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AfricaFebruary 22 2011

Africa's debt markets attract international attention

Despite a sovereign default and the impact of rolling popular uprisings across north Africa, many are increasingly hopeful about the prospects for Africa's debt markets, as improving economic conditions and growing international appetite look set to underpin further new issuance.
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Africa's debt markets attract international attentionAlassane Ouattara, accepted as the winner of the recent election in Côte d’Ivoire by the UN

When Nigeria issued its benchmark $500m Eurobond in January this year, it joined an elite club. The west African country became only the fifth in sub-Sahara, excluding South Africa, to issue sovereign bonds. The deal, which the country's finance minister said was two times oversubscribed, capped a successful 18 months of sovereign issuance across the continent: 2010 alone saw the launch of 10 Eurobonds. The deals signal Africa's growing importance on the international bond stage as yield-hungry investors look to markets they have previously shunned. 

Côte d'Ivoire default

The success of Nigeria's debut deal was followed by perhaps the fastest default on a restructured bond in history. In February, Côte d'Ivoire defaulted on a bond it issued in March 2010, when the country had swapped all of its six defaulted Brady bonds for one $2.3bn global bond due in 2032. More than 99% of bondholders tendered their bonds into the exchange, leading market participants to hail the deal as one of the most successful distressed sovereign debt exchanges ever.

Part of the reason for the success, they said, was the relatively small haircut. At just 20% of the principal amount outstanding, it meant that investors got a performing bond with a face value of $800 in return for a defaulted bond with a face value of $1000. Investors obviously saw it as a good deal, even if the coupon offered on the new bonds was low in the early years: it started at 2.5%, but stepped up to 5.75% in 2013.

That was then. On February 1, 2011, the country's Eurobonds sank to a record low of 40 cents on the dollar after Côte d'Ivoire, the world’s biggest cocoa producer, missed a $29m interest payment amid a fight for political control of the west African nation. While the International Monetary Fund (IMF) said at the time that the country had $3.28bn of foreign-currency reserves (as of September 2010), the claimants to the presidency seem to have neither the inclination nor the means to make even a delayed payment. The winner of the election, Alassane Ouattara, says that there is no money left; his predecessor, Laurent Gbagbo, has been cut off from state accounts.

As the political crisis in Ivory Coast unfolded and popular protests spread across north Africa, other African bonds proved not to be immune to this turbulence. According to market participants, at the end of January, the yield on Ghana's $750m 2017 issue, a benchmark for frontier sub-Saharan foreign currency debt, jumped from below 6.3% to 6.8%. Similarly, the yield on Gabon's 2017 issue rose from 5.3% to 6%.

But emerging market specialists argue that the effect of the default is limited. “While the Côte d'Ivoire default has been a set back, we have seen little contagion across the continent and the bond market continues to do well,” says Jan Dehn, portfolio manager at Ashmore, a London-based investment company specialising in emerging markets. Moreover, Mr Dehn expects bond issuance from Africa to double over the next two years.

Senegal's resilience

Commentators cite the performance of Senegal's benchmark issue as proof of African markets' resilience. “The $500m Eurobond that the Senegalese authorities are seeking to issue probably in the first half of this year will build on the efforts made following the launch of their $200m, 8.75% 2014 bond [issued in December 2009],” says Paul-Henry Aithnard, head of research at Ecobank, a pan-African banking group. “It should help set a benchmark price not only for Senegalese corporates looking to borrow on global markets, but also other governments within the CFA [monetary union] franc zone, particularly Côte d’Ivoire and Cameroon."

With the IMF projecting real gross domestic product (GDP) growth in Senegal to be 3.4% in 2011, most bankers believe conditions are ripe for further capital markets activity in the country. It is already reported to be looking at its first sukuk (Islamic bond), for example. Bankers say that the west African nation, whose population is about 94% Muslim, will use the bond to strengthen ties with investors and governments in the Middle East, and that funds are likely to be used to pay for improvements to roads and energy. 

