Transaction continues risk transfer strategy

The African Development Bank (AfDB) and the African Trade Insurance Agency (ATI) have completed a landmark US$500m credit insurance deal, covering approximately 22% of the bank’s US$2.3bn outstanding portfolio of non-sovereign operations in Africa. The deal is intended to protect the bank against non-payment of loans made to around 30 African financial institutions, across all major regions on the continent.

ATI will be the direct insurer for the African Development Bank and the transaction also involves the participation of a number of Lloyd’s & Company private reinsurers who will share the risk on a range of African financial institutions. The deal is expected to create around US$500m of headroom for new lending, while enabling many insurance companies operating outside Africa to participate in financing the development of Africa, for the first time.

Consequently, it is hoped that this deal will strengthen the development of credit insurance in Africa and lead to the development of greater comfort in risk transfer between the African Development Bank, the African Trade Insurance Agency and Lloyd’s reinsurers. Through this, the deal may also lead to the lengthening of insurance terms and lower insurance and financing costs, boosting trade and investment in the private sector and the African region.

The credit insurance deal is the second balance sheet optimisation transaction under the Room to Run initiative, following the landmark US$1bn capital relief trade completed last month (SCI 20 September). Like that transaction, it is hoped that this deal will serve as a blueprint and pave the way for further, similar transactions in future.

Like the CRT, this deal also responds to the G20 and G7 call on the multilateral development banks to explore innovative ways to optimise their balance sheets. Like synthetic securitisation, credit insurance is one such instrument involving a specialised market with currently low penetration in Africa, but which has been earmarked to play a more active role in funding lending and development on the continent.

Richard Budden