Tapping international capital markets for a creative approach to West Africa’s housing shortage
Earlier this year, a financial institution in West Africa completed a transaction to raise money for mortgage lending across eight countries, where rapid population growth combined with one of the fastest rates of urbanization in the world have left a massive need for more affordable housing.
The sale of these bonds might have been unremarkable, if not for the fact that they were rated Aa1, a level more commonly seen in developed country offerings. The high rating generated robust demand and helped ensure the 205 million Euro offering was fully subscribed, ultimately generating billions of CFA Francs — equal to millions of dollars — for affordable mortgage lending from Senegal to Niger.
The bonds were issued by a U.S. trust for the benefit of Caisse Régionale de Refinancement Hypothécaire de l’UEMOA, or CRRH-UEMOA, a financial institution that works to provide liquidity for long-term mortgage lending to banks in the West African Economic and Monetary Union. A staggering 60 percent of the people in this region — comprised of Senegal, Cote d’Ivoire, Togo, Mali, Benin, Niger, Burkina Faso, and Guinea Bissau — live in substandard housing.
CRRH-UEMOA is partly owned by a collection of development institutions, including West African Development Bank, International Finance Corporation, ECOWAS Bank for Investment and Development, and Shelter Afrique. But it was the involvement of DFC, the U.S. International Development Finance Corporation, that made the bond sale so successful.
DFC guaranty elevates bond rating
Under the innovative structure of the transaction, DFC, the U.S. Government’s development finance institution, provided a 20-year, $356 million guaranty of U.S. bonds to be matched with a parallel issuance by CRRH-UEMOA in Togo. This dual structure enabled CRRH-UEMOA to benefit from rates near U.S. Treasury long-term bonds, and as a result, obtain the long-term financing it was seeking at a competitive price, ultimately raising 36 billion CFA Francs, equivalent to about $65 million. The Aa1 rating on the bonds compares with a Ba2 that Moody’s had assigned to CRRH-UEMOA in 2021. While there is a market for emerging-market corporate bonds with speculative grade ratings, they tend to carry higher interest rates and shorter tenors.
In a statement announcing the transaction, Moody’s said the elevated Aa1 rating was “based solely upon the credit strengths” of the DFC guaranty.
“The issuer’s credit profile is underpinned by the strong guaranty provided by DFC,” said Christopher Bredholt, Moody’s Vice President and Senior Credit Officer. “The transaction will materially increase capital for home loans to low- and middle-income households in West Africa.”
DFC’s transformative loan guaranty was the culmination of an extensive whole-of-government collaboration with the U.S. Agency for International Development and Prosper Africa to structure the transaction.
Funds raised through this transaction are expected to meet the mortgage finance needs of thousands of low- and middle-income families over a three-year period.
Making mortgages more affordable
Housing is a fundamental need that is in short supply across much of the world. The World Bank estimates that by 2030, some three billion people, or 40 percent of the global population, will need new housing. People who live in substandard housing often lack clean water or adequate sanitation and are at risk of serious illness. They are also more vulnerable to severe heat, flooding, and other impacts of climate change.
Across Africa, where 60 percent of the population is under the age of 25, demographics and a migration toward cities have made the housing crisis especially severe. OECD, the Organisation for Economic Cooperation and Development, says Africa’s population is expected to double by 2050 and that most of that growth will be absorbed by urban areas. By 2050, OECD projects, Africa’s cities will be home to almost one billion additional people.
Addressing this worsening crisis will require a multipronged approach, including building more housing and making that housing more affordable. Mortgage financing for housing in West Africa is limited, with loans typically carrying short tenors of less than eight years. While longer tenor mortgages would make homes more affordable, many West African banks are unable to raise the necessary capital because of poorly developed local capital markets.
By incorporating financing from the U.S. and European capital markets, the DFC transaction offers a model for mobilizing capital in a region where institutional investors have limited exposure. At a time of significant volatility for emerging market debt, the DFC guaranty also paves the way for emerging market businesses to access deeper capital markets in the future.