Investors are willing to diversify into African corporate debt, despite emerging market volatility, as was proved by Goldman Sachs' $400m Tier 2 transaction for Access Bank.

With periodic convulsions in emerging markets over the past year, Africa has provided some diversification opportunities for investors. In debt issuance, Nigerian banking has been one of the most active sectors, and Goldman Sachs one of the most active advisers.

Goldman’s most recent Nigerian deal was a $400m Tier 2 transaction for Access Bank. It acted as joint global coordinator alongside Citi, which has also been prominent in new Nigerian bank issues.

Sub-Saharan Africa is a relative newcomer to the emerging market universe for all but the most intrepid investors. One of the pitfalls of investing in that universe is the speed with which portfolios become highly concentrated around the likes of Brazil, Turkey and Russia. Over the past seven or eight years, Africa has become an increasingly popular way of spreading some of that risk.

“Africa has caught the imagination of investors, despite the wobbles of early 2014, or perhaps because of them,” says Martin Weber, head of growth markets debt origination at Goldman Sachs. “Emerging market investors have become more aware of the need to diversify and to focus on different growth stories. The better performing credit stories have done well and Nigeria is one of them.”

One measure of this increased attention is the growing number of dedicated Africa funds. These include Atlas Mara, a $325m vehicle set up by former Barclays boss Bob Diamond specifically to target the region’s financial sector.

“When we speak about Nigerian banking to the international investor base, it is now extremely well understood,” says Anant Prasad, Goldman’s head of African debt origination. “Investors know the leading banks, and they follow their performance and relative values. It’s not a frontier market any more.”

Consolidated market

Investor interest is focused in Nigeria partly because the country now has the largest economy in Africa and the largest population. Its banking sector has attained a level of sophistication well ahead of most of the rest of the continent. Since the expensive clean-up following the Nigerian banking crisis of 2009, the industry has been in relatively good shape.

There are five banks in the top tier – Zenith Bank, Guaranty Trust Bank, First Bank of Nigeria (FBN), Access Bank and United Bank for Africa (ranked in order of Tier 1 capital). All are rated BB- in line with the sovereign.

Access is a full-service commercial bank with 366 service outlets located in major centres across Nigeria, as well as in sub-Saharan Africa and the UK. It was listed on the Nigerian Stock Exchange in 1998, and has four separate operating units – personal banking, business banking (small and medium-sized enterprises), commercial banking, and corporate and investment banking.

Access has been growing by acquisition, most recently taking over Intercontinental Bank, a casualty of the crisis. Until then, its customers were mainly commercial and institutional. The integration of Intercontinental gave Access a substantial 3.8 million retail customer base and more diversified funding in the form of meaningful deposit-taking.

Subordinated debt

Two years ago, shortly after this acquisition, Goldman was joint lead on Access’s debut international issue, a five-year 7.25% transaction raising $350m. Earlier this year, it was joint lead on a $500m five-year issue from Zenith Bank, its international debut.

Last year, Goldman acted as joint lead on a rare Tier 2 offering from FBN – $300m in subordinated notes with a maturity of seven years, non-callable for five years (7NC5). That was the first Nigerian subordinated offering in the international market since FBN’s earlier issue in 2007.

The Nigerian regulatory regime is migrating from Basel I to Basel II, at which point the Central Bank of Nigeria will insist that systemically important banks stick to a minimum capital adequacy ratio of 16%. “Access is very prudent and aims to maintain a 20% capital adequacy ratio,” observes Mr Prasad. “It wants the right capital buffer that will allow it to go out and aggressively target the opportunities before it.”

Tier 1 capital was an option, at least in theory, but being more subordinated and equity-like, it is also more expensive for the issuer. “Tier 2 is more investor-friendly,” says Neil Slee, head of growth markets debt syndicate.

Goldman was invited to join a beauty parade in January. Since this was the first Tier 2 issue by Access, a certain amount of fresh documentation had to be prepared, but the aim was to come to market before the August break, when a good window presented itself.

“It was a professionally run process, compared to some other markets,” Mr Weber points out. At the same time, the continuing unwinding of quantitative easing in the US was putting pressure on emerging market currencies and causing capital outflows.

“By the end of the first quarter, issuance in central and eastern Europe, Middle East and Africa was 30% down,” says Mr Weber. “But since sovereign volumes were up on the previous year, corporate and [financial institutions group] issuance was actually 70% down. So it was a very challenging environment.”

By the beginning of June, however, the project was ready to go, and the deal was announced in the first week of that month. It was roadshowed in London, New York and Boston, with the late addition of a day in Los Angeles following a reverse enquiry.

“We had experience of the buyer base involved,” says Mr Slee. “There were a number of investors keen to dedicate resources to the African region and to Nigeria. They had supported similar issues in the past, and liked the high-quality, well-capitalised, well-funded banking space.

“We also expected an element of domestic bid – features such as the must-pay coupons meant this was an instrument they could get their heads around.” As a Basel I/II instrument, the notes had limited covenants but there was no loss-absorption feature. The notes were 7NC5 with special event calls at par.

Risk assessment

Investors were interested in the status of post-merger integration and in future strategy, but they also asked questions about the recent activities of Boko Haram, the Islamist militant group that are particularly active in northern Nigeria. They were told that, while the media coverage was relatively new, the situation was not, and that, while it was depicted as a religious problem, it was actually rooted in economic conditions and the politics which flowed from that. Management referred to resources being directed at empowerment and education by Aliko Dangote, Africa’s richest man and himself a Muslim from northern Nigeria.

The books were opened with price guidance in the 'high 9%' area, after reference to the sovereign and outstanding Access and FBN paper. The expected size was $300m. Market conditions were not, however, perfect. The Ukraine crisis was still bubbling away, and that was the day that Russia chose to cut off all gas supplies to its neighbour.

“There were a lot of headwinds,” Mr Slee admits. “The equity market was marginally down. But we had spent a lot of time working with the investors and there was a good demand base. So we felt sufficiently confident to proceed with the trade.”

Demand from domestic Nigerian investors came through as hoped and there was strong interest from the US. Total orders were just short of $600m. The size was increased to $400m and the coupon tightened to 9.25%, with a single reset after five years to two-year mid-swaps plus 767.7 basis points. The re-offer yield was 9.5%. While nearly one-third of the allocation went to Nigerian investors (30%), 35% went to the US and 26% to the UK.

“The deal showed that there is a continued appetite for investors to diversify, and to look at new names in Africa,” says Mr Slee. “It’s encouraging to see the expansion of that issuer universe. It is no longer just sovereigns issuing out of Africa – we are able to place real corporate risk.”


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter