Given the current situation, the issuance of BS would enable the Government to generate employment, provide food security, affordable housing and reactivate the economy.
By Andrés Kuan -Veng
Partner of the Corporate Area of Estudio Rubio Leguía Normand
3 billion dollars. This is the amount that will be assigned by the African Development Bank (ADB) to finance programs for access to health, basic goods, development of basic services and construction of infrastructure as remedies against the spread of the coronavirus, from the placement of the «Fight Covid-19» bond last week. The outstanding demand for this bond has raised significant expectations among the world’s leading institutional investors about the future of social bonds (BS), as this is historically the largest dollar denominated BS issued in international capital markets.
The astonishment is not unfounded. Since the first issue of a BS in 2015, the amount raised by the BAFD, at a time when investors seek to reduce their risk exposure and avoid volatility, sets an important milestone that demonstrates the positive trend and strong appetite of the capital markets for(SRI).
As fixed-income instruments, in the form of bonds, BSs can be issued by any entity with a credit rating (companies, local governments, development banks, etc.) and their particularity is that they exclusively finance or refinance projects with a positive social impact, called «Social Projects». There are four types of BS and their differences differ depending on the needs of the issuer and the social problems they seek to address or mitigate. Some of them expose the investor directly to risk, while others are more complex and are securitized and hedged. Part of their appeal as SRIs is due to the formal and rigorous process they must go through, which monitors and guarantees that resources are allocated 100% to meet the objectives of their issue.
Although Chile, Colombia, Ecuador and Mexico have issued BS for more than US$ 800 million, in Peru, the first issue of a BS for US$ 13 million was launched last year at the initiative of Banco Pichincha. Given the current situation, the issuance of BS would enable the Government to generate employment, provide food security, affordable housing and reactivate the economy.
The Government´s need for immediate liquidity without significantly affecting its debt levels and the interest of investors in performing SRI are the ideal combination to face this crisis.