Many of the investment funds that specialise in Africa are looking at Senegal - a major peanut producer - with renewed interest. According to Mr Aithnard, francophone west Africa is the next hot spot. “We believe that prospects for investing in domestic fixed-income securities in the region are good, based on several factors,” he says.

West African promise

Mr Aithnard points to the underlying strength of most economies in west Africa (with the exception of Côte d'Ivoire), due to robust international demand for many of the commodities they export. In addition, there is a small but growing middle class, which is boosting domestic demand and encouraging economic diversification into areas such as services and manufacturing.

The sectors that hold particular promise include financial services, consumer goods, soft commodities and telecoms, says Mr Aithnard. beyond west Africa, Kenyan telecommunications company AcessKenya, for example, is expected to issue a bond sometime in 2011.

“Several years of successful implementation of macroeconomic policy reform, along with relatively low levels of political instability [again bar Côte d'Ivoire] have proved to be a major focal point for investors,” says Mr Aithnard.

The prospects for bond markets look good. With inflation remaining relatively low and equity market returns weak, corporates in the region - such as Senegalese telecommunications company Sonatel - have turned to the debt markets to raise finance. Moreover, the need for significant infrastructure investment across the region is expected to drive issuance.

Better issuance conditions

In 2010, countries across Africa, including Morocco and South Africa, came to market with international bonds. South Africa issued five bonds in 2010 worth a combined $7bn, lead by bookrunners Deutsche Bank and Standard Bank as well JPMorgan, Barclays Capital and Bank of America Merrill Lynch.

Morocco sold €1bn worth of euro-denominated, 10-year bonds, returning to international capital markets for the first time in more than three years, in 2010. The new bonds were priced at $99.495 with a coupon of 4.5%. They will pay investors a spread of 200 basis points over midswaps. Morocco took advantage of the strong market appetite for yield to price the bonds at the lower end of the yield guidance provided by the lead of managers HSBC, Barclays and Natixis.

Many countries were reviving issuance plans that were delayed by the global financial crisis, and much of last year's issuance was driven by an improvement in borrowing conditions.

In the second quarter of 2010, Egypt sold $1bn of 10-year notes yielding 5.75%, and $500m of 30-year paper, yielding 6.95% (or 199.7 basis points and 232.8 basis points, respectively, over US Treasuries). At the time, Egyptian finance minister Youssef Boutros-Ghali - who resigned from the chairmanship of the IMF’s policy advisory committee on February 4 - said the country's government was issuing the bond to finance the budget deficit estimated at about 8% of GDP.

The Egyptian financial sector also took advantage of better borrowing conditions. In July, state-owned National Bank of Cairo issued a $600m bond, due in August 2015, via its Cayman Islands' subsidiary, Nile Finance. The bank said that the bond - led by bookrunners, Deutsche Bank, Morgan Stanley and Citi - would be used to develop the country's financial services industry.

Analysts say the funds will be used to update the bank's IT systems and to introduce more sophisticated products to the market. The aim is to extend internet and phone banking to rural areas and penetrate the unbanked segment of Egypt's population.

Ashmore's Mr Dehn says that many countries on the continent are being forced to turn to the capital markets for funding because the level of aid they receive from wealthier nations is decreasing. However, he adds that now is a good time to tap the markets and accelerate capital market development: with yields so low in the US, Europe and Japan, there is plenty of liquidity chasing better returns. “[These are] exceptionally benign conditions for emerging markets, since it has never been cheaper to issue,” says Mr Dehn.

Good fundamentals

Stuart Culverhouse, chief economist at investment banking boutique Exotix, agrees that the time is ripe for Africa's issuers to capitalise on growing appetite for African paper. “The return of stability across much of the continent, coupled with the opportunities of high return in many sectors, mean that all eyes are on Africa,” he says.

While bond yields and currency valuations in countries such as Gabon and Ghana have been impacted by the popular uprisings across north Africa and the Middle East, as well as the Côte d'Ivoire default, Africa specialists argue that the market reaction was not justified by economic fundamentals. They believe that in the medium to long term, all indications point to further economic growth and the development of capital markets.

Ghana, for example, has been firmly back on investors' radars since the discovery of good quality, sweet crude oil. The country already benefits from a largely positive perception as a well-managed economy; as oil production gathers momentum, analysts predict significant further growth, leading to a further reduction of the country's budget deficit and a build-up of foreign exchange reserves, which should help to keep its currency stable. This virtuous circle, say commentators, will lead to lower interest rates, encourage private sector participation in the development of the oil sector and ensure an increase in infrastructure projects. In a report, Ecobank said that, in turn, this should create a favourable environment for further bond issuance.

South Africa: still market leader

For the moment, South Africa is the only African country issuing a steady stream of bonds. Volumes are dominated by government issuance, used to fund large infrastructure projects, and bonds from large mining companies, used to fund ongoing development of operations. Out of 10 benchmark bonds from Africa in 2010 (valued over $500m), five were South African. Three of these were issued by mining companies – such as the $1bn bond issued by AngloAhsanti Holdings in April 2010. 

Many believe that South Africa's entry to the economic coalition that includes Brazil, Russia, India and China (BRIC) announced at the G-20 meeting in February, will go a long way to positioning the country among the world’s major economic players.

Standard Bank says South African corporates are already taking advantage of the high levels of global liquidity and positive sentiment about emerging markets. The bank, which is 20% owned by China's ICBC, was involved in several key deals over the past 18 months, including South Africa's $2bn government bond issued in March 2010.

The bank believes that the large-scale capital expenditure requirements of both South Africa and the rest of the continent will have to be met through the international markets, and expects a significant increase in the number of international bond issues in 2011.

“[This year will] be an unprecedented year for both South Africa and the rest of the continent, as the transport, utilities and infrastructure sectors require more funds,” says Florian Von Hartig, global head of debt capital markets at Standard Bank.

East Africa holds promise too

But developments in other parts of Africa are also sending positive signals to the continent's bankers and the international market. For example, the East African Common Market agreement, which was signed at the end of 2009 and came into force in June 2010, should help to foster growth across all the economies involved and help to attract both domestic and international investment.

From July 1, 2010, Burundi, Kenya, Rwanda, Tanzania and Uganda ended all barriers to trade, to enable the free movement of people, capital and services, and to abolish import duties. The common market aims to build on the existing East African Community (EAC) agreement, under which participants had already adopted a common external tariff, an identical tax applied to imports from outside the bloc, and allowed duty-free regional trade. 

While this will take time to have any effect - it is likely to be 2015 before a free-trade zone is fully operational – most analysts expect it to generate significant economic growth and opportunities. But the EAC's ambitions go beyond trade and tax agreements. The hope is that member states will adopt a common currency by 2012, allowing them to move towards a political federation.

There are some concerns that Kenya, which is the economic powerhouse of the five (generating some 46% of the region’s overall $76bn GDP, despite having only one-third of east Africa’s 112 million population), could end up dominating its neighbours. Bankers certainly believe Kenya is the country with the greatest promise in terms of deal flow. Analysts are already talking of large companies such as East African Breweries or Safaricom as potential candidates for bond issuance sometime towards the end of 2011. According to a report from Exotix, the country's banking sector – which has seen a fall in non-performing loans - is also benefiting from a growth in lending to small- to medium-sized enterprises.

Challenges remain

While it is clear that Africa's financial markets still face significant structural challenges – not least the need to build domestic capital markets and establish liquid dollar yield curves – the appetite for Nigeria's debut international bond and improving economic fundamentals underpin confidence that African issuers will find international markets receptive.

However, some international investors have other concerns, including the fear that the unrest in north Africa and the Middle East could spread to other parts of the continent. After all, there is no shortage of countries with long-serving authoritarian leaders, youthful and growing populations, high unemployment and unequally distributed riches. The first tests of public sentiment will be in Uganda, which had elections in mid-February, and Nigeria, where elections are scheduled for April.

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