Focus on the 3 levers BOAD uses to optimize its balance sheet

“It’s a product that has an equity flavor, that has a color, but it’s not one in the sense that it doesn’t change the shareholding.” This is how Serge Ekué, president of the West African Development Bank (BOAD), spoke on May 14, 2024, explaining to a limited number of journalists the strategy that the development institution follows in optimizing its own capital.

For three years, the West African bank first engaged in creative destruction by seeing its expenses grow faster than its income. After that, the process was reversed with regard to reforms and innovations and a capital increase from 1.5 to 3 billion euros.

So in December 2023, BOAD innovated by issuing a hybrid bond through a private placement, a world first for a multilateral development bank. The amount of the operation was USD 100 million, underwritten by a single investor, BADEA (Arab Bank for Economic Development in Africa). This is the first tranche of a US$600 million private bond program that is expected to close by the end of the Djoliba plan (2025).

The aim of this super subordinated bond operation was to raise capital to support sustainable development projects and at the same time strengthen the bank’s equity capital. Proceeds from this issue, executed in US dollars and secured in Euros, made it possible to strengthen BOAD’s debt capacity and protect its financial profile from potential shocks, thus maintaining its investment grade credit rating.

Super subordinated bonds were a success. “We’re also the first development institution to use such a tool,” explains the former Natixis executive, who has brought in his bag a range of tools like these Canadian cookies that the market uses to optimize balance sheets and improve stock performance.

At the end of such an operation, the result remains the same, but the difference is in the ability to optimize it.

Another tool that BOAD uses is credit insurance, which allows it to transfer part of the risk from its balance sheet to leading insurance companies. “This allows the bank to strengthen its risk profile and optimize the use of its capital.” As of 2021, BOAD has taken out credit insurance covering 11% of its total loan portfolio, which represents approximately EUR 500 million of mobilized capacity. This strategy made it possible to achieve significant equity savings and thus facilitated the deployment of additional financing. “Basically, insurance allows us to transfer risk to others because the balance sheet is limited in size,” explains Mr. Ekué. Through this process, the bank has been rated Baa1 by Moody’s with the top rated BB clients managing to de-risk their portfolio to A, paying a premium of course. So the question is whether this bonus generates a return on investment. “It is very profitable because the insurance allowed us to save 70 billion FCFA and thanks to the leverage effect we were able to reinvest 235 billion FCFA, which more than justifies the insurance premiums we pay.” In addition, adds Mr. Ekuè, “we kept the service to the customer, only the risk was transferred”.

Securitization is another key tool in the arsenal of financial instruments mobilized by BOAD. By transforming part of its receivables into marketable securities, the most financial of the African development institutions increases its liquidity and its intervention capacities, while diversifying its funding sources. A significant operation was the securitization of UEMOA’s national debt, which raised 150 billion FCFA and was rated by the regional AAA rating agency.

“A third-party investor pays us a fixed rate and we transfer a performance (variable rate) leveraged swap to them,” summarizes Mr Ekue, who sees supporting evidence that the transfer of part of the portfolio has a rate of 6.6%. be a good deal. “Thus, we save our own capital. The advantage is that we no longer tie up our own funds for the duration of the commitment”

This initiative not only strengthened BOAD’s financial position, but also met with great success among investors, reflecting increased confidence in the bank. The second securitization operation in the amount of 100 billion FCFA is structured with a view to its implementation in the first half of 2024. It will concern part of the portfolio of receivables from the private sector.

Financial engineering enables the Bank of West African Development (BOAD) to finance its 2021-2025 Djoliba Plan by going above and beyond its own resources.

These various operations aim to increase the bank’s funding by 50% compared to the previous five-year period, while maintaining the financial balance and improving the institution’s credit rating.

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