Emerging emerging markets
Expectations at the end of last year that 2008 would see a surge in equity issuance from Sub Saharan Africa have proved overdone despite some high profile deals. The region's equity markets have also come under pressure as global turmoil spreads. But investor interest in African companies remains strong and bankers are optimistic that the region's capital markets will continue to develop. Chris Vellacott reports.
Investor enthusiasm for Africa is built on sound economic credentials. Research by Renaissance Group, a Russian bank which has focused its efforts on the continent, shows five of the 20 fastest growing economies in 2006 were African. Meanwhile, the region as a whole has posted annual GDP growth of 7% over the past five years.
"Economic and political risk in the region is at a relatively low level historically, though it is still present, and factors such as a young population are starting to attract investor interest," said Brendan Spinks, associate director of equity capital markets with HSBC.
That is not to say that Africa has remained immune from the financial turmoil that has buffeted markets elsewhere.
Not quite credit crunch-proof
Many had hoped the region would remain buoyant as a deepening relationship with China shielded it from troubles in traditional trading partners in Europe and North America. According to Rennaissance, African exports to China are increasing at a rate of 40% per year. Furthermore, by the middle of last year, China had invested US$12bn in the region over three years, with another US$20bn to come in the next five.
Yet recent months have seen a flight from African equities, as illustrated in the chart showing stock market performance for Kenya and Nigeria – two economies that are regarded as among the brightest hopes for the region, which in the past two years proved the most active markets in terms of equity issuance.
In 2007, a run of Nigerian banking issues such as Guaranty Trust Bank, Access Bank and United Bank of Africa served to attract investor interest to Nigeria beyond the hedge fund sector, easing concerns about risk and governance.
Most recently, a sale by the Kenyan government of 25% in mobile telecoms company Safaricom in a KSh50bn (US$766bn) IPO was widely tipped to act as a catalyst for African equity issuance this year. The deal was a clear success, with local demand high enough for the Kenyan government to exercise a clawback option and reduce the allocation to international investors.
Meanwhile, the allocation of shares to foreigners – even before it was reduced to 20% from 35%, and despite a 10% premium on the price offered to Kenyans – was well oversubscribed. The shares put in a robust performance in the aftermarket, and soon afterwards, predictions that Safaricom would provoke a rush of issuance across the continent appeared to have been fulfilled when another company, Celtel Zambia, launched its own IPO.
Celtel Zambia is a subsidiary of Kuwaiti telecoms giant Zain and carried out a ZK665.6bn (US$199m) deal which also attracted considerable demand. It also put in a text book performance after it listed. But though the deal flow from the region has continued, it has not met expectations and has fallen short of the surge of issuance seen in 2007 that was concentrated in Nigeria and dominated by banking IPOs.
Christopher Laing, a co-head of emerging markets ECM at Deutsche Bank said diminished investor enthusiasm for the region is as much to blame as a perceived problem with the markets themselves. "Investor risk appetite has taken a hit and if you look at some of the hedge funds, they don't have the same amount of money to invest as they did in the past," he said.
Nevertheless, in spite of slower than expected volumes of issuance in 2008, the outlook remains positive, Laing said. Few bankers are pessimistic about the future for African capital markets. "African markets are not immune to what's happening on global markets so the shine has come off a bit… but there is still a big pipeline and that should continue," said Lorcan O'Shea, director of ECM for the EMEA region at Merrill Lynch
In addition to the impact of global financial turmoil, bankers also attribute the slower-than-expected flow of deals to the fact that African capital markets are at an early stage of development – South Africa excepted.
"Africa isn't going away. A lot more is going to happen there but the market is relatively new… so it can take months to get a deal done,” said Emmanuel Gueroult, managing director of global capital markets at Morgan Stanley. “You are not going to see a hundred deals coming one after the other because these things take time."
A common way to circumvent the shortcomings of illiquid, underdeveloped markets, meanwhile, is to issue global depository receipts (GDR) listed in London alongside a local listing. This, in addition to the fact that it is in the same time zone as much of Africa, has allowed London to retain the status as an offshore financial hub for the continent.
This situation has come under fire from multilateral institutions for siphoning liquidity away from Africa and stunting the development of local capital markets. However, in the past year, a significant proportion of equity issues have remained purely local, including the Safaricom deal. Furthermore, many equity transactions in the last year were too small to make a GDR issue worthwhile, or warrant the involvement of international banks in the bookbuilding process. This has undoubtedly provided a significant boost to local capital market development.
A recent example is the TSh63bn (US$54.5m) privatisation IPO of Tanzania's National Microfinance Bank, ahead of a Dar es Salaam listing at the end of October. If the deal is successful, NMB's market capitalisation of TSh300bn will rank it as the fourth-largest company on an exchange that currently has just 11 constituents.
The South African connection
Meanwhile, the Johannesburg Stock Exchange (JSE) is understood to be considering launching a push to establish itself as a listing hub for Sub-Saharan Africa, potentially attracting issuance away from London. South Africa has by far the most developed capital market in Africa, and will probably use higher liquidity and standards of governance as principal selling points to attract listings and institutional investors.
However, many ECM bankers doubt the JSE has the capacity to attract enough institutional investors away from London to make a South African listing worthwhile for African companies. "I admire what they are trying to do but I don't think it will work out," said one emerging markets specialist. Any move to become a regional listing hub by the JSE would follow an inauspicious legacy of failed attempts by exchanges to wrestle business from London. The most conspicuous recent example is Dubai International Financial Exchange (DIFX) which continues to struggle with low liquidity.
Meanwhile, one Nigerian company, energy group Oando, which already has a South African listing, has found its efforts rather wasted, providing an ominous precedent. Less than 1% of all trade in the shares over the past nine months was conducted in South Africa. "Oando has found itself subject to South African regulatory requirements on governance which takes time and involves costs for very limited trade of the South African shares," said an Africa-focused equities analyst.
But one banker suggested the plan would work if structured and promoted as access to South African institutional investment, which is currently subject to restrictions on how much can be allocated to foreign assets. If the scheme allowed non-South African companies with dual listings in Johannesburg to qualify as local stocks, it would make the option attractive by demonstrating access to a captive pool of local capital.
It appears, therefore, that the hegemony of London over African capital markets will continue, at least until markets in Nigeria, Kenya and elsewhere have developed enough to mount a serious challenge. Bankers report the prospects for this look good, particularly in Nigeria, where there is a growing pool of local capital and liquidity resulting from the recent run of economic growth. This has not only encouraged locally focused equity issues but also nurtured a native banking sector by allowing local brokers and banks to lead deals sometimes too small to be viable to international banks.
"High levels of liquidity in domestic markets have allowed issuers to tap local capital via local brokers successfully," said Merrill Lynch's O'Shea. It is clear, therefore, that despite relatively sluggish growth, few in the banking community doubt Africa's continuing potential for the future as a source of business. Equity issuance is expected to continue to grow outside its traditional hubs in South Africa and Nigeria and take root in an ever broader range of industrial sectors.
"Nigeria and South Africa should continue to be the most active in terms of issuance, though people are also talking about Kenya and Ghana. Companies in Nigeria and South Africa still need capital, and those countries will remain the main sources of new issuance," O'Shea said.
"There are a number of deals coming out of South Africa and that doesn't happen very often,” added Deutsche Bank's Laing. “South Africa, Egypt and Nigeria remain the main markets in Africa and all sizeable issuance in 2009 will come out of these three."
Meanwhile, in addition to natural resources, the traditional pillar of African economies, bankers have high hopes for financial services as issuers of equity in the coming year, as well as telecommunications.