Rush to lend
Competition to lend to the best names has pushed pricing down in Africa to levels close to those seen in Europe and syndication has survived unlike in the rest of EMEA. But only for the best credits.
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Africa’s stronger credits, especially those with a track record in the syndicated loan market, are attracting an ever-growing pool of international banks to their loans, and demand has pushed pricing down closer to levels more commonly seen in Europe.
Ghana’s cocoa industry regulator Cocobod, which taps the loan market on an annual basis, is a recent example. In September it signed a US$1.2bn loan priced at 70bp over Libor, 105bp lower than the borrower’s US$1.5bn 2012 deal.
“Cocobod is a good example of an investment-grade business in Africa which has regular access to a lending base being subject to the whims of the international banking market,” said one banker involved in the deal. “Last year everyone was afraid to do underwriting so there was just one bidding group, this year there were three bidding groups so the pricing has reduced.”
Cocobod attracted a number of new European banks not previously involved in its annual deals.
“I wanted to increase my African exposure so it’s important to get into a benchmark deal like Cocobod, cocoa prices are stable and the company is good,” said a London-based head of syndication at a European bank.
While more international banks are seeking to increase their presence in Africa, there is still a relatively small amount of deals that their credit committees are comfortable approving. As a result, their activity is focused primarily on the most secure credits.
“There are a limited number of deals which will suit the risk appetite of credit departments of international banks, so competition for these deals has pushed pricing down,” said a banker speaking at the Loan Market Association conference in London in September. “They are afraid to step into deals below this level where there is more value but perhaps more risk.”
Old school syndication
A feature of top-tier African loans this year is the survival of the syndication process, which has almost evaporated in the rest of EMEA, where club deals dominate.
“While the European loan markets have evolved into clubs, Africa is really the only truly syndicated loan market left,” said a second banker at the LMA conference.
Angolan state oil company Sonangol’s US$2.5bn five-year loan and Cocobod’s annual financing were each provided by 24 regional and international banks, while Nigerian cement group Dangote’s US$3.3bn oil refinery financing involved 12 lenders.
In addition, South Africa-based Aspen Pharmaceuticals has launched a US$2.04bn multi-tranche term loan into general syndication having completed the senior phase with nine banks.
The interplay between international and local banks on African deals is complicated by the prohibitively high cost of US dollar funding for local banks and international banks’ caution over African exposure.
Many local banks, for whom the price of dollar funding can be as high as 400bp, were priced out of Aspen’s loan, which carries a relatively tight margin of 240bp/250bp. However, several Nigerian banks participated in the Dangote loan, which priced much higher at 450bp.
“We gave the local banks a little margin over the cost of funding,” said one banker close to the Dangote deal. “It was quite tight but they are willing to do it because they want future business from the borrower.”
Nigerian banks are queuing up to tap the international loan market over the coming months in an effort to boost their dollar funding.
Skye Bank is leading the march having mandated Standard Chartered to arrange a US$100m one-year facility, which is expected to price between 400bp and 500bp.
Skye raised its first internationally syndicated loan in May 2012 when it signed a US$150m five-year amortising loan through mandated lead arrangers African Export Import Bank, Citigroup and Standard Bank.
First City Monument Bank is looking for a two-year US$100m facility. Like Skye Bank, FCMB is a second-tier Nigerian bank and as such its loan is also expected to price between 400bp and 500bp.
Two other second-tier banks – Union Bank of Nigeria and Africa Finance Corporation – have also sent out requests for syndicated loans. UBN is looking for a US$100m three-year deal, while AFC is in talks for a US$300m two or three-year loan.
Meanwhile, top-tier Zenith Bank is looking to mandate for a debut US$100m one to two-year facility, which is expected to price between 380bp and 420bp.
Until now, Nigerian financial institutions have rarely tapped the international loan market, with only five deals completed. Among them were Skye Bank’s 2012 loan and FCMB’s US$55m loan in 2008, while Intercontinental Bank signed a US$160m term loan in 2008 and Fidelity Bank agreed a US$100m two-year unsecured debut loan earlier this year.
“We are seeing the solid development of Nigerian banks,” said the second banker, speaking at the LMA conference. “Larger transactions will always need local currency tranches and as these banks’ balance sheets increase in size we will see them more frequently on these deals.”
As the larger international banks continue to shy away from perceived African risk, these local banks can continue to carve themselves strong local niches.
“These are good banks which in some cases are deploying huge parcels of liquidity on US$500m deals where there are no European or US banks. Do not underestimate the depth of the market in Africa for the right deal,” said a second London-based loans banker.