The ALCB Fund is delighted to close a EUR 100 million guarantee facility, provided by KfW with funding by the European Financial Sector Deepening (EFSD+) programme, to enable more access to long-term local currency financing for African businesses.With a AAA-rated guarantor (KFW), providing local currency financing to the ALCB Fund should be an appealing treasury investment opportunity for local banks and institutional investors looking to diversify their investments. This will lead to the ALCB Fund further reducing its funding costs and FX frictions, allowing it to support a wider-range of sectors/issuers and continue its work in driving capital markets development on the African continent.
Many African countries have considerable development potential and favourable conditions for investment. A young population, an abundance of raw materials and growth markets offer a suitable environment for entrepreneurial commitment where there is long-term political stability and dynamic economic activity. However, financing is often a bottleneck because the local capital markets are structurally underdeveloped. KfW is helping here on behalf of the German Federal Government and the EU by providing guarantees to the African Local Currency Bond Fund (ALCB Fund), with which it has now signed a further framework agreement worth EUR 100 million. Backing for this comes from the EU, which provided a counter-guarantee in the same amount from the European Fund for Sustainable Development Plus (EFSD+) for the first time in October. "This is an important milestone, which is now being complemented by the framework agreement as a second building block," explains Michael Schuster, portfolio manager at KfW Development Bank's Equity Finance team. "With the EU, we have another strong partner at our side to achieve the goal of facilitating local currency refinancing for companies in Africa and mobilising private capital."
The ALCB Fund was established at the end of 2012 by KfW on behalf of the German Federal Government to support the development and expansion of African bond markets in local currency. For this purpose, the fund has since invested as an anchor investor in local currency bonds issued by African companies. These are companies from various African countries that raise capital via the respective local bond market. As an anchor investor, the ALCB Fund has the task of attracting private investors to participate in emissions. At the end of 2022, the fund had 47 active bond investments in 16 countries totalling around USD 148 million. KfW holds a fiduciary participation in the ALCB Fund on behalf of the German Federal Government totalling EUR 92.6 million.
KfW will now issue individual guarantees to ALCB Fund lenders under the EU counter-guarantee. This approach will help the fund to leverage private capital in local currency and will also allow for greater diversification of funding sources and lower costs. Ultimately, the fund will be able to expand its business activities - and thus its developmental impact.
Numerous projects in various countries have benefited from this in recent years, including Namibia: here, in 2022 the ALCB Fund initially invested USD 7.5 million and later another USD 4.7 million, both times in local currency, in initial issues of green bonds from Standard Bank Namibia, with terms of three and five years respectively. This benefited the bank's customers, who were able to access an expanded range of financial services for private individuals and companies. Climate protection and energy supply in southern Africa also benefited, as Standard Bank Namibia used the funds raised from the issues to finance renewable energy projects.
In Tunisia, on the other hand, small and medium-sized enterprises were strengthened. Here, the fund invested USD 1.8 million as part of an issue by the microfinance institution Enda Tamweel, which grants loans and microinsurance products to micro-entrepreneurs. Since its foundation, Enda Tamweel has supported around 900,000 micro-entrepreneurs and disbursed a total of USD 1.7 billion. Given the high level of economic uncertainty, the involvement of the ALCB Fund was a key factor in ensuring the success of the issue.
The fund was also able to achieve a structure-building effect through its USD 10.0 million investment in the West African telecommunications company Sonatel, which operates in Senegal, Mali, Guinea, Guinea-Bissau and Sierra Leone and reaches a total of more than 32.7 million people with its services - a considerable range of social stratification and an important contribution to infrastructure provision in the area of connectivity. This bond issue by Sonatel, which totalled around EUR 170 million, was the company's first in more than 20 years and the largest corporate bond issue ever in the West African Economic and Monetary Union.
As usual, the fund acted as anchor investor in the transaction and actively supported the recruitment of additional anchor investors to ensure full subscription of this large issue. Co-investors included local institutional investors such as pension funds and asset managers as well as international creditors, including development finance institutions.
Together with the EU, which is now supporting the programme with its counter-guarantee, the ALCB Fund will be even better positioned in the future to contribute, together with KfW, to ensuring that entrepreneurial success stories continue to be written in Africa and that economic prospects for the future are opened up.