The tide is high

IFR IMF/World Bank Report 2014
10 min read

A late summer rush into Sub-Saharan African bonds has kept the spotlight on the region’s high growth rates, as investors seek out rare opportunities for high yields.

In August, Ecobank Nigeria sold US$200m of dated subordinated notes, due 2021 with a yield of 9%, joining two other Nigerian lenders, Access Bank and First Bank of Nigeria, which came to market with bond issues of US$400m and US$450m, respectively. The banks are all looking to raise money for investment in the West African country’s infrastructure and energy industry.

The banks’ fundraising comes hot on the heels of a round of international issuance by Sub-Saharan African sovereigns, which have turned to the capital markets to plug short-term holes in their budgets and finance capital investment in infrastructure and social programmes.

The increasing international debt load in some countries is, analysts warn, perpetuating the high interest rates that are blocking African corporates’ access to finance. This, along with volatile currencies and a lack of scale, means that aside from a few outliers in the financial or natural resource industries, few companies are likely to benefit from the buoyant market for high-yield debt.

“Developing credit to, or increasing credit to, the private sector is extremely important,” says Angus Downie, head of research at Ecobank Capital, “but nothing is going to happen very quickly on that when you have large fiscal deficits that need to be plugged with short-term financing.”

“A lot of investors are still looking to add African risk to their portfolios, because there hasn’t been a lot of it going around over the last few years”

According to data compiled by Standard Bank, African sovereigns issued a record US$16.6bn in 2013, but by August the flood seemed to be over. In July last year, Ghana issued US$750m of Eurobonds, which, while oversubscribed, seemed to demonstrate investors’ cooling interest for frontier debt. The coupon on the bonds was 8%, more than 100bp higher than the yield on a bond issue by tiny Rwanda two months earlier. In April, the yield on Ghana’s earlier 2017 bonds had traded as low as 4.25%.

A year on, Sub-Saharan African sovereign issuance is on course to surpass the record set in 2013. Figures from Standard Bank estimate that total sovereign issuance stood at US$10bn on July 5. In July alone, Senegal, South Africa and Cote d’Ivoire came to market; the latter less than three years after it had undergone a major restructuring of its debt. In June, Kenya broke the record for a Sub-Saharan African sovereign issue, raising US$2bn.

Even though the gloss has come off some of the region’s more compelling growth prospects, sovereigns have been able to raise billions of dollars. However, corporate issuance is still rare and companies in the region struggle to access finance. Questions also remain over whether recent Eurobond issuance is actually deepening Sub-Saharan capital markets.

With high-yielding assets in higher-income emerging markets still depressed and developed economies still slow growing, investor appetite for frontier debt has survived talk of tapering and a putative slowdown in China, allowing Sub-Saharan African countries to price their issues at competitive rates. Cote d’Ivoire’s US$750m Eurobond issue in July was priced at 5.625%.

As Megan McDonald, the global head of debt capital markets at Standard Bank, pointed out, the thin supply of Sub-Saharan debt means that each issuance is hotly contested. Although Eurobond issuance from the region has grown at a compound rate of about 34% for the past five years, it is still only around 5% of total emerging market Eurobond volumes.

“That indicates a bit of a scarcity factor,” McDonald said. “A lot of investors are still looking to add African risk to their portfolios, because there hasn’t been a lot of it going around over the last few years.”

McDonald admits that the low yield on Cote d’Ivoire’s July Eurobond offering was “quite surprising”, given the country’s recent history. Once the economic powerhouse of Francophone Africa, Cote d’Ivoire suffered de facto partition and civil war for two decades, culminating in a violently disputed election in 2011.

Since then, the country has been recovering rapidly, with GDP growth for 2014 forecast at 8%. As the largest producer of cocoa in the world, investors are also buying into a commodity play.

Zambia, which began the recent rush to market by African sovereigns with its debut Eurobond issue in 2012, has suffered from sliding demand for copper, which comprises 70% of its export earnings. The local currency, the kwacha, has slid by 11% this year, and the government asked the IMF for assistance in June.

Zambia’s US$1bn Eurobond offering, issued in April, was oversubscribed with a coupon of about 8.5% – considerably higher than its debut, which was priced at 5.375%.

Ghana is also expected to come to market later this year, but McDonald expects the country to pay a high price due to its widening budget deficit, stuttering growth and collapsing currency.

The Ghanaian cedi is the worst performing currency in the world, losing 33% against the dollar between January and the end of July. (See “Frontier Markets”)

The Zambian kwacha lost more than 20% over the same period.

Nigeria’s naira is informally pegged to the dollar, but has been volatile in interbank markets, and the central bank has had to intervene several times to prevent it from slipping.

Currency weakness

Currency weakness poses a huge problem for corporates issuing dollar-denominated debt unless they generate revenues in hard currency, said David Makoni, head of Africa credit at Stanlib Asset Management.

This limits the potential universe of corporate issuers to commodity exporters, which sell in dollars, and to the few financial institutions on the continent with the requisite scale to reassure investors.

“If you look at the Eurobond markets, I think the reason you tend to find sovereign and bank issuers, and not many non-bank corporates, is generally because outside of South Africa and Nigeria there aren’t many non-bank corporates of significant size to be able to digest a benchmark Eurobond issue,” Makoni said.

Issuing Eurobonds

When countries in the region started to get sovereign ratings in the mid-2000s, and then began discussing issuing Eurobonds, there was a stated ambition to build a reference point and a yield curve for local corporates to then be able to access international capital markets, and an expectation that the private sector would soon begin issuing their own bonds.

“It’s rubbish. It doesn’t happen,” said Ecobank Capital’s Downie. “It’s a very slow process and you only have to look at Asia and the whole development of their debt capital markets to realise that this takes a very long time.”

Access to finance has been a perennial problem for Sub-Saharan African corporates. Private credit-to-GDP ratios are low across the entire region, with the exception of South Africa. Kenya’s 37% is by some way the highest, considerably higher than Nigeria and Ghana at 11.9% and 15.7%, respectively.

Interest rates in many of the regions are high. Kenya’s central bank has held a restrained 8.5% this year, while Nigeria’s is at 12% and Ghana, facing massive depreciation to its currency, raised its rates to 18% in February.

“The private sector is crowded out by high interest rates that are offered by the sovereign. Why are interest rates high? Because there are large fiscal deficits that need to be financed, and the only way the private sector is willing to finance them, ie, the banks, is by having interest rates that offer them a real return,” Downie said. “I think you’ll continue to see the private sector starved of credit in many countries for years to come.”

Although there is huge diversity across the continent, even in more developed economies in Sub-Saharan Africa, companies are often relatively informal and lack the collateral or human capital to effectively access bank or local capital market finance.

Complex corporates

Faced with a complex corporate environment, many banks in the region prefer to simply lend to the sovereign, offering unsustainably high interest rates to private-sector lenders. This means it is very hard for even well-established businesses to secure financing in local currency, let alone on international markets.

At Stanlib, Makoni believes this is gradually changing – although he cautions it will be an evolution, rather than a sudden shift.

“If you recall, several years ago a lot of countries were dominated by multinational entities. They were usually the main domestic banks in the financial system. With the growth of indigenous players to compete against multinational banks, you’ve basically seen greater intermediation happening,” he said.

“Banks usually had no incentives to cause disintermediation. But there’s a lot more competition, there’s a lot more skills. People have know-how around how finance can be availed. Banks are forced to consider not just direct lending, but also lending through the capital markets.”

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The tide is high