The African Development Bank, the UK Government and three globally recognised insurance companies have entered into an innovative new risk-sharing transaction known as the Sovereign Space that aims to support more mitigation and adaptation projects in Africa.
The Sovereign Margin transaction was structured to increase the African Development Bank’s climate finance commitments by up to $2 billion and will go a long way towards helping African countries meet their Nationally Determined Contributions (NDCs). The support provided by the UK and private insurers under this risk transfer agreement will enable the Bank to reduce the capital currently consumed by its sovereign operations, creating room for further lending operations in priority sectors, in particular climate finance, to support more mitigation and adaptation projects across the continent.
The Sovereign Margin is a risk-sharing arrangement based on a subset of the Bank’s sovereign loan portfolio for up to 15 years, under which the insurance market, namely AXA XL, Axis Specialty and HDI Global Speciality, bear a first loss tranche of USD 400 million, while the UK’s Foreign Commonwealth and Development Office (FCDO) will provide additional coverage of $1.6 billion, based on a second-loss tranche, on the same subset of loans.
“This is an innovative transaction that will optimize the African Development Bank’s balance sheet, while supporting its climate agenda. It shows how the public and private sectors can complement each other by working together,” said Hassatou N’Sele, the Bank’s Vice President for Finance and Chief Financial Officer.
Vicky Ford, FCDO Minister of State for Development, said: “I am delighted that the Sovereign Margin guarantee to which the UK committed in May has now been finalised. I would like to formally welcome our three new insurance providers from the London market. The $2 billion guarantee reflects the UK’s commitment to invest in climate-related projects, drive clean growth and deliver on global climate ambitions. »
The transaction covers current and future lending from eleven borrowing countries through the Bank Group’s non-concessional window. This is an excellent continuation of cooperation with private sector and institutional investors following the G20’s call for MDBs to make better use of their balance sheets and following the Bank’s two pioneering operations on its private sector portfolio executed in 2018. It also reflects the positive results of the G20 recommendation on capital adequacy published in September 2022.
The participation of the UK private insurance market and FCDO brings to the table innovative PPP-style collaboration between DFIs and the insurance market that helps achieve the vision of the Addis Ababa Action Agenda which sets out the ambition to address the significant needs required to achieve the Sustainable Development Goals (SDGs) by leveraging the private sector.
“AXIS is proud to play a leading role in the AfDB’s Sovereign Flexibility program, aligning the strength of our specialist underwriting with the ability of the London insurance industry to work together to support positive change,” Richard Lamb, Head of Credit and Political Risk at AXIS’ Lloyd’s of London Syndicate.
“We are delighted to support this landmark policy between the AfDB, the UK government and private insurers. The combination of the unique lending capabilities of an MDB and the coverage of a private insurer can help unlock large amounts of capital to further assist countries and sectors in need of financing,” said Nick Robinson, Head of Credit and Political Risk at HDI Global Specialty.
“This important transaction is further evidence of the importance of DFIs mobilising uncapitalised private sector insurance capacity to support climate, mitigation and adaptation finance in Africa. This transaction demonstrates the significant risk-taking capabilities of the insurance market when working with an DFI and the potential that insurance products can provide to increase development-oriented lending,” Simon Bessant, Director of Texel Group, insurance broker with the African Development Bank for the Sovereign Margin transaction.
The B&A initiative builds on the African Development Bank’s overall balance sheet optimization objective, which aims to improve the Bank’s capital metrics, provide additional lending to enable the Bank to achieve its institutional and global development objectives, and lead innovation and demonstration impact to attract institutional investors to Africa.