Jury out on African Eurobonds amid Fed-tapering threat
A flurry of Eurobond issuance out of Africa was characterized by cheap funding as portfolio funds flooded Africa looking for yields, but as Fed tapering comes to the fore, African sovereigns might tilt back towards local currency bond markets.
Sub-Saharan African (SSA) countries reached record levels of hard-currency debt issuance in 2013 at $7.65 billion, as international investors hunted for yield amid a modest supply of sovereign paper in frontier markets – a bright spot in an otherwise weak year for African portfolio flows.
Six SSA countries are due to issue debut bonds in the international markets within the next few years, according to Moody’s. Cameroon, Angola, Kenya, Mozambique, Uganda and Tanzania are potential issuers, says the rating agency, though such predictions have failed to materialize in recent years as African debt-management practices remain a work in progress, and amid pricing fears.
Now there are 11 SSA countries on JPMorgan’s Emerging Markets Bond Index – South Africa, Mozambique, Senegal, Tanzania, Nigeria, Angola, Namibia, Cote D’Ivoire, Gabon, Ghana and Zambia – all which have raised at least $500 million on the bond market.
Nevertheless, as the Fed plans to ease up on quantitative easing, all-in borrowing costs for African sovereigns will rise, testing the price-sensitivity of issuers, though most-recently issued African sovereign debt is trading above par.
The deepening of the capital market access for African sovereigns marks an important milestone in African economic development, says Jan Dehn, head of research at Ashmore Group, an emerging markets investment manager, striking a bullish note on African sovereign market access as global policy rates normalize.
“Sub-Saharan African credits have become a permanent fixture for large institutional funds,” he says. “African credits are becoming institutionalized.”
Zambia, for instance, is set to raise $1 billion in the Eurobond market this year after the announcement it has renewed its contract with Deutsche Bank and Barclays to act as joint bookrunners for the latest issue.
However, while Zambia’s debut 10-year Eurobond issue was priced at 5.625%, the government could expect to see yields as high as 8.25% for the next issue.
“Countries with high debt-to-GDP ratios, including Zambia and Ghana – although often the foreign exposure can be as low as 10% – will find themselves in vulnerable positions as hard-currency funding costs increase,” says Peter Enti, partner and portfolio manager at Nubuke Investments. “Debt servicing will become difficult.
“But many of these countries actually get a lot of their hard-currency funding from bilateral, aid organizations – the likes of the IMF and the World Bank. This way, African sovereigns can borrow hard currency with low interest rates over long periods and the terms can be renegotiated if needed.”
He adds: “Moreover, Fed tapering will be measured. We see changes to be around 200 basis points only, which won’t have the huge effect on African sovereigns that some might be expecting.”
As hard-currency yields increase in Africa, sovereigns will be more tempted to turn back to issuing local currency debt, say analysts, though the appeal of dollar debt lies in establishing a sovereign’s reputation in the eyes of capital markets and establishing benchmarks for corporates as much as financing deficits.
Indeed, the local currency bond market in Africa remains markedly larger. According to Ecobank, local currency debt issuance in Africa reached $57.7 billion in 2012, with total local currency debt outstanding at $273.9 billion. South Africa, however, accounts for nearly half of all local currency debt outstanding.
“The cheap borrowing costs that African sovereigns once achieved is no longer available and sovereigns will start to look for alternative, cheaper methods of funding,” says Stephen Charangwa, portfolio manager at Silk Invest based in London.
“Local currency bonds will become more attractive again as Eurobond prices continue to increase in the current environment,” he says. “Although this will depend on the funding need, we might see a tilt back to issuing in local currency in Africa, and Eurobond issues might start to die down.”