Taking risks

Finance: Ecobank makes a bold bet on London’s debt market

By Aurélie M’Bida

Posted on July 6, 2021 13:56

Firefox_Screenshot_2021-07-02T09-06-52.595Z © Ecobank headquarters in Lomé. Michel Aveline for JA
Ecobank headquarters in Lomé. Michel Aveline for JA

Ecobank’s debt listing on the London Stock Exchange on 24 June provoked a lot of reactions. The symbolism was strong: the UK bourse invited Ecobank Transnational Incorporated (ETI), the banking group’s holding company, to open the session on the main market and mark the successful issuing of $350m worth of “sustainability” bonds.

This transaction represents the first time that a sub-Saharan financial institution released subordinated eurobonds that comply with sustainable-development standards. It was a big success for the group that has been led by Nigeria’s Ade Ayeyemi since September 2015.

The coupon for these bonds was set at 8.75% and they have a 10-year maturity period. With such a high rate, the issuance was oversubscribed by almost four times, and the investors’ geographical origins are quite varied: the UK, US, Europe, Middle East, Asia and Africa.

The sustainable nature of the issue should allow Ecobank to align its funding with its sustainability objectives.

But the cost remains high for the bank. Back in 2019, ETI issued a $450m eurobond with a coupon set at 9.5%, but in that case, the shares were conventional bonds – i.e. more liquid than sustainability bonds – and the maturity was five years.

Subordinated debt

Ecobank justifies the high rate of its latest issue by saying that it is due to the type of financing scheme. “As Tier 2 capital, this debt is subordinated, in addition to being a sustainable issue,” the bank says.

The subordinated nature of the bond gives it a lower priority for repayment. To illustrate this: even if the bank fails, ordinary savers and other creditors will have a priority right to the recovered assets over the subscribers to these subordinated bonds, hence their higher interest rates. These characteristics also explain why these types of bonds are particularly useful for banks, when taking into account their prudential ratios.

“Pricing is based on many factors including ratings, credit outlook, investor feedback and appetite,” says Samuel Sule, a senior finance executive at Renaissance Capital, one of the arrangers of the deal. “The bond has further rallied in the secondary market, highlighting the strength of the Ecobank credit story,” the former HSBC and Standard Bank executive says.

Based in Lomé, ETI recorded 4% growth in its turnover of $1.7bn in 2020, despite the difficulties linked to the Covid-19 crisis. But in this context, its pre-tax earnings fell sharply (-57%) to $174m, due to provisions for the depreciation of its asset portfolio and various costs, notably legal ones.

Attracting a new type of investor

“The sustainable nature of this issuance will help Ecobank diversify its investor base. This is because the pool of environmental, social and governance-focused investors that would typically invest in such sustainable-bond issuances would differ to some extent (although partly overlap) from the pool of global emerging-market investors that would typically invest in regular bond issuances from banks based in frontier or emerging markets,” says Mik Kabeya, an analyst at Moody’s.

Moreover, the sustainable nature of the issue should allow Ecobank to align its funding with its sustainability objectives, as the group is required to use the funds to finance green projects and eligible social projects.

In May, Ecobank Group established a ‘sustainable financing framework’ under which it can issue financial instruments to finance and refinance eligible green and/or social projects.

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