Opec Fund enters capital market with a modest but attractive proposition

$50m trade first step in larger plan

A small private placement would not normally spike interest, but when the Opec Fund for International Development sold a $50m trade earlier this month, it marked the arrival of a brand-new supranational borrower to the capital markets.

‘We had planned to come to the public market first in October but we felt the market volatility at the time was not really appropriate for a debut issuer,’ said Martine Mills Hagen, head of funding at the Opec Fund. ‘So we decided to put that transaction on hold until the first quarter of next year and go ahead with a private placement, which is also very much part of the funding strategy.’

The trade was sold to a single Asian-based investor, that ‘was keen to invest now rather than wait for the public transaction next year,’ said Hagen. The three-year floating rate note was priced on 1 December at a spread of the Secured Overnight Financing Rate plus 75 basis points via Nomura and came with a sustainability label.

The Opec Fund has been preparing to make its entry into the capital markets for some time. In 2019, the ministerial council of the Fund approved ‘Strategic Framework 2030’ which provides a mandate from its member countries to become a more visible multilateral development bank with a larger development footprint. The Fund then hired Hagen, formerly of the Asian Infrastructure Investment Bank, as its head of funding at the end of 2020, before receiving its first set of credit ratings in the summer of 2021. It then set off for to meet investors earlier this year.

‘Despite being set up in 1976, we are not particularly well known to investors as we have not been in the capital markets until now,’ said Hagen. ‘Having access to funding from the capital markets as well as from member countries, similar to other MDBs, provides us with financial sustainability for the long-term.’

In total, the Opec Fund met more than 90 investors through a combination of virtual and in-person meetings. ‘Many target investors we were speaking to had not heard of the Fund, so it really was a case of explaining the history of the organisation and the projects we are involved in and our credit fundamentals,’ said Hagen. Nevertheless, the feedback they received from investors was ‘very positive’ who ‘see the quality of the credit,’ she said.

The Opec Fund will not be a huge borrower, with an approved funding programme of up to $3.5bn of total outstanding long-term debt between 2023-25. But it will be an important borrower for investors to gravitate towards with an increasing focus on impact investing. The Fund has developed a sustainable development goal bond framework aligned to the UN’s SDGs that will allow it to issue green, social and sustainability bonds. The supranational will also be a diversified borrower with issuance of benchmark bonds as well as private placements and euro commercial paper. It will also eventually issue in different currencies, although the focus for benchmark transactions will be the dollar. A benchmark transaction will be anywhere from $500m upwards and it will aim to issue an annual public benchmark for the first few years.

While the Opec Fund is rated just below the top tier supranational borrowers with ratings of AA+ and AA by Fitch and S&P, respectively, the aim is for the Fund to sit among the top names. ‘It is important to remember that we have been part of the MDB community for almost half a century,’ said Hagen. ‘We co-finance projects with many of the well-known MDBs that already issue debt and aspire to be a triple-A credit down the line. With our strong credit fundamentals, it is natural for us to position ourselves as a high quality MDB issuer.’

Hagen is no stranger to launching a supranational borrower to the capital markets, having set up the funding programme for the AIIB and led its entry into the capital markets in 2019. This will be a different challenge for Hagen, with a smaller funding programme and a lesser-known organisation, but, like with AIIB, investors will warm to it and view it as an important borrower with a strong mission.

Burhan Khadbai is Head of Content at OMFIF’s Sovereign Debt Institute.

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