CAF in the past, present and future
CAF – Development Bank of Latin America (CAF) is about to celebrate its 50th anniversary. Gabriel Felpeto, chief financial officer at CAF in Bogotá, reflects on the supranational’s evolution as a lender, recaps its emergence as Australia’s first Latin American issuer, and discusses the development of green and social bonds. CAF has been active in the Kangaroo market since 2013, and now has more than A$1.3 billion (US$930.3 million) on issue (see chart).
Presumably sustainable development is more important than ever in Latin America in a period of uncertainty for the region. What is CAF’s role?
CAF is a competitive financial institution. It is client-oriented, sensitive to social needs and supported by highly specialised staff. CAF predominantly focuses on infrastructure and energy projects, which represent about 60 per cent of the loan portfolio.
One example is the Panama Canal expansion. In addition to US$300 million in financing for the construction phase, CAF provided knowledge and support to reduce the project’s carbon footprint, define the logistical road map and promote the productive development of, for example, the coffee growers of the canal’s basin.
Other recent projects include three subways in Lima, Quito and Panama City, and various urban highway projects across Latin America. As well as having a focus on infrastructure and energy, other sectors in our loan portfolio that are worth mentioning are social development and water sanitation.
What advantages does CAF bring to the table as a lender to the types of project you describe?
Another very important component of our participation is that CAF will generally lend longer than private-sector investors. These types of lenders have a focus out to 10 years while we can lend to 20 years and sometimes even longer. In most cases the borrower is either the sovereign or is guaranteed by the sovereign. These are the main borrowers and also the shareholders.
We pass on our low cost of funding to our clients. Public-sector investors may participate in other projects, but normally at a higher rate.
CAF issued its first green bond in 2018. Are you seeking to build out issuance of themed bonds and, if so, is a Kangaroo green bond on the cards?
We began issuing these types of instruments in 2016, with our first socially responsible investment (SRI) bonds, known as “waterbonds”. We executed three green bonds in private-placement format in 2018 and, more importantly, we expect to issue our first public green bond this year. Having processes and frameworks in place that are in line with market standards is very important for us.
We have still not determined the market for our inaugural green-bond transaction. Seeing the excellent results from other issuers that have already issued green bonds in Australia, I would not be surprised if CAF elects to issue a green bond in the Australian market in the near future.
Why have you gone for a green, rather than a social or sustainability, bond as your first public deal in this space?
In a world where traditional global alliances and trading links are shifting, CAF has been working hard to promote a stronger relationship between Latin America and Asia. What does this involve, particularly in capital markets?
More recently, CAF’s SRI bonds have been targeted at Asian investors which have significant demand for these types of instruments. We also issue private placements in a variety of Asian currencies on a regular basis and tenors that satisfy investors’ demand. We issue constantly in the Uridashi market – which was the target market for our first privately placed social bonds.
Let’s talk more about funding. What proportion of funds does CAF raise via the bond market, which currencies does it target and where do Australian dollars fit in?
The main reason for the array of currencies is investor diversification, which is very important for CAF and the reason we have several capital-market programmes in place around the world. Currencies outside of US dollars represent more than 59 per cent of our total bond funding. In any market we decide to access, we make it our goal to be a regular issuer and to create a complete curve – as we have done in Swiss francs and euros, for instance.
We plan to replicate this in Australia given the importance of this market for us. Although Australia only represents about 5 per cent of our current funding, we hope to increase this number in the coming years.
The supranational sector is dominated by triple-A names in global capital markets. As a smaller-scale supranational issuer with a different rating profile, does CAF tend to attract a different investor base from some of its peers? What is CAF itself targeting as a buyer base?
There is a difference in yield pick-up, given CAF’s lower rating, but the specific investor names are comparable. For example, central banks and official institutions took around 50 per cent of our latest US dollar global deal – a level that is similar to a triple-A rated orderbook.
When we debuted in the Australian dollar market in 2013, only triple-A rated supranationals had previously issued. But we believed we had a good story to tell and that story proved to be one that resonated. We achieved a pair of firsts in the Kangaroo market: we were the first Latin American borrower and the first supranational issuer that is not rated triple-A.
"We have the impression that there is demand for more issuance from Latin America and we know there are more issuers from the region that would like to access Australian dollars. However, these issuers have not, to date, fit with the conservative nature of the Australian dollar investor base."
It has been suggested that there is an investor preference for triple-A names in the supranational, sovereign and agency sector in Australian dollars – though it is hard to tell based on issuance volume, as of course the triple-A names have the biggest programmes. What is CAF’s experience in this regard?
There aren’t many double-A rated supranationals in the world, and what is relevant for investors is that we offer relative value compared with our triple-A rated peers. In addition, we believe liquidity will continue to improve as investors see that issuance is becoming more regular.
Some SSAs report that Australian investors ask for a liquidity premium from smaller issuers. Is this something you have encountered?
Speaking of CAF’s Australian dollar debut, what were your goals when entering the Kangaroo market – and why did it become a target?
It is also important to highlight the considerable growth that CAF has experienced with new shareholder members joining the bank over the years, to the extent that in the last 10 years annual growth in our loan portfolio has been 6-7 per cent. This means finding new funding markets, such as Australia, has become even more important for our funding programme, which was close to US$5 billion in 2018.
CAF now has more than A$1.3 billion outstanding in the Kangaroo market across five bond lines, as well as the debut deal that has now matured. Most of its issuance falls into the 2023-27 maturity window, however. How close do you believe you are to building a curve in Australian dollars?
How has the Australian market changed since 2013, in CAF’s experience?
We are very pleased that since our inaugural issuance we have seen other Latin-American issuers access the Kangaroo market.
We have the impression that there is demand for more issuance from Latin America and we know there are more issuers from the region that would like to access Australian dollars. However, these issuers tend to be lower-rated and higher-yielding and have not, to date, fit with the conservative nature of the Australian dollar investor base.
CAF turns 50 this year and is hosting a dealer event in Sydney as part of the celebrations of this milestone. What else is taking place globally to mark the occasion?
CAF’s 50th anniversary will focus on igniting a much-needed discussion on the main obstacles in the development of the Latin-American region and the possible solutions.
Which are the main ways CAF has evolved over its half century in existence?
With a loan portfolio of almost US$25 billion, we have become one of the main multilateral lenders for infrastructure and energy in the region. We have a deep commitment to increasing regional productivity and living standards through international cooperation designed to strengthen infrastructure, logistics and integration.
SSA Yearbook 2019
The annual guide to the world's most significant supranational, sovereign and agency sector issuers.