AfDB, UK, 3 insurers close on risk-sharing deal for climate change

By Business a.m.

The African Development Bank (AfDB), the UK government and three globally recognised insurance companies have closed on an innovative risk-sharing transaction known as the Room to Run Sovereign.

The Room to Run Sovereign deal was structured with the intention of scaling up the AfDB Group’s commitments to climate finance by up to $2 billion and will go a long way in supporting African countries to meet their Nationally Determined Contributions, or NDC’s.

The support provided by the UK and private insurers in this risk transfer arrangement will allow the AfDB to reduce the risk capital currently consumed by its sovereign operations, thus creating headroom for new lending operations in priority sectors, particularly climate finance, to help support more mitigation and adaptation projects across the African continent.

The Room to Run Sovereign is a risk-sharing arrangement based on a subset of the Bank’s portfolio of sovereign loans for up to 15 years, where the insurance market, namely AXA XL, Axis Specialty, and HDI Global Specialty, is taking a $400 million first-loss tranche, while the UK’s Foreign Commonwealth and Development Office (FCDO) will provide a further $1.6 billion of cover, on a second-loss basis, on the same subset portfolio of loans. The transaction covers current and future loans from 11 borrowing countries of the AfDB’s non-concessional window.

“This is an innovative transaction that will optimise the balance sheet of the African Development Bank, while supporting its climate agenda. It showcases how the public and private sector can work together and complement each other,” said the AfDB Group’s vice president of finance and CFO, Hassatou N’Sele.