Winning over sceptics
African issuance has defied the rollercoaster year for emerging markets. Issuers have sometimes had to pay up to secure funds, but investors are ready to take a chance in return for yield and greater transparency.
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Africa’s debt markets have had a tumultuous year. Despite misgivings by some investors, notably in May in the wake of the US Federal Reserve’s first indications that it would soon reduce purchases of US Treasuries, bond sales have held up well throughout the year. Appetite for riskier securities among many emerging market investors remains strong.
Sub-Saharan African governments issued US$4.2bn in sovereign debt in the current year to September 12, up from US$3.6bn in the same period a year ago, according to Thomson Reuters data. That African states have managed to sell debt in a tough market will merely have burnished the continent’s image in the minds of many investors.
“It used to be seen as a post-colonial economic tragedy, now the world is catching up to its true fundamental value,” said Nicholas Samara, vice president, CEEMEA DCM at Citigroup.
Nor have debt sales been limited to big countries or good times. South Africa sold US$2bn worth of 12-year bonds in the days leading up to the Federal Open Market Committee’s September 18 meeting. The Fed ultimately opted to delay the widely anticipated taper, but the move raised crucial funds when they were available and showed appetite remained despite huge fund outflows and the slump in the rand since May.
Nigeria, for its part, sold US$1bn worth of 10-year bonds in the direct wake of the Fed’s May announcement, when investors were fleeing anything with the emerging market taint. The year has also seen some smaller states, economically and geographically, take centre stage. Rwanda, notably, launched its debut sovereign bond in April, raising US$400m.
It has not all gone swimmingly. Following the Fed’s meeting in May, the spread of emerging market debt over US Treasuries widened. For a few months, emerging market debt looked a troubled asset class. In June alone, US$18.1bn fled emerging market debt funds, followed by net outflows of US$7bn in July. India saw US$5.6bn in foreign institutional investor capital exit debt securities in June, a record.
For investors over the European summer, September 2012 seemed a long time away. A year ago, Zambia’s debut bond, based on robust global commodity prices, led the continent back to the international debt markets. During its roadshow, the IMF tipped Zambian GDP to grow by 7.7%, fuelled by rising copper and agricultural production.
The country priced US$750m worth of 10-year notes on orders of US$12bn with a coupon of 5.375%, comfortably inside the 6% coupon that bankers had predicted.
Demand continued to rise into 2013, driven, said John Wright on the European syndicate team at Barclays, by “a combination of emerging market investor appetite for genuine growth potential and the rarity of the offerings”.
For the first five months of 2013, there appeared to be little let-up in the story. Rwanda’s market entrance was followed by Nigeria’s surprise May placement, where about 90% of the sale went to asset managers and fund managers, said Maryam Khosrowshahi, head of CEEMEA public sector origination at Deutsche Bank. That was followed in July by the first Ghanaian sale in six years, the West African nation issuing US$750m worth of 10-year paper with a yield of 7.875%, with Barclays and Citigroup underwriting the sale.
Syndicate bankers are under no illusion why these deals were so successful. The attraction of SSA debt was partly rooted in investors’ desire for yield, which averaged 4.28% across the asset class for the past 12 months to end-May 2013, against 3.43% for Asian debt and 1.75% for 10-year US Treasuries.
Use of proceeds
And it isn’t like investors are blindly chasing yield, governance has clearly improved. “Investors have warmed to the transparency of deals,” said Megan McDonald, head of debt primary markets at Standard Bank. “Investors don’t like sovereigns borrowing a billion because they can. They want to know what they are going to do with it.”
Ghana and Rwanda issued detailed plans during their roadshows about how they would use freshly-issued capital, focusing on infrastructure. “Ghana was careful about overborrowing,” said Jacki Collins, director, DCM EMEA at Barclays. During the roadshow, Ghanaian officials sent a clear message to investors that the US$750m raised would be spent refinancing local debt and funding capital projects.
It appeared as though Sub-Saharan Africa had made the breakthrough. A summer slump briefly challenged that notion, suggesting that global investors’ extended flirtation with SSA debt, stretching from late 2009, may have waned. Spreads on African debt soared, with Rwanda’s 2023 bonds yielding 8.65% and Senegal’s 2021 bonds yielding 8.1% by end-August. Yet such notions have been scotched by the ongoing regularity of debt sales, and the reinvigoration of emerging market securities in August and September.
One outstanding question remains – Africa’s internal security. The continent, at least south of the Sahara, has largely avoided the sort of dramatically violent ructions seen even in the recent past and the ongoing upheaval in Egypt.
This year’s elections have been peaceful, notably Kenya’s presidential ballot in March and the successful September re-election of Rwandan president Paul Kagame’s incumbent RPF party.
Conflict has been resolved, at least for now, in Mali. Senegal solved a brief leadership dispute, after President Macky Sall sacked Prime Minister Abdou Mbaye, raising questions about the country’s ability to raise debt until the leadership was resolved. Mbaye swiftly replaced the country’s second female premier, Animata Toure.
Yet for all the positives emanating from the region, investors are forced to ask questions that, previously, were easier to gloss over. Are international bond sales merely a neat way of escaping the oversight and close monitoring of funds from multilateral institutions, as some cynics allege?
And though GDP growth figures for much of Sub-Saharan Africa remain seductive – Tanzania is on track to grow by 7% this year, with the economy of Nigeria, the region’s most populous nation, set to expand by 6.7% in 2013, according to the African Development Bank – pressures exist on the margins. Commodity prices are under stress as China’s economy slows. That could force some African nations to delay or restructure debt. Cote d’Ivoire in 2011 was forced to restructure its debt after defaulting on its US$2.3bn 2032 bonds. Last year, Gabon narrowly avoided a default on its 2017 notes.
Investors, as a result, are looking “more closely at credit quality”, said Barclays’ Wright. “At the end of 2012 the ‘reach for yield’ theme from investors was broad-based and even highly subordinated structures from a wide range of emerging market regions were printing at aggressive levels. That is not happening anymore. Order books are more modest and investors are asking more searching questions.”
South Africa’s US$2bn September sale serves as evidence. Africa’s richest economy had to labour to get the bond away. The premium was generous, at 30bp–35bp, yet bankers were impressed that the country defied problems that had led some to question its investment-grade rating.
A handful of countries have lined up to follow by the end of the year.
Kenya and Tanzania are both seeking to sell US$1bn worth of new paper before the year is out. The likelihood of Kenya’s long-planned sale hitting the market in the fourth quarter as planned will depend on the international interpretation of the attack by militants of the al Qaeda-aligned al Shabaab group on a Nairobi shopping centre and the government’s response.
Senegal and Angola also have plans to tap international interest.
The question on everyone’s lips will be whether global investor hunger for Sub-Saharan Africa debt remains. South Africa’s September issuance would appear to show that the appetite remains undiminished. Bond sales in Kenya and Tanzania, however, could prove far tougher, and therefore, far more telling about the real state of the market.