Namibia has weathered the emerging markets storm to issue only the second-ever government bond, a deal that Standard Bank helped to arrange after acting as joint-bookrunner on the country's inaugural bond. Edward Russell-Walling reports. 

In a choppy season for emerging market sovereigns, Namibia was able to issue only its second ever international bond with relative ease. South Africa's Standard Bank was a joint bookrunner on the deal, doing more than just adding a touch of local colour. 

Namibia is a rare issuer in more than one sense, being part of sub-Saharan Africa's highly select group of investment-grade sovereigns. There are only three others – Botswana, Mauritius and Namibia's next-door neighbour, South Africa, with which its economy is closely intertwined. 

The former German colony, then administered by South Africa, became independent in 1990. It has subsequently proved to be one of Africa's most stable democracies, and former president Hifikepunye Pohamba won 2014's respected Ibrahim Prize for Achievement in African Leadership. The prize, which recognises good governance, is only awarded in years when a worthy candidate can be found.

Africa's star 

Today, Namibia is one of the best-performing economies on the continent. "One of its distinguishing features is its strong growth rate," says Megan McDonald, Standard Bank's London-based head of debt primary markets (DPM). "Its economy grew by 6.4% in 2014, while South Africa's grew by less than 2%." 

Having nearly shuddered to a halt in 2009, along with the rest of the world economy, Namibia's annual gross domestic product (GDP) growth has been above 5% every year since then. Although best known for mining, notably for diamonds and uranium, the country's economy is well diversified, driven by services, and mining actually contributes less than 12% of GDP. 

Namibia's debt-to-GDP ratio is a lowly 22.9%. "That will increase as a result of the latest issue," Ms McDonald acknowledges. "But there is a self-imposed cap – the government has promised that debt will never exceed 35% of GDP." That would keep Namibian debt levels at similar levels to Indonesia, Mexico and Turkey – and, indeed, Australia and Switzerland. 

The sovereign used its credentials to issue an inaugural Eurobond in 2011. The $500m 10-year bond was a 144A/Reg S issue with a 5.5% coupon, priced to yield 5.75%. It was oversubscribed, and the joint bookrunners were Standard Bank and Barclays.

Strong relationship 

Unsurprisingly, as one of South Africa's two biggest banks with its own Namibian retail network, Standard Bank has a close relationship with Namibia's Ministry of Finance and central bank, the Bank of Namibia. "We speak regularly about [the country's] fund-raising requirements," says Ms McDonald. "The Namibian dollar is pegged one to one with the South African rand and, from 2011 until now, [Namibia has] been able to fund all those requirements in the local [Namibian and South African] capital markets." 

However, the government has been pursuing a contra-cyclical fiscal policy, increasing its spending in areas such as infrastructure, education and health. This has fed into fiscal and current account deficits and caused a drain on foreign reserves. 

"Namibia's import bill has been increasing, because of larger capital-intensive investment – including two new mines which import a lot of equipment," says Ed Cerullo, a member of Standard Bank's DPM team. "That has been driving the current account deficit." 

Before the new issue, foreign exchange import cover was down to only 2.5 months-worth, so reserves needed topping up, according to DPM team member Tariq Rajwani. "There was also a need to diversify funding sources," he adds. 

Investors who had bought into the 2011 issue let it be known that they would be interested in further supply. "We had said continually since 2013 that market conditions were very favourable for a second bond," says Ms McDonald. "But they didn't require that much, and you can't do only $200m – it must be a sizeable issue." 

In 2015's budget, however, Namibia's funding needs were large enough to support an issue of at least $500m, so the discussion moved to a higher plane of where such an issue might price. Namibia decided to go ahead and issued mandates to Barclays, JPMorgan and Standard Bank at the end of August.

On the road 

This was now a less propitious time, however. Conditions for emerging market and African issuers had been hostile through the middle of the year and there had been no African issuance since June. However, while the bankers were duly cautious, they knew that Namibia was an attractive proposition. "There will always be a price for Namibia, and there was never a question of not having access," says Carl Piccolo, Standard Bank's head of fixed-income syndicate. "So it was decided to get on the road, see the investors and then determine what to do."

Two roadshow teams went out in mid-October. One, led by the minister of finance, headed for the US, calling on Los Angeles, New York and Boston. The other, including the finance ministry's permanent secretary and the central bank governor, visited London and Germany. 

The investors were largely dedicated emerging market funds, with some investment-grade bond funds and, in Europe, many private banks. They were keen to hear more about what was driving the fiscal and current account deficits, which had grown since 2011, and what plans there were to keep these under control. 

There were also questions about the Namibian dollar's peg to the rand and whether, with the depreciation of the latter against the US dollar, it was still helpful. "The answer is that Namibia imports 70% of its requirements from South Africa, so the peg provides a natural hedge against inflation," says Ms McDonald. "And while some of the depreciation is South Africa-driven, more of it is emerging market-driven so, unpegged, the currency might have slid even further." 

Other concerns included the impact of falling commodity prices on the mining industry. "There is still a steady market for diamonds in India, China and the US," says Mr Rajwani. "And uranium is supported by China's moving away from dependence on coal and towards cleaner energy."

Where to start? 

The feedback from the roadshow was encouraging and, as soon as it had concluded, the decision was taken to launch a 10-year US dollar transaction. There were two different starting points for travelling towards a price. One was to look at it as a spread to the yield of a comparable South African bond, and the other was as a spread to Namibia's own 2011 bond. "Both methodologies gave us our initial price thoughts," says Mr Piccolo. "We arrived at 100 basis points [bps] back of South Africa in the secondary market, or 65bps back of the 2011 – i.e. 5.75% area." 

The deal was helped by the fact that the market was starting to come back on track, according to Mr Piccolo, and investors were beginning to look at deals again. Their positive response allowed the leads to tighten the pricing to 5.5% plus or minus 0.125%. At that level, the book retained more than $3bn in orders, and the $750m transaction, with its 5.25% coupon, was finally priced to yield 5.375%. "That degree of tightening is unheard of in this market," says Mr Piccolo, adding that the new issue premium was effectively zero. 

This was the first US dollar deal from a central and eastern Europe, Middle East and Africa sovereign for three months. Geographical distribution was 49% to the US, 29% to the UK, 19% to the rest of Europe and 3% elsewhere. Funds took 76%, pension and insurance investors 10%, and banks and private banks 6%, leaving 8% for other investor types. "It reaffirmed our view that Namibia is highly regarded by the international investment community," says Ms McDonald. 

Standard Bank owed its mandate to more than just courtesy to the local lender. Namibia wanted an African bank on the deal, and one with local knowledge. But it also wanted the kind of capital markets know-how and skills transfer that Standard Bank can provide through its daily contact with the country's central bank."We were not the minnow on the trade," says Mr Piccolo. "Because we are Africa-focused, we know where to put the paper. All the accounts that counted, Standard Bank had covered."

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