Making full use of a renewed investor interest in African markets

For bond investors on the hunt for higher yields, sub-Saharan Africa promises to become a prime source this year. If it does, Standard Bank's debt capital markets (DCM) team will expect to see a decent slice of the action. It enjoyed a taste of things to come as joint bookrunner on east Africa's first ever Eurobond in November last year, a $300m five-year deal from Kenya's PTA Bank.

Headquartered in South Africa and now 20%-owned by the Industrial and Commercial Bank of China, Standard has made Africa its stamping ground, becoming the continent's largest bank. It has an investment banking presence in a further 16 African countries, ranging from the richer seams of Nigeria and Kenya to less developed territories such as Angola, Democratic Republic of Congo and Mozambique.

As a result, it has had a relationship with Nairobi-based PTA Bank for some years, bringing a number of local currency transactions to market on its behalf. The Eastern and Southern African Trade and Development Bank, commonly known as PTA (which stands for preferential trade area), is the development bank for the Common Market for Eastern and Southern Africa (Comesa) and is owned by 17 Comesa member states, plus China and the African Development Bank.

Some 18 months ago, PTA began to contemplate the offshore funding market. "One of PTA's key shareholders, African Development Bank, is already a player in the international capital markets," says John Ngumi, Standard's head of investment banking coverage in east Africa. "And PTA felt that it needed to wean itself off reliance on development finance institutions and lines of credit and start funding itself on its own."

Running the books

Standard has been building its DCM credentials recently. It worked on the previous two sovereign deals out of sub-Saharan Africa, as joint bookrunner on South Africa's $2bn 10-year issue last March and as a last-minute joint lead manager on Senegal's $200m five-year issue in December 2009.

Citigroup had been mandated as sole bookrunner on Senegal's global debut but, launching into a quiet and nervous period before Christmas, was unable to distribute the bond fully. On the insistence of a lead investor, Standard came in at short notice and underwrote almost a quarter of the deal to make sure it got away before the year end. "The Senegal deal is a clear example of Standard Bank's strong commitment to the African market," says Peter Baillargeon, the bank's head of international DCM for Africa.

In summer 2009, it was decided to stage a non-deal roadshow for PTA to introduce the credit to a dozen or so strategic London accounts and allow the finance director and his deputy to tell their story. "It's good to meet investors when you don't need anything," says Florian von Hartig, Standard's global head of DCM. "That's the right way to do business. We made it clear that this was a fact-finding mission and PTA would not be coming to market for at least 12 months."

The roadshow confirmed that sub-Saharan credits were a sought-after asset, thanks partly to their scarcity. It familiarised PTA with the various investor types - hedge funds, asset managers, bank treasuries - and their differing preoccupations. And it was a dry run for the bank to hear the kind of concerns and questions potential investors might have, on subjects such as the shareholder base (which includes some very lowly rated countries) and lending concentrations. While PTA's assets are relatively small - $726m as at June 2010 - it has a strong capital base with callable capital of $944m.

Patience rewarded

Towards the end of 2009, PTA sent out a request for proposal. But the new year did not turn out to be plain sailing. A number of emerging market sovereigns issued successfully in the spring, but by May the Greek crisis had broken and the market shut its doors again. The PTA board finally gave the go-ahead for an issue in the summer, and mandates were awarded to Standard Bank and HSBC as joint bookrunners. Standard also acted as ratings adviser. PTA had only one rating - BB- from Fitch - and Moody's was asked to provide a second. Moody's rated the bank a helpful two notches higher, at Ba1 for long-term foreign currency debt. Now it was a question of waiting for the right time.

It was a long wait, but PTA was patient. In October, with the market looking healthy, a five-day roadshow was announced with the expectation of a Reg S issue thereafter. The anticipated size did not justify the added disclosure and legal costs of marketing to the US. The roadshow took in Hong Kong, Singapore, Zurich, Geneva and London. On the last day, both syndicates felt it was time to go, and released a price whisper of low 7% for a $200m to $300m transaction. The same day, informal orders worth more than $350m came in.

The next day, price guidance was refined to 7.125% and within four hours there were orders of more than $600m. A $300m transaction with a 6.875% coupon was finally priced to yield 7.125% in the first Eurobond from any east African issuer, sovereign or corporate. It was the only non-sovereign deal from sub-Saharan Africa in 2010 and only the second since 2007, when Nigeria's Guaranty Trust Bank debuted with a $350m five-year issue. European investors took 77% of the PTA deal, and the team was pleased that 15% went to US offshore accounts, even though it had not been marketed directly to them.

The transaction bears interesting comparison with a deal from Cairo-based African Export-Import Bank exactly a year earlier, when markets were more volatile. That too was a $300m five-year issue, though, with a BBB- Fitch rating, the issuer was an investment-grade credit. It was priced to yield 9.125%.

Having two ratings was a help to PTA, as was the state of the market. "Market conditions are the single greatest determinant of the pricing you receive," says Mr Baillargeon. "And the liquidity of new issues is very important to this investor base, particularly in the wake of the crisis."

Riding a wave

Mr von Hartig believes the first introductory roadshow paved the way for the PTA issue's ultimate success. "The non-deal roadshow was a great thing," he says. "When you meet investors for the second time, you have broken the ice already." In the roadshow proper, PTA management was able to show a professional face to the investment community, and to field all their questions in a way that made this seem unlike a debut issue. "PTA feels that the issue could not have gone as well as it did without the practice run," Mr Ngumi concurs.

The current low yield environment has prompted a wave of bond issuance from emerging markets in general, and an unprecedented flow of deals from sub-Saharan Africa is already shaping up. While Senegal has been floating the possibility of an Islamic bond, the ranks of potential first-time issuers are growing. Angola, Ghana, Kenya, Tanzania and Zambia are other sovereigns in various stages of preparedness. However, as The Banker went to press, Nigeria put on hold a $500m 10-year debut deal because of market volatility.

"If markets remain stable, we could see $5bn of African sovereign issuance in the next 12 months," says Mr Baillargeon. "A number of African corporates could also access the market." He knows of at least five corporates pondering debt capital market issues, "from all over" Africa, but Nigerian and Kenyan companies are the most likely.

Mr Baillargeon points out that debt relief and new political stability has transformed the economies of many African countries and set the stage for increased international investor interest. "Investors are scrambling for higher yields," he says. "People may have overused the phrase 'a new scramble for Africa', but this could really be the start of an extraordinary time in Africa's history."