Africa FX special report: Still an appetite for African debt
The good times are not entirely over for issuers.
Emerging-market turmoil stemming from a raft of global issues has dented bond issuance from Latin America to emerging Asia. Africa has been hit hard too, though the picture here is a mixture of good and bad. Issuance has declined as global investors put their capital to work in mature Western markets offering growth and higher yields. Internationally marketed Sub-Saharan African sovereign and agency bond issuance totalled $2.7 billion in the first nine months of 2015, against $5.9 billion in the same period a year ago.
Yet there was good news, even in these darkening hours. While sovereign bond issuance declined over the period, volumes remained higher than those posted in three of the previous five years, according to data from Dealogic. Global issuance by African corporates also showed solid signs of life. Total bond issuance by regional firms topped $2.9 billion in the year to September 2015, against just $250 million in the same period a year ago.
To many, this is a clear sign that global institutions are happy to snap up African sovereign and corporate debt securities. Big recent deals on the sovereign side include the Republic of Zambia’s $1.25 billion amortizing bond printed in June 2015 - the country’s third international sale in three years. The sale came despite a sharp fall in the price of the country’s staple hard export commodity, copper. And in February, the South African electricity utility Eskom printed $1.25 billion worth of 10-year notes that brought in $4.5 billion worth of orders.
For years, conditions for regional bond issuance, both in local and hard currencies, were ideal. Rapid economic growth allied with near-zero US interest rates boosted risk appetite from offshore investors. Many saw the region as an easy way to divest their portfolio into assets bearing higher returns. African sovereigns rushed to raise funds in euros and US dollars, including first-time issuers such as Rwanda and Kenya. Almost all were over-subscribed: Ivory Coast was able to raise $750 million in dollar-denominated debt in 2014, despite defaulting on a similar obligation just three years earlier.
So what does the future hold? For sure, life has become more complex for Sub-Saharan African sovereigns, at precisely the time when many might have been looking to raise capital from investors to balance the books, invest in public services or pay down debt. Yet that doesn’t mean the good times are entirely over. Adedapo Olagunju, group treasurer at Nigeria-based Access Bank, says there is “still room for more Eurobond issuance in Africa, as most countries still have relatively low debt-to-GBP ratios”.
This will require some careful financial planning by sovereigns. Issuing in the Eurobond market may prove on the surface to be a cheaper source of funding than, say, printing local bonds that bear double-digit yields. But long-term borrowing in foreign currencies will likely prove “more expensive than initially anticipated”, says Olagunju, especially in cases where inflation in a sovereign issuer’s homeland is running at a higher rate than that of the borrowed currency. “As a result, some African economies have now turned to their domestic markets to raise funds,” he adds. “This expected increased liquidity in local market will boost foreign investor participation, assuming that the local currency in question remains stable.”
It is hard to predict the strength of demand for regional debt sales going forward. On the one hand we may, warns Alan Cameron, chief Africa economist at boutique investment bank Exotix, see a slow tailing off in US dollar-denominated issuance, except in cases where the “local markets are saturated and the need for financing is great”. Cameron expects to see sovereign prints completed this year in Ghana and Nigeria, though on the corporate side, sales are likely to be trickier. “With sovereigns trading at yields of 8-10%, the best that regional corporates can hope for is 12% – and earning a return of 12% on a hard currency is not easy to do,” he warns.
On the other hand, notes Jean Claude Karayenzi, managing director at Access Bank in Rwanda, bond issuance is “gaining some momentum in some part of Africa. In Rwanda for instance, the government last year started to issue bonds dominated in the local currency [the Rwandan franc] on a quarterly basis with tenors of up to five years to finance major infrastructures projects.” Adds Roosevelt Ogbonna, executive director, commercial banking, at Access Bank: “Several pension funds and hedge funds will continue to focus on Sub-Saharan Africa. They may be increasingly selective, but Africa is still a big growth story. Smart-money investors will continue to put their money to work in these transactions, as African credits will remain a strong play for years to come. But the region needs to develop deeper local bond markets to make sure it continues to grow.