LSF: The long road to an African repo market
A groundbreaking repo facility for African sovereign Eurobonds was completed in time for a debut trade as COP27 took place. The road to closing the deal was far from simple.
A debut $100 million repo trade by the liquidity and sustainability facility (LSF) set up by the United Nations Economic Commission for Africa (UNECA) was completed as planned in time for a launch during the COP27 climate change conference in Sharm el-Sheikh this month.
The inaugural deal was closed with Citi at a rate for the bank of SOFR plus 65 basis points against a basket of Eurobonds issued by Angola, Egypt and Kenya, with funding support from Afreximbank and using a triparty repo platform designed for the LSF by BNY Mellon.
There were some minor complications on the target trade date of November 11 – US bond markets were closed for the Veterans’ Day holiday in BNY Mellon’s New York headquarters, while the lingering effect of a transport strike delayed the arrival of some Citi repo staff in its London dealing room in Canary Wharf.
These hiccups were nothing compared to a tortuous journey of over two years from the conception of the LSF as a platform designed to fulfil dual goals: enhancing the liquidity of African sovereign Eurobonds and incentivizing sustainable development investments in Africa, including green bonds.
The original concept for the LSF and its initial aim of using repo markets to improve African government bond liquidity and cut borrowing costs came from a discussion at a dinner in New York.
Vera Songwe, a former World Bank lead economist who is executive secretary of the UNECA and now chairs the LSF, talked to Scott Mather, who was then chief investment officer for US core strategies at Pimco, about the potential benefits for African borrowers of improved liquidity in their debt.
We want to engage with other investors in order to get the African asset class effectively re-rated. As for banks, the more the merrier
Mather also supervised environmental, social and governance (ESG) investments at Pimco and was one of its most influential managers. With his support, Pimco staff produced analysis to back the contention that improved liquidity and better access to Eurobonds could save African nations $11 billion in borrowing costs during the next five years.
Pimco also agreed to anchor the first repo trade for the LSF, whose foundation was announced at the COP26 climate change conference in Glasgow at the end of 2021.
However, in October this year, Pimco announced that Mather would be taking a personal leave of absence. This upended plans to have Pimco conduct the inaugural repo deal for the LSF and led to a scramble to find another counterparty.
Citi was able to fill this gap, and the broader global fund management endorsement that the LSF was seeking was helped when Amundi, Europe’s biggest asset manager, committed to joining the on-boarding process for the new platform.
That sponsorship was also helped by a personal contact, as David Escoffier, a veteran banker who is now CEO of the LSF’s secretariat, had worked with Amundi’s chief investment officer Vincent Mortier when they were both at Societe Generale.
Pimco is still likely to join the new African repo initiative, while other leading US and European banks are expected to follow Citi in handling trades, so private sector backing for the LSF seems assured.
Gaining tangible financial backing from governments has proved tougher for the LSF.
Afreximbank, the African multilateral development bank, was an early supporter, and its president and chairman Benedict Okey Oramah backed funding for the first repo trade and sits on the LSF’s board.
Slow to endorse
G7 and G20 governments, by contrast, were supportive of the concept of the LSF but slow to endorse its goal of on-lending some of their unused special drawing rights (SDRs), the reserves created by the International Monetary Fund.
As meetings with officials – including staff in the UK Treasury and prime minister’s office, and the French presidency – continued without actual commitments, the LSF’s board members decided to press on with establishment of the repo facility.
“We realized that they were engaging us at a high level, but it was not actually working,” the LSF’s Escoffier tells Euromoney. “It is a testament to the resilience of Vera Songwe that she didn’t give up. We knew that if we can do this, it is going to change the way markets work and it will be sustainable in the long run.”
He adds that the need for work to improve borrowing conditions for African sovereigns has become more pressing during 2022.
“Since the Ukraine crisis began, the amount of debt that Africa needs to refinance, recycle and issue has ballooned,” he says.
Escoffier also hopes that the extensive legal work that was led by law firm White & Case to establish the structure of the LSF and its repo platform will pay dividends in the future.
“We now have a programme that’s been reviewed and refined by some of the largest asset managers in the world, along with some of the largest banks in the world, and four external law firms,” he says.
The LSF currently offers refinancing of a universe of more than 120 African sovereign Eurobonds for up to a year with its repo facility and aims to increase its counterparties to around 20, with an optimal eventual funding capacity of $30 billion.
Dedicated emerging market funds are obvious potential users, but other end-investors such as insurance companies and pension funds are also being targeted.
“We want to engage with other investors in order to get the African asset class effectively re-rated,” says Escoffier. “As for banks, the more the merrier. What we hope is that in five years’ time the LSF will not be the biggest repo provider in Africa but instead will be a backstop, and that commercial banks will be more significant.”