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Tuesday, 12 December 2017

Down but not out

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  • Down but not out

Debt issuance from sub-Saharan Africa has slumped thanks to high-profile questions of impropriety and the commodity crisis. But the fundamentals have not really changed.

It reads like the plot of one of the more outlandish Marx Brother movies. At the end of June last year, Adriano Maleiane, finance minister of Mozambique, played havoc with the markets, when he was quoted as having told parliament that the repayment period for an US$850m 6.305% seven-year bond the government had sold to build a state tuna-fishing fleet and bolster maritime security was too short.

The bonds promptly went into as a tailspin as markets presumed that a restructuring was imminent, and yields shot up above 10% as Maleiane back-peddled on his comments as rapidly as he could. There had been translation errors, he said, and of course Mozambique would stand by the state guarantees to Ematum, a government agency SPV. Nothing to see here.

By September, all had calmed down. The government paid the US$103.3m that was due – US$26.8m in coupon, the remainder the first payment under the amortisation structure – but the damage had been done. Although the bonds are now trading at 80 cents in the dollar, hardly the case if investors had genuine concerns about repayment, any other fallout has been contained and remains localised.

But there has been a growing unease about debt sales from sub-Saharan Africa elsewhere too. There have been political problems in South Africa. The shock dismissal of Nhlanhla Nene, South Africa’s finance minister, in the run-up to Christmas caused the sovereign’s September 2025 notes to widen by 80bp and have put all thoughts of issuance there on hold. And, thanks to the drastic fall in the price of oil, Nigeria is currently trying to change the payment schedules for N167.5bn (US$842mn) of domestic debt, with a meeting scheduled for February 23.

Tarnished

Once one of the darlings of the EM world, there is a distinct tarnish to the shine that investors had become used to for names from sub-Saharan Africa. There was little in the way of supply last year. Sub-Saharan Africa SSA debt issuance hit a paltry US$15.5bn in 2015, according to Thomson Reuters. That was 22% down on the previous year and the lowest volume since 2012.

There are no sub-Saharan Africa deals in the market at the moment. But this is thanks primarily to the broader market turmoil and commodity slump that has settled into the markets since the turn of the New Year.

“Spreads are blowing out,” said Zeina Bignier, global head of DCM public sector origination at Societe Generale. “When we did the Senegal bond two years ago, it came in at 6.25%; when we did the Ivory Coast, it was 5.25%. Anything above 10% is not acceptable either in terms of the cost of debt and the debt burden,” she added.

The crucial point is that while it is probably better to describe investor sentiment as cautious rather than losing faith in the Africa story, the sovereigns themselves cannot afford to tap the markets at the moment.

What characterised the deals at the end of last year was high coupons. Angola printed a US$1.5bn 9.50% 10-year trade in November via Goldman Sachs, Deutsche Bank and ICBC; and Cameroon printed its debut US$750m 10-year amortiser at 9.75% a week later via Societe Generale and Standard Chartered.

Those deals are light years away from Gabon’s deal through Deutsche Bank, JP Morgan and Standard Chartered in June. Then, the Central African nation printed a US$500m 10-year note at par to yield 6.95% that came in 30bp inside initial price thoughts – unthinkable in current markets.

Guaranteed to succeed

Given how far yields have jumped, it is surprising that more sovereigns have not looked towards Ghana’s solution for its last deal. It sold a partially guaranteed US$1bn October 2030 amortising bond in October. What makes the bond different is that it has an up to 40% guarantee from World Bank agency the International Development Association.

It was a first for a sovereign, and although the deal printed, it is not without controversy. Some bankers away from the transaction point out that the 10.75% coupon is a trifle stiff for the issuer (in fact, it was flat to the Ghana curve at the time), especially given the guarantee. While others point out that the World Bank cannot be turned on like a tap – a guarantee takes months of negotiation.

Still, as one DCM head said: “A World Bank/IDA guarantee is appreciated by investors and it does get you a lower coupon than you might expect. To come to market with a guarantee could be an option for other issuers.”

That might all seem rather gloomy, but those who have written off sub-Saharan African issuance this year have taken a step too far. There is going to be issuance, but the dynamic has changed somewhat. Before 2014, agree bankers, a main reason that they sold debt was that yields were too good to be true. Issuance was in many ways being driven by the commodity boom. Yields might not be anywhere as low as they once were, but the need for funding has in many ways increased.

“Although most governments have slashed spending on capex, they don’t want to offset the decline in oil revenue completely by cutting spending,” said Jan Friederich, head of Middle East and Africa sovereign ratings at Fitch.

Of course, the local markets are not adequate sources of funding, so little wonder that there is scepticism about cancelled issuance plans. Issuers will keep a close watch on the market for any sign of market stability. Governments, after all, still need to fund their infrastructure programmes, payrolls and buyouts, and they have to get the money from somewhere.

Limited pressure

Despite that stress, few are expecting any funding crisis, as the debt levels are considerably lower than popular imagination suggests.

“There is little immediate funding pressure,” explained Simon Ollerenshaw, head of CEEMEA DCM at Barclays.

Ghana’s debt servicing payments are 32% of government revenue, according to Fitch, but that is the exception. The majority of sub-Saharan African countries have a debt service costs below 10%: Nigeria has 13.2%, Cameroon 3.5%, Angola 6.9% and Gabon 6.7%.

More to the point, the very fact that the majority of the debt raised so far has had a tenor of 10 years means that the funding impetus on sovereigns in the regions is eased.

“Most sub-Saharan countries in Africa have demonstrated a prudent long-term funding plan, issuing debt with average 10-year tenors, which should mean there are no refinancing pressures in the short term,” said Ignacio Temerlin, head of Sub-Saharan Africa DCM at Citigroup.

And while the elephant in the room remains the commodity crisis, there is a good argument to be made that that has been priced in already. Barclays’ Ollerenshaw raises the intriguing possibility that sovereign bonds in the region might have taken the commodity hit upfront.

“Zambia’s most recent bond has fallen from par to the low/mid-60s cents in the dollar in a relatively short period,” he said, which means that they could be prepared for a swift lift-off as soon as normality, or at least a version of it, returns.

The point to remember above all is that the Africa story itself has not really changed. There might be slightly less overt enthusiasm about the growth of the African middle classes than there was before, and some of the shine might have come off some of the more giddily enthusiastic trends, but the underlying figures remain incredibly positive.

“The factors behind the African story are still there. The continent has a young population and high growth. The reasons, the fundamentals, that people were excited about haven’t changed. It is a huge region, it will keep going,” said Citigroup’s Temerlin.

Indeed, Fitch, for example, forecasts the region to remain one of the fastest growing in the world, with median GDP growth of 5% this year.

And in the meantime, then, it is simply a case of waiting for markets to normalise. As Maryam Khosrowshahi, head of CEEMEA public sector origination at Deutsche Bank, said: “We just wait to have orderly conditions.”

 

To see the digital version of this special report, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com

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