When Côte d’Ivoire was planning its record-breaking euro-denominated bond issue earlier in 2018, it turned to Société Générale’s emerging markets team as co-bookrunner. Edward Russell-Walling reports.

Team of the month 0618

From left: Yannick Lakoue Derant, Aymeric Arnaud, Jaime Sanz

After flourishing at the start of 2018, the bloom on the emerging markets peach has faded. Côte d’Ivoire nonetheless managed to issue the largest ever euro-denominated bond, and the longest, from an African sovereign. Société Générale was a joint bookrunner.

What makes this more than usually noteworthy is that, while Société Générale is the largest bank in the former French colony, it has never before been mandated on any of its sovereign bond deals, making this a welcome first.

Debt capital market (DCM) issuance from sub-Saharan Africa hit a new high in 2017 at about $30.5bn, according to Bloomberg. The pace did not let up in January this year, which was the busiest on record, and by mid-May the market had already seen more than $24.5bn-worth of new transactions. A lot of that came early on as issuers tried to pre-empt anticipated rate hikes in the US.

Emerging market issuance has since suffered along with demand as the lure of US rates and indeed the US economy as a whole has strengthened. In this dollar-centric market, which has been a major beneficiary of quantitative easing, the fear was that a return to normal would have a seriously negative impact.

Positive experience

Société Générale does not subscribe to that view. “We remain very constructive on emerging markets,” says Aymeric Arnaud, Société Générale’s head of DCM, Middle East, Turkey and Africa.

Emerging markets fundamentals are relatively stable, Mr Arnaud insists. Growth is surprisingly strong, and those economies that have been in recession, such as Brazil, South Africa and Russia, are coming out of it. “However, we recognise that conditions have changed, and that the market has become tougher to read and to navigate,” Mr Arnaud acknowledges.

Yannick Lakoue Derant, a director in Société Générale’s sovereign, supranational and agency syndicate, agrees. “The market is becoming more window-driven, with headwinds from other assets,” he says. “We are moving away from an issuer’s market, with its minimal new issue premiums. But despite stretched valuations and easing inflows, we believe deals will perform.”

While emerging markets investors now have more bargaining power, Africa remains attractive to them. “Curves continue to tighten, because there is a lot of liquidity out there,” observes Mr Arnaud. “Africa’s relative value is cheaper and offers returns, and the yields on offer have lifted activity.”

Even so, there are now clear winners and losers. “Some issuers still have deep access, such as Senegal, Côte d’Ivoire and Kenya,” says Mr Arnaud. “Some others may struggle as investors become more disciplined.”

Ups and downs

Côte d’Ivoire has not had an easy ride in recent years. It has endured regional and ethnic tensions, bouts of civil war, army mutinies and fluctuating commodity prices. Just as its political situation entered a period of relative calm, the price of cocoa, the country’s principal export, plunged yet again.

The economy has proved resilient, however, with estimated 2017 and forecast 2018 gross domestic product (GDP) growth of more than 7%. Public finances are in relatively good shape, with a debt-to-GDP ratio, by the state’s own reckoning, of 42.6% in 2017.

Côte d’Ivoire, rated Ba3 by Moody’s and B+ by Fitch, has issued international bonds four times in the past five years, predominantly in US dollars. In June 2017, however, it executed the first euro-denominated deal out of sub-Saharan Africa (excluding South Africa): a €625m bond maturing in 2025 at 5.125%.

We are moving away from an issuer’s market, with its minimal new issue premiums. But despite stretched valuations and easing inflows, we believe deals will perform

Yannick Lakoue Derant

Given that emerging market funds are firmly skewed towards US dollars, what is the rationale behind issuing in euros? “Côte d’Ivoire’s currency [the West African CFA franc] is pegged to the euro, so the euro is almost their home currency,” says Jaime Sanz, Société Générale’s head of sovereign ratings. “They also have export partners in the eurozone, such as France and Germany, so they have a lot of euro cashflows.”

Issuing in euros always made sense but, until recently, the market was not ready to buy an African credit in this particular currency, according to Mr Sanz. While Société Générale was not in on the deal, the sovereign’s euro debut was pragmatically priced and sized. It accommodated investors on pricing, and the bonds have performed well in the market. “So this year Côte d’Ivoire could show up again with a strong credit story, and investors were ready to do a very big trade,” says Mr Sanz.

Going long

The sovereign needed €2bn equivalent in funding for 2018. “That could have been done in the international market or in the domestic market,” says Mr Arnaud. “In fact, the domestic market was more expensive than the international market.”

Once the issuer’s needs had been identified, the bankers stressed how attractive conditions are in the international market. “We had the feeling we could be very adventurous and do a 12-year, though that would be pushing the boundaries,” Mr Arnaud recalls.

Then it became clear that the authorities wanted to maximise the international portion of their funding. “So we had to be creative,” says Mr Arnaud. “It was decided just before the announcement to add that we would investigate a long euro trade if the feedback was strong enough.”

The mandate had been announced in mid-February, with BNP Paribas, Citi, Deutsche Bank and Société Générale as joint bookrunners. As African issuers go, Côte d’Ivoire is quick on its feet, but the decision to issue goes right to the top and by the time the country was ready to move, the frenzied New Year window had passed.

The transaction was announced on March 7, a couple of weeks before the Federal Open Market Committee’s next, and widely anticipated, rate hike. On the five-day roadshow was the same team investors had seen in the run-up to the previous deal, including the prime minister, finance minister and special adviser to the president. They visited London, Frankfurt, Paris, New York and Boston.

Wide appeal

While the principal target was the emerging market portfolio, the transaction did have broader appeal. “It was important to have historic supporters who understood the fundamentals,” says Mr Lakoue Derant. “But because of the yield on offer, it was possible to expand the investor base to traditional investors in European credits.”

As the roadshow progressed, it became clear that a 20- or 30-year trade was on the table. “Going from 20 to 30 years was only plus 12.5 basis points [bps], so that was the obvious trade to close,” says Mr Arnaud.

The dual-tranche transaction was announced on the last day of the roadshow. It comprised a 12-year and a 30-year tranche with initial price thoughts of 5.5% to 5.625% and 6.875% to 7%, respectively.

Demand expectations proved correct. The combined order book totalled €4.8bn before final guidance was tightened to 5.375% plus or minus 12.5bps and 6.75% plus or minus 12.5bps with a commitment to price in range. The deal was finally priced off a €4.2bn order book, evenly split between the tranches, at 5.25% and 6.625%, at the tight end of guidance and well inside initial price thoughts.

The two tranches were sized at €850m each, totalling €1.7bn. Geographical distribution for the 12-year and 30-year was out of the ordinary. It illustrated the particular appeal of the euro, with 36% and 38%, respectively, going to the US, 28% and 24% to the UK, and 28% and 26% going to the rest of Europe.

Not the new thing

Distribution was noticeably large in continental Europe, where it is usually difficult to achieve more than a 5% share of emerging market issues from traditional credit buyers. The overall success of the transaction demonstrated that sovereigns who deliver on their economic promises are rewarded, according to Mr Sanz.

Does it herald a slew of euro issuance from Africa? Perhaps not. “The euro capital markets make a lot of sense if there is a natural need for euros or if there is an absolute need to diversify,” Mr Arnaud points out.

While recent euro issuers Senegal and Côte d’Ivoire have a natural need, Egypt has an absolute need to diversify, he says. African corporates and banks generally have neither. “If you don’t have a natural or absolute need, issuing in euros is more expensive than dollars,” says Mr Arnaud. “So while we will see more supply from sovereigns who tick those boxes, it will never be on a par with the US dollar space."

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