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SSA corporate funding: Sub-Saharan Africa set for more equity deals, survey finds

Sub-Saharan Africa’s capital markets continue to make up a tiny proportion of overall global investment banking activity. Investment banking fees for the region in the first eight months of the year totalled less than $200 million, a fraction of a global fee pool of close to $60 billion, according to data from Thomson Reuters.

Key points
• Biggest corporates prefer equity to debt issuance
• Vast majority of company funding executives say Africa’s capital markets are open for business
• Treasurers express strong preference for local over foreign currency funding
• Lack of knowledge/education about funding opportunities is one of the biggest barriers to growth of region’s capital markets

Despite an uptick in activity, especially in the sovereign bond sector, capital markets business from SSA corporates in particular remains sparse, even as more local and international investment banks look to build up their offerings within the region.

Bolaji Balogun, chief executive at Chapel Hill Denham, a leading independent investment bank in Nigeria, says: “Large African entrepreneurial businesses are traditionally family-owned, and issues around dilution and control do exist. Bank debt has been available to our better companies and is becoming available in larger amounts. Corporate debt through the bond market hasn’t necessarily been as widespread for a number of reasons, be it regulation or unfamiliarity with the way the process works.”

However, the results of Euromoney Research Group’s pulse survey on SSA corporate financing suggest that companies in the region are increasingly looking at the potential to access the capital markets.

During July and August, 85 large and mid-sized companies in the SSA region took part in the Euromoney pulse survey.

Some 69% of funding officials at those companies consider Africa’s capital markets as being open to them should they wish to issue equity or debt. Among larger corporates, that figure is 83%.

Is funding through the capital markets largely closed off to African corporates? (All respondents)

The number of IPOs in SSA has been a big disappointment for a number of years, with only nine taking place in 2012 and eight in 2013. This year however, is more encouraging, with seven deals having already been completed. That could be about to change. Of the bigger corporates surveyed by Euromoney, 67% said that they were likely to prefer to issue equity over debt instruments. For all respondents, 52% of funding officials and company executives prefer equity as a potential funding source.

2. What is the most important product/service banks offer you in/around the funding space? 

Balogun says: “I expect to see an increasing amount of equity issuance in our core markets. There have been reasonably small volumes of capital raising done in public equity markets by major listed companies for a period of four to five years. Some of that has been occasioned by the domestic financial crisis, which really took effect in the middle of 2009. We are seeing an increasing number of international investors, especially on the domestic stock markets.”

Debt issuance from companies in the region had been growing in recent years. In 2012, completed deals in the SSA corporate debt capital markets were valued at $4.7 billion. In 2013 this rose to $6.9 billion. So far this year, has seen a sudden slow down. Just $250 million-worth of debt has been issued.

The shift in sentiment towards equity financing is in part explained by the survey’s findings that some 69% of respondents expect yields on SSA corporate debt to rise over the next 12 months. Over 20% of all companies taking part in the survey expect yields to rise over the coming year.

That rise in yield could, however, encourage renewed interest in SSA corporate bonds from international investors. Rob Hersov, founder and chairman of Invest Africa, calls a recent debt issue for Helios Towers, a telecom tower operator, a “game changer. The issue was 2.5 times over-subscribed and could signal a whole new wave of African registered corporations turning to international debt markets to aid growth ambitions. As the global hunt for yield continues, SSA is the next market for the fixed-income players, and large African corporations should get excited by their potential arrival.”

Policymakers, governments, central banks, development banks and investment banks are all working hard to promote the growth of local capital markets in the region. For most of its corporates, this development cannot come quickly enough.

The equity capital markets across SSA are growing. In both 2012 and 2013 over $4 billion of deals were done. So far this year, that figure is already in excess of $6.4 billion.

3. Is it better for SSA corporates to raise funds in local or foreign currency? 

Close to 60% of all respondents say it is better to raise funds in local, rather than foreign, currency. Surprisingly among larger corporates, which would probably find it easier to access foreign-currency funding, that preference is even more pronounced, at 75%.

In a market where bank finance continues to dominate, bank loans remain the most important product or service that corporates receive from the financial sector. But only 51% of all respondents, and 42% of the largest corporates, nominated bank loans as their first priority.

Among the larger corporates, 25% say helping them to access international and regional markets is the most important service banks provide. For all respondents, the most important service after bank loans is education on new and nontraditional funding options. This suggests that many medium-sized African corporates are looking for help to diversify their funding away from traditional bank lending.

Unsurprisingly, in a region which continues to suffer from geopolitical risk, more than 50% of respondents say political and security risks are the biggest threat to the development of capital markets in sub-Saharan Africa.

Ishmael Nwokocha, general manager of telecommunications company MTN’s treasury in Nigeria, warns that the risks can be over-stated.

“Political risk is viewed differently by the international community than is it in Africa. There needs to be clear understanding and differentiation of political from security risk. Physical assessment of the environment and the feeling on the street also show that the security risk is exaggerated abroad.”

Those involved in trying to promote the growth of these markets will note with interest that 18% of funding officials taking part in the survey believe that a lack of adequate policy is the main barrier to growth.

That’s a sentiment that Balogun at Chapel Hill Denham agrees with.

 4. What are the biggest risks to the development of the capital markets in Africa?

“Very few governments recognise the importance of their capital markets; they are focused on the banking sector,” he says. “They see capital markets as ‘nice to have’, not ‘need to have’. Regulations are formed with banks in mind. There isn’t the same understanding or urgency as there is around making policies for the banking sector.”

Perhaps the most interesting finding of all is that, after political risk, treasury executives see a lack of education among potential corporate issuers as the next biggest threat to the development of SSA capital markets. This suggests that investment banks looking to build capabilities in the region would do well to provide education, as well as product expertise, to potential issuers.

Ansigar Casmir, finance manager at Panasonic Energy Tanzania, highlights the difficulty for companies in finding their way through the fledging capital markets.

“The laws are very new so there is a lack of information for companies trying to access capital markets,” he says, lamenting the limited number of experts available to offer advice.

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