Callable Capital Rise Highlights AfDB’s Shareholder Support

LONDON (Capital Markets in Africa): The African Development Bank’s (AfDB) temporary callable capital increase of XDR28.6 billion (to XDR180.6 billion) should ensure the bank’s net debt will remain fully covered by ‘AAA’ callable capital – the key metric underpinning the bank’s ‘AAA’ rating – even in the case of a US (AAA/Negative) downgrade, Fitch Ratings believes. After the 2019 General Capital Increase (GCI-VII), which raised the bank’s capital by 125%, the new capital increase approved by the bank’s board of governors in March 2021 provides further evidence of the strong shareholder support. This also highlights the sensitivity of the bank’s support-driven rating to potential negative rating actions on its ‘AAA’ rated shareholders.

The subscription of the newly created shares would become effective should a single event lead to a reduction in the stock of the bank’s ‘AAA’ rated callable capital by at least 30%. Such a reduction would in turn reduce the coverage of the bank’s net debt by ‘AAA’ rated callable capital to below 100%. The mechanism would ensure that the callable capital subscription would become effective should the US be downgraded, as the country accounted for 6.35% of AfDB’s capital and 38% of its ‘AAA’ rated callable capital as of end-2020. A downgrade of the US (not offset by an additional callable capital subscription) would reduce the coverage of the bank’s net debt by ‘AAA’ rated callable capital to below 100%.

In Fitch’s view, this new capital increase is strong evidence of the bank’s shareholders’ support for its role as a key channel of non-regional member states’ development policy in Africa. Fitch expects shareholders will now proceed with the subscription of the new callable capital shares. A number of ‘AAA’ rated member states have already committed to do so. Delays in the subscription by ‘AAA’ rated shareholders, which would increase the risk of net debt exceeding ‘AAA’ rated callable capital, could lead to negative rating pressures.

The possibility that the bank’s net debt could exceed the amount of ‘AAA’ rated callable capital, either because of ‘AAA’ rated sovereign downgrades or fast growth in the bank’s net debt, has been a key risk to AfDB’s rating. Canada subscribed to temporary callable capital in 2019 to support the bank’s debt coverage. AfDB’s ‘AAA’ callable capital was negatively affected by Canada’s downgrade to ‘AA+’ from ‘AAA’ in June 2020 – Canada holds 3.68% of the bank’s capital. In the longer term, AfDB’s ‘AAA’ rating will depend on the bank’s ability to manage its growth to ensure net debt does not exceed ‘AAA’ callable capital.

Fitch expects the proposed capital increase should ensure net debt coverage at least until end-2023, when the temporary callable capital shares are set to expire. Fitch’s medium-term forecasts assume that loans will grow by 5% yoy on average in 2021-2022, after the pandemic-related acceleration in 2020 (9% yoy). This is supported by our expectation that the bank will introduce tighter controls on its annual lending limit, including a lending cap set by the board of directors from 2021, in line with reforms agreed with GCI-VII.

AfDB’s ‘AAA’ rating is driven by the extraordinary support the bank receives from its shareholders. The bank is owned by 81 shareholders, including 27 non-regional shareholders, eight of which are rated ‘AAA’ (the US, Germany, Sweden, Norway, Denmark, Luxembourg, Switzerland and the Netherlands). Like most multilateral development banks, support from shareholders takes the form of unpaid callable capital, which can be called if needed. As of end-2019, the bank’s net debt was XDR13.2 billion. This was fully covered by the bank’s ‘AAA’ callable capital of XDR13.9 billion.

Contact:
Khamro Ruziev, CFA
Associate Director
+44 20 3530 1813
Fitch Ratings Ltd
30 North Colonnade,
Canary Wharf London E14 5GN

Arnaud Louis
Senior Director
+33 1 44 29 91 42

Eric Paget Blank
Senior Director
+33 1 44 29 91 33

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
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