Alecta, the biggest pension fund in Sweden with more than SEK1trn (€100bn) of assets, has just signed a deal to invest $100m in a new blended finance social bond, with the proceeds set to flow to various health, financial inclusion and renewable energy projects in emerging markets around the world.
The bond, dubbed “Financing For Healthier Lives”, is issued by a non-profit company which is backed by emerging markets asset manager responsAbility, and the issue has been arranged by Danske Bank.
The blended-finance element comes from the fact that up to 25% of any overall loss over the bond’s life – 5.5 years – will be absorbed by Sida, Sweden’s government agency for development cooperation, which has issued a guarantee to that effect.
The pension fund said it was the first time Sida was guaranteeing a privately-funded social bond.
Kalle Hellman, Sida’s deputy head of unit for guarantees and catalytic financing for development, said: “The government has tasked Sida to mobilise private capital for development and by issuing a guarantee to responsAbility, Sida reduces the risk for investors, which in turn reduces the uncertainty for them to invest in new markets and environments.”
There are only two investors in the bond, the other being Swedish company AFA Insurance, which is taking up the remaining $52.5m of the issue.
The social bond will provide lending to underlying borrowers located in Africa, Asia including the Pacific region, Central and South America as well as Eastern European countries, according to Alecta.
It will only include investments supporting improved access to health and sanitation, the reduction of pollution through renewable energy, sustainably produced food, and access to finance, the pension fund said.
Julian Jonsson, portfolio manager at Alecta, told IPE: “We were having discussions about the creation of this bond before COVID, after the arranger approached us with the idea. We made quite clear that in order for us to participate, we would need a certain size,” he said.
For this reason, it was decided to sell the security directly to just two institutional investors rather than issuing it to the broader market, according to Jonsson.
Half of the proceeds of the bond were distributed when the agreement was signed or soon afterwards, to borrowers already identified by responsAbility, Jonsson said, with the remaining half to be distributed in September.
“I think the key thing for Alecta with this type of investment is that, because the pension fund doesn’t have its own presence in the development world, we need to work with partners who have local presence and have an understanding of the area, and are able to verify that the funds are being used according to our expectations,” he said.
The bond will provide returns of US dollar 6-month Libor plus 2%, he said.