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Nigeria, InfraCredit

Unlocking capital from domestic pension funds to finance infrastructure

Nigeria InfraCredit

Context
The Government of Nigeria recognises infrastructure investment as a key driver of economic growth. In spite of increased government funding, infrastructure investment remains insufficient, whilst falling global oil prices and heightened security concerns have negatively impacted the country’s economy. Nigeria’s commercial banks are constrained in providing long-term infrastructure finance, and dollar-denominated loans from international banks carry the uncertainty of exchange rate fluctuations. With assets of NGN 5.8tn (approximately $20bn), Nigeria’s pensions sector has been identified as a potential source of long-term domestic capital required to meet the country’s infrastructure needs.

Project
Investment by Nigeria’s pension funds in infrastructure-linked bonds has been constrained by a lack of precedent and insufficient credit quality to satisfy investors. In 2011, GuarantCo drew on its AAA credit rating to credit enhance Tower Aluminium’s bond issue, making it eligible for pension fund investment in a ground-breaking transaction for Nigeria’s debt capital markets. Following the Tower transaction, GuarantCo and TAF provided technical assistance for the Nigerian Securities & Exchange Commission (NSEC) and National Pension Commission (NPC), bringing both funds to the attention of the Nigerian Sovereign Investment Authority (NSIA). GuarantCo and TAF worked with NSIA to establish the Nigerian Infrastructure Credit Enhancement Facility, InfraCredit. InfraCredit is designed to provide local currency guarantees for corporate and project bonds issued across a range of sectors. GuarantCo committed NGN15bn ($50m) to InfraCredit through a Callable Capital Funding Facility Agreement, with NSIA providing NGN7.5bn ($25m) of paid-in equity. An expression of interest has been received from the Africa Finance Corporation to invest a further NGN7.5bn ($25m) of paid-in equity alongside NSIA.

Impact
It is anticipated that InfraCredit’s guarantees will derisk bonds issued by eligible companies, increasing the confidence of Nigeria’s pension funds to invest in long-tenor, Naira-denominated bonds thereby offering an alternative source of finance for vital infrastructure projects. InfraCredit’s preliminary domestic rating of AA+, issued by Global Credit Ratings, will enable it to crowd in domestic private sector investment. GuarantCo’s expertise and strong working partnership with NSIA made development of InfraCredit possible. A returnable grant from TAF to support feasibility studies and a capital markets training programme with NSEC and NPC was fundamental to establishing InfraCredit and wider efforts to institutionalise bond market reforms. The model has scope for replication in east Africa and south Asia.