AfDB Approves $1 Billion Exposure Exchange with Asian Development Bank to Boost Sovereign Lending Capacity

Exposure exchanges between multilateral development banks involve a synthetic exchange of sovereign exposures in a risk-neutral manner, addressing single obligor constraints and portfolio concentration.

African Development Bank‘s Board of Directors have greenlit a significant exposure exchange with the Asian Development Bank, amounting to $1 billion.

The strategic transaction aims to support the African Development Bank‘s efforts in unlocking additional sovereign lending capacity while reinforcing its capital adequacy metrics.

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This marks the second exposure exchange agreement executed by the African Development Bank, building upon the success of a previous deal with the Inter-American Development Bank and the World Bank Group’s International Bank for Reconstruction and Development back in 2015.

Exposure exchanges between multilateral development banks involve a synthetic exchange of sovereign exposures in a risk-neutral manner, addressing single obligor constraints and portfolio concentration.

Given the challenges posed by the Covid-19 pandemic and the spillover effects of the Russian-Ukraine war on most African countries, this new exposure exchange allows the African Development Bank to continue supporting its regional member countries effectively.

Moreover, the exchange aligns with the G20 Action Plan, seeking to optimize balance sheets of multilateral development banks without significantly increasing risk or negatively impacting credit ratings.

Despite the African Development Bank‘s current prudential ratios complying with statutory limits and maintaining a AAA credit rating from S&P Global Ratings, this second exposure exchange enables the Bank to provide additional financing to African nations.

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Specifically, it allows for increased countercyclical lending while adhering to internal single obligor limits and concentration ratios.

Max Ndiaye, Director of the Syndications, Co-financing and Client Solutions Department at the African Development Bank, emphasized the importance of this operation, showcasing how multilateral development banks embrace the G20’s call to collaborate and adopt innovative approaches for risk transfers, ultimately maximizing capital for increased development lending.