IFAD becomes only UN agency to issue bonds

The International Fund for Agricultural Development intends to raise between $600 million and $700 million of its 12th replenishment in private placements to meet its fundraising goal of $3.5 billion by 2024 and help alleviate increasing world hunger. Last month, it issued its first two bonds totaling $150 million, which makes it the first United Nations fund, and the only U.N. body and specialized agency other than the World Bank Group, to enter capital markets in this way. According to Natalia Toschi, IFAD’s head of funding, the steps were necessary because official development assistance to agriculture has “remained rather flat” at 6%, even as world hunger is rising. The latest figures from the U.N. show that as many as 828 million people could not regularly consume enough food to fuel a regular active, healthy life in 2021, while 71 million people have been pushed into poverty since the war in Ukraine began. “It was just not enough. Public spending will not be enough. … If you put together the aftermath of COVID — whose effects are actually not yet fully embedded in the numbers — the food crisis that will come from the conflict in Ukraine, the fact that actually rural smallholder farmers are the most vulnerable to climate change,” Toschi told Devex. “You put all of these shocks together … there is no question that more funds are required.” IFAD issued a $100 million sustainable development bond with Swedish insurance and pension fund Folksam and a $50 million bond with the Dai-ichi Frontier Life Insurance Co. Ltd. The fund, which supports smallholder farmers globally through loans and grants, began building the internal infrastructure to issue bonds in 2014, Toschi said. That year IFAD began to leverage its balance sheet by borrowing via bilateral loan agreements. In 2018, the organization began “upgrading” its internal financial architecture with new policies and risk management offices. As a result, IFAD received credit ratings from Fitch, and Standard and Poors. “After we obtained the rating, we started relooking at our borrowing policy because at the time our borrowing policy only allowed us to borrow through bilateral loan agreements. But of course having the ratings in place and having a much stronger financial architecture in place gave us opportunities to go a step further into our diversification of funding sources,” Toschi said, noting that IFAD developed a new integrated borrowing framework in 2020. “That was groundbreaking because with that policy it allowed us to fund ourselves through another means which are indeed private placements, so private bond issuances issued to institutional impact investors. It was very clear under the integrated borrowing framework that IFAD wanted to increase its funding because unfortunately the needs are increasing instead of decreasing” she said. IFAD changed its articles to explicitly allow the fund to borrow, which market standards require, Toschi said. The organization also made it a point to hire colleagues from banks or other international financial institutions that had expertise not only in finance but the legal aspects of financial markets and who could help negotiate contracts. Throughout 2021, IFAD had discussions with institutional impact investors as it sought to build relationships with like-minded entities. Toschi said IFAD was specifically looking for partners which shared the fund’s mission and commitment to the Sustainable Development Goals and had obvious environmental, social, and governance policies. Both Folksam and Dai-ichi Frontier had been following IFAD for a while, Toschi said, which allowed the bond issuances to take place close together in June because they had already developed relationships with the companies. IFAD eyed bonds with longer maturities of seven or more years, Toschi said. The Folksam bond is for seven years while the Dai-ichi Frontier bond is for 15. “If you look at the investors that naturally like and need some long-term assets, these are typically insurance companies and pension funds because they have on their end long-term liabilities and so they need to match them with long-term assets,” Toschi said. “From a financial perspective, it’s a very good fit to have insurance companies and pension funds.” To secure the rest of the money needed for its replenishment, there are “a number of investors” IFAD plans to engage, which have already been approved by the board. “Funding through financial markets is a great opportunity for other aspects, in addition to finance. It really puts us in the playground with our big sisters but it creates a lot of synergies beyond the pure financing with the other IFIs, with the investors that maybe didn’t know us,” Toschi said. “It’s a great loudspeaker for what IFAD does. And it opens up a number of new venues and avenues. I’m noticing this and I think this is very important.”