Saturday, 21 July 2018

African pause

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Sub-Saharan African supply has stalled since 2007's groundbreaking Ghana and Gabon debuts, with political problems in Kenya offering a timely reminder about the risks of doing business there. But there are still some signs of life in Africa’s debt markets. John Weavers reports.

After the appalling violence in the Republic of Kenya following the disputed presidential election at the end of 2007, investors might have been forgiven for turning their backs on the country. A planned Eurobond was postponed, while S&P cut its sovereign rating to B from B+ and Fitch lowered its B+ ratings outlook to negative.

Yet it is looking to launch and price its delayed US$500m debut Eurobond in late 2008 or early 2009, and the signs are positive that it will receive strong support. After all, Safaricom's (Kenya's leading telecom company) KSh50bn (US$765.9m) June IPO came to the market almost as soon as the domestic situation had calmed down but was still 4-5 times oversubscribed having attracted huge foreign demand.

The coalition government has helped stabilise the country, and in August S&P raised Kenya's B rating to positive from stable. "Since then the political agreement has held and the economy has picked up," said Razia Khan, regional head of research, Africa, at Standard Chartered. "However, the balance of risks now lies with the global picture rather than domestic factors. The current international environment makes this an interesting time for any African issuance".

The forthcoming launch will be sub Saharan Africa's third sovereign Eurobond in the last 30 years (besides South Africa) following the well received 8.5% US$750m 10-year from Ghana (NR/B+/B+) in September 2007 and the Gabon (NR/BB-/BB-) 8.20% US$1bn launched 10 weeks later which represent obvious comps for any the new bond.

Kenya had provisionally targeted a US$300m debut to finance infrastructure development and took the unusual step of placing an advertisement in the Financial Times on November 12 2007. This stated the government's aims as being to "diversify its investor base, establish a liquid pricing benchmark as well as enhance the Republic's reputation and visibility among the international investor community".

Kenya could yet be overtaken by Uganda (NR/NR/B), another country that has experienced its fair share of troubles, which is also contemplating a debut Eurobond, according to Fitch. The ratings agency has said that the government would use any money raised for infrastructure spending, to tackle growth-constraining power shortages and improve the country's road and transport systems.

With average real GDP growth of 7.6% in the five years to 2007 and the reduction of the debt burden to 26% of GDP following external debt relief, it is not hard to see why investors are attracted to the country.

But besides Tanzania and Zambia, which are both rumoured to be potential Eurobond visitors, Africa has no other prospective issuance in the pipeline – adding to the appeal of the deals that are on offer.

Even Nigeria’s benchmark deal, mandated to Citi, JPMorgan and Merrill Lynch back in 2006, looks extremely doubtful. Its planned US dollar roadshow (NR/BB-/BB-) was pulled as local legislators voiced their opposition to new external debt. Dissenters pointed to the country's experience with its Paris Club liabilities, which more than doubled to US$30bn owing to accumulated arrears and penalties before being retired.

Instead the Nigerian Finance Ministry has since announced plans for a US$500m equivalent, naira denominated 10-year Eurobond to finance infrastructure spending.

A naira denominated Eurobond should attract significant investor interest led by dedicated EM, fixed income and local currency investors. Such a bond would continue the trend by more mature emerging market economies who have issued in local currencies with offerings from Brazil, Mexico and Turkey for example all going well," noted Stuart Culverhouse, chief economist at Exotix.

A new 10-year naira Eurobond would pay a little less - perhaps 50bp-100bp than local naira bonds - to reflect the greater security from a bond covered by international rather than domestic law. It also makes sense from a liquidity management perspective, said Culverhouse, given that the money raised will be spent on internal infrastructure projects. An international issue will enable the government to tap the market for a greater size than it can do domestically.

African debt markets may prove more active on the corporate side, particularly in the banking and telecoms sectors, once conditions improve or more sovereigns establish themselves in the market. "The corporate sectors in Kenya and Nigeria are pretty deep and strong, but the global environment is hardly favourable at the moment. So many potential issuers are seen waiting for a decline in risk-aversion before coming to the market," Culverhouse said.

Ghana Telecommunications (GT) showed the way when it became the first corporate issuer in Sub-Saharan Africa, excluding South Africa and Nigeria, in December 2007 following the sovereign. GT's senior secured US$200m five-year note pays an 8.5% coupon and amortises annually in five equal installments of US$40m for an average life of 2-1/2 years.

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