COP27: Citi closes inaugural $100mn transaction with Africa repo facility, Amundi signs on

The Liquidity and Sustainability Facility (LSF) closed an inaugural $100 million repo transaction at COP27 with Afreximbank and Citi to improve the liquidity of African sovereign bonds, relying on triparty infrastructure developed with BNY Mellon and White & Case.

There are few mechanisms for converting emerging markets and developing countries (EMDC) sovereign bonds into liquid assets in a timely and affordable manner, and this results in paying a liquidity premium for market financing.

The Liquidity and Sustainability Facility (LSF) is a new mechanism to support the liquidity of sovereign Eurobonds and to incentivize the issuance of SDG (sustainable development goal) and green bonds. It was launched at the previous Conference of the Parties (COP), the United Nations Climate Change Conference.

The LSF is among the market mechanisms identified as a priority for managing liquidity risk by the Independent High-Level Expert Group report: “Finance for climate action: Scaling up investment for climate and development“.

According to the report:

African countries alone have a bond market exposure of about $160 billion and pay on average an additional 170 to 250 basis points due to the illiquidity of their paper. Removal of this liquidity premium would save them $2.7–4 billion each year. The lack of adequate market infrastructure for EMDC bonds can be solved by putting in place repurchase or repo markets, as is commonly available for other financial instruments. The total volume of repos traded daily in advanced markets is about $20 trillion for both sovereigns and corporates, suggesting that repo markets are a critical component of efficient market functioning.

The Liquidity and Sustainability Facility launched by the UN Economic Commission for Africa creates a repo facility for African sovereign bonds. It provides international investors with a rapid and transparent way of converting their securities into cash. This will attract new investors into the market, creating competition and diversification, and eventually drive down pricing. With the rollover possibilities of the repo, the tenure of investments could also be longer. As the repo market develops, it is expected that prices will better reflect true country risk and provide better debt transparency.

The LSF, working with Citibank, Afreximbank and Bank of New York Mellon, was planning to close its first deal in November 2022. Additional funding will be crucial to the long-term success of the facility, as there is no African Central Bank to provide the needed liquidity. The LSF is looking for funding from multilateral institutions, commercial banks and individual EMDC central banks who see the facility as a tool to improve their country’s creditworthiness.

“Citi just closed a first time transaction with the Liquidity & Sustainability Facility ( LSF) and with the extraordinary help of the African Export-Import Bank we now have a serious proof of concept,” wrote Jay Collins, vice chair for Banking, Capital Markets, and Advisory at Citi, in a LinkedIn post. “The documentation and pipes are there. We now need scaled participation from efficient funding sources and institutional investors.”

“As the originator of the idea and working for over two years to see the LSF happen, I’m very proud as it exemplifies a pragmatic and concrete illustration of what Africa can do for itself when taking the initiative to build the modern financial infrastructures that will boost its green recovery and foster sustainable investments in Africa,” said Vera Songwe, LSF chair, in a statement. “This is an important edifice for emerging markets generally and we hope we can grow the facility to support many more countries especially in these challenging times. It is a privilege to be supported in that endeavor by such leading international financial institutions.”

“Afreximbank is very proud to have supported the LSF from the start” said Benedict Okey Oramah, president and chair of the Board of Directors of African Export Import Bank. “This is needed and as players in Africa’s development field we know how strategic it is to have efficient and transparent market mechanisms in place so that a wider range of private investors can invest in African debt issuances and improve their liquidity. For years we talked and contemplated about the possibility of an Africa-focused liquidity instrument to support its bond issuances. Today, we start the journey in earnest as we transition from talk to action. With Africa’s liquidity premium addressed, African issuers can look forward to lower bond yields.”

“Innovation can support positive change, and we are proud to be part of this initiative to help the African economy achieve sustainable growth” said Brian Ruane, CEO of Clearance & Collateral Management at BNY Mellon, in a statement. “A well-functioning repo market enhances the liquidity and the attractiveness of sovereign debt which contributes to realizing new solutions that work beyond business and for society as a whole.”

“Now that the facility is up and running, we are pleased to offer refinancing for a well-defined universe of more than 120 eligible African Sovereign Eurobonds and for maturities extending up to one year,” said David Escoffier, CEO of the LSF Secretariat, in a statement. “The repo market now operates at the highest standards in Africa as in developed countries and the LSF is here in particular to incentivize green bond issuances.”

“We are pleased to be among the first asset managers to start the onboarding process on the platform,” said Vincent Mortier, CIO of Amundi, in a statement. “This initiative should increase the demand for African Sovereign Eurobonds, in particular green and climate bonds, which we see as a long-term investment trend for international investors.”


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