches to optimising capital, the Biden administration in the US – particularly treasury secretary Janet Yellen – intensified the pressure as the largest owner in multiple MDBs, headed by the World Bank.
Yellen endorsed the use of financial innovations “to responsibly stretch [MDBs’] existing balance sheets”, claiming that doing so could deliver up to US$50bn in additional World Bank lending over the next decade.
While the second Trump administration’s stance on the MDBs has appeared more focused on the possibility of the US withdrawing from the institutions, private sector bodies have endorsed the push for new financing channels too.
Adopting a so-called originate-to-distribute model is one of four key demands of MDBs from the Private Sector Investment Lab of 15 finance and other chief executives that World Bank president Ajay Banga has convened.
Similarly, 10 bodies representing major financial institutions – including the Institutional Investors Group on Climate Change and the United Nations-convened Net-Zero Asset Owner Alliance and Net-Zero Banking Alliance – previously issued a “call to action to scale private capital mobilisation”. This urged MDBs to “move from an originate-and-hold … model, creating structures that are familiar to institutional investors.”
Early signs
Against this background, the early signs of a long-anticipated wave of MDB securitisations are a key development.
Although the sector has been slow to follow the African Development Bank's trailblazing synthetic "Room2Run" deal, which transferred the mezzanine risk on a US$1bn portfolio of private sector loans to investors back in 2018, a few transactions have already closed.
The West African Development Bank (known as BOAD) carried out securitisations of CFA Fr150bn (US$250m) and CFA Fr160bn in 2023 and 2024, respectively.
In addition, IDB Invest completed its "Scaling4Impact" transaction last year too, transferring US$100m of mezzanine risk on a US$1bn portfolio to investors and insurers.
Moreover, several significant MDB securitisations are set to close this year, with issuers seeming likely to use both cash and synthetic structures as adoption grows. The deal flow potentially includes the inaugural issue under the International Finance Corporation's landmark "Warehouse-Enabled Securitization Platform" – the first move into ABS by the World Bank group, where Banga has described WESP as “the first step towards a much bigger idea” of wider MDB securitisation.
WESP, an up to US$2bn multi-originator platform (US$1bn from IFC), will co-finance Paris Agreement-aligned emerging market loans by MDBs and hold them until packaged into securities, according to a tender document last year for the platform's adviser.
IFC and the tender winner, BlackRock’s independent financial markets advisory business, have been arranging an inaugural deal under the platform since last year. Based on IFC assets, this may be structured as a collateralised loan obligation.
In addition, AfDB and Development Bank of Southern Africa have invited proposals from advisers on another multi-originator synthetic securitisation programme.
They intend initially to securitise a combined reference portfolio of roughly US$2bn, according to the RFP. By pooling loans originated by multiple development lenders, they expect to create larger-scale pools of diversified assets to appeal to institutional investors.
The programme is likely to feature a special purpose vehicle that would consolidate cashflows from the reference portfolios and issue CLOs to institutional investors. It appears set to use a revolving structure that would allow the portfolio to be replenished with new assets over time.
Other MDBs are also under way with ABS deals. These include the European Bank for Reconstruction and Development, whose chief executive said last year it would issue its first securitisation in 2025.
Equity credit
At the same time, the African securitisation pioneers AfDB and BOAD have also been prominent in the sector’s efforts to attract subordinated financing that would support increased lending by qualifying for full equity credit from ratings agencies.
BOAD was the first MDB to complete a hybrid (US$100m sustainable note issued to the Arab Bank for Economic Development in Africa in November 2023, terms undisclosed) and has subsequently closed both a second private placement, this time with green use of proceeds (€100m to the Italian Climate Fund in July 2024, terms again undisclosed), and a public hybrid (a US$500m 30-year non-call five sustainable bond in February this year).
Previously, BOAD had failed to complete an attempted a 60.75-year non-call 5.75 public hybrid in 2022. It also sought to attract surplus Special Drawing Rights issued by the International Monetary Fund through an SDR-denominated hybrid, but lacked the “prescribed holder” status that the IMF made a condition of its approval of such transactions.
BOAD’s successful public hybrid came after pioneering undated deals for AfDB (a US$750m perpetual non-call 10.5-year sustainable bond in January 2024) and, reinforcing the product’s African dimension further, Africa Finance Corporation (US$500m perpetual non-call 5.25 bond this January).
AfDB’s deal, the first benchmark issue of MDB hybrid capital, was launched originally in September 2023 but took months to complete as underwriters sought buyers for the novel instrument.
More recently, the issuer base began to broaden when Corporacion Andina de Fomento marketed its own hybrid to more than 100 investors in April. The Latin America/Caribbean development bank has yet to launch the Rule 144A benchmark bond, however.
Meanwhile, the World Bank has developed an alternative model for hybrid debt. Its programme of shareholder deals, which began with a €305m transaction with Germany agreed in September 2023, has now brought in some US$1bn of subordinated financing from 11 countries.
The institution is also looking to issue the instrument to philanthropies and foundations, though it has yet to close a “development partner” deal.
“It's a very interesting option that we are making available, but we have not been able to bring these things together like a new way of doing philanthropy,” said World Bank treasurer Jorge Familiar.
The instrument (which pays the supranational’s senior funding spread) may be too low yielding for foundations’ asset management arms, though its impact is significant.
Nonetheless, Familiar is persevering. “We will continue trying and I am sure that once we have one, others will follow.”
In addition, the World Bank has board approval for a US$1bn “pilot” public market hybrid. Although officials are concerned by the instrument’s high cost, which would have to be passed on to borrowers, it is pursuing structural solutions.
Improving outcomes
The World Bank has also pioneered outcome bonds to finance specific development initiatives and projects in areas such as plastic pollution, rhino conservation and water purification. The Washington-headquartered Triple A has already raised over US$600m from a series of issues in the format since 2020, culminating in the largest yet – US$225m for Amazon reforestation in August 2024.
Deal sizes have grown with wider investor participation. “Now it's not a cute thing that happens once, but rather it's something that's starting to take shape and with a much broader investor base,” Familiar said, anticipating further creative development.
“This structure can be used for many interesting things in the development space. We have lots of ideas that we're exploring and an interesting pipeline, and I hope that we will bring more [outcome bonds] to market.”
Coral reef and mangrove restoration/conservation, food security, land use and health are possible areas for future deals.
While the instrument has been principal-protected, with investors only risking a portion of their coupons, the World Bank is also examining the potential for principal-at-risk structures given their potential appeal to buyers of its catastrophe bonds. It is already exploring a cat-type bond to cover the risk of drought in Africa, for example.
Other MDBs are also now considering the instrument. Last year, the Inter-American Development Bank acknowledged that it was seeking to follow the World Bank’s lead, though sources cautioned that an inaugural deal was not imminent.
Linking to KPIs
In addition, some MDBs are examining the potential of the new sustainability-linked loan financing bond. Pioneered by commercial bank Nordea and subsequently adopted by a number of European and Gulf peers, the SLLB is a use-of-proceeds instrument that enables investors to fund issuers’ key performance indicator-linked loans.
The Nordic Investment Bank, which has put a growing proportion of its lending to high-emitting and hard-to-abate borrowers committed to transition in sustainability-linked loan format in recent years, has been investigating the product since 2023. It served as a coordinator of an International Capital Market Association taskforce that published guidance for SLLBs a year ago.
With other MDBs also increasing their sustainability-linked loan financing, at least one other Triple A is also exploring the structure.