DCM: A good time for African Eurobonds
Fed tapering will prompt rises in yields for African hard-currency debt, but this doesn’t mean that countries with strong economic fundamentals should hold off issuing.
Following a line of successful issues in the past two months, on December 6 Gabon became the latest and the last African country to issue a Eurobond in 2013. The sovereign’s second Eurobond (its first was a $1 billion deal in 2007 with an 8.2% coupon) was the largest frontier market bond from the region so far.
The deal went well. The $1.5 billion amortizing 10-year issue was priced at the tight end of guidance to yield 6.375%, less than the 7.875% Ghana paid in its July 2013 offering and the 6.625% Rwanda achieved for its debut issue in April.
With Fed tapering due to begin, however, African countries might find it difficult to achieve pricing as good as this, as the risk-on environment that emerging markets have benefited from globally begins to recede. Investors might start redirecting their money to safer, developed markets where interest rates might start rising.
Following Fed chairman Ben Bernanke’s speech in May that threatened the beginning of the end of monetary easing, yields on African Eurobonds soared and Nigeria and Ghana paid a premium for their deals in June. Some analysts have argued that Kenya, which has been making preparations for its debut Eurobond issue for some time, should expect to pay between 7% and 8% when it comes to market.
But this does not indicate the end of a positive run for Africa. Gabon’s deal shows just how interested investors are in the positive stories that African sovereigns have to tell.
With low inflation and exchange rate stability, investors are attracted to Gabon’s strong economic fundamentals. The previously oil-reliant economy is making important steps to diversify its revenue by boosting infrastructure.
The fall in the interest rate between the debut issue in 2007 and its latest offering means that Gabon can reduce its borrowing costs as well as extend the maturity profile of its debt, reducing roll-over risk. Over $600 million of the amount raised will be used for a partial buyback of its existing 2017 bond. Kenya might not perform as well as some of its African peers that issued in 2013 in part because of its poorer economic fundamentals – not just because of Fed tapering.
Quantitative easing encouraged a rush of money into emerging markets, with yield being the main attraction, but Fed tapering will force investors to look much more closely at these countries’ fundamentals. African sovereigns with strong economic fundamentals poised to issue should persist with their plans and not be put off by the onset of tapering. Although yields are set to rise, African countries will still do well if their story supports their issues.