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Bankers are hoping the avalanche of low-fee African sovereign Eurobond deals will provide a gateway to more-remunerative business, says Helmut Engelbrecht, head of investment banking in Africa for Standard Bank.
The African Eurobond business remains a decidedly low-fee affair, say bankers, who hope their labour will pay off with ancillary business.
This is despite the fact that African sovereigns pose unique challenges compared with higher-rated sovereigns with well-developed yield curves, and fewer bookrunners are prepared to undercut competitors with low fees in contrast to the pre-Lehman heyday.
According to Engelbrecht, global and regional investment banks still charge low fees, within a highly competitive environment for bookrunners.
Helmut Engelbrecht, Standard Bank
As Engelbrecht says: “While volumes and deal size are reaching record levels in Africa, they are still very small compared to global levels. There just aren’t that many issues when it comes to international sovereign debt, so investment banks are competing in quite a fierce environment.”
He adds: “So as it stands, Eurobonds are not a lucrative business for investment banks. More than anything, this is a way for banks to build up a reputation in a region which shows high levels of growth. Investment banks take on this type of low-fee work as it is a low-risk way to build up credentials in a region.”
In July, Zambia's $1 billion Eurobond landed the bookrunners a profit of $1.6 million. One of the lowest profits made from any sovereign Eurobond during the past four years came from Nigeria's issue in July of last year, with a fee of $0.3 million for the $1 billion issue.
“As Eurobond issues for Africa extends to parastatals and African corporates, the profitability from Eurobond should increase,” says Engelbrecht.
“Therefore, building a track-record in sovereign issuance will be a benefit for when the more lucrative Eurobond business comes to the market. Bonds are also a good way to get a feel for a market and build credentials while the rest of the market for investment banking – such as M&A and equities – is still developing.”
While eastern European sovereigns have, in recent years, developed a reputation as fee-sensitive, with Ukraine's famous zero-fee mandate in 2008 causing ire, African sovereign issuers are largely following in the footsteps of emerging-market issuers, who are seen as more price-sensitive compared with US issuers, and able to command aggressive terms to a global investment banking industry that is still arguably suffering from over-capacity.