Confidence is growing among bankers in Luanda and London that Angola will finally be able to achieve its long-held ambition of raising money on the Eurobond market, and hopes are being pinned on September.
The market is hoping that, providing the ratings agencies back their positive comments about the performance and management of the Angolan economy with a strong rating, it will be possible to raise at least $500m, that the bond will qualify for indices such as the JPMorgan Emerging Markets Bond Index and there will be significant demand from investors hungry to take on more African sovereign debt.
Current market speculation is that the government is no longer planning to use Goldman Sachs as its lead manager and is instead considering a group consisting of JPMorgan, BNP Paribas and Citigroup. But bankers say there is every chance that the identity of the lead manager may change again.
Crucial to any bond’s chance of success will be the attitude of the rating agencies, which are completing research that is expected to deliver a more positive assessment than last year, when Angola received ratings from Moody’s, Fitch Ratings and Standard & Poor’s, with the latter basing its B+ rating on its view of the country’s “large hydrocarbon endowment, strong growth prospects and low government and external debt levels".
Once the sovereign bond has been issued successfully, it is now assumed that companies such as the state-owned oil company Sonangol could tap the market and itself be followed by issues from some of the commercial banks.
Exceeding expectations
This year’s performance by Angola on every economic measure has exceeded expectations, which means investors are talking about the country with increased enthusiasm. “Angola is rated B+ or B1 and it is likely to be upgraded soon, which would make it more economical for the country to raise a Eurobond later this year. [Angola] should go to BB- which would put it in the same ballpark as Nigeria. It should be able to raise at least $500m or more,” says Florian von Hartig, global head of debt capital markets at Standard Bank.
Florian Van Hartig, global head of debt capital markets, Standard Bank
What is beyond doubt is that Angola has clearly learned from the experience. There was first talk of a Eurobond in 2007, but this was quietly dropped because of Angola’s low funding requirement.
The subject was revived three years ago when there was a significant funding gap. But the way it was proposed meant it would have been an extremely ambitious first foray into the markets.
In November 2009, when the rebuilding of the country’s finances had barely begun after the crisis of the previous two years, the government announced that it planned to raise $4bn of bonds in the first six months of 2010 as part of its debt management and financing strategy.
This was double the initial figure originally permitted in Angola’s International Monetary Fund (IMF) programme, although it was raised to $6bn in 2010. There was also some concern from potential investors when the government announced that it did not believe the absence of a sovereign rating would preclude it from an initial bond sale, although it also made clear its intention to get a rating.
Strategic delay
Having listened to market concern about the size of an issue and scepticism about the timing of the rating, the bond was delayed until after the ratings agencies had published their results. There was some frustration at the lack of activity at the back end of 2010, but this time there appears little doubt that the issue will happen.
“The latest information is that the government is waiting for the right time to issue a bond. The government’s financial position is strong because of the price of oil and, once we have digested the impact of the rating agencies’ report, it may be the right time,” says Daniel Chambel, president of the executive committee of Caixa Totta bank.
Bankers in London believe that if market conditions when the bond is issued are the same as they are today, Angola could raise at least $500m for 10 years – and expect to see considerable demand for the bond.
“The bond should be attractive as there is comparatively little outstanding sovereign African debt. If it is more than $500m, those funds which follow the emerging bond index will need to invest in it. Its appeal can only be enhanced by the fact that it is a debut bond,” says Mr Hartig.
At Exotix, the London-based investment bank specialising in frontier markets, chief economist Stuart Culverhouse argues that “[Angola] is one of those countries with the size, resources and commodities that it can leverage from. There is a big appetite for all emerging markets at the moment but particularly from Africa. There are not many issues, but funds want to have exposure to the continent.”
Lack of transparency
The one concern felt by Mr Culverhouse and other analysts is that the government’s finances are still too opaque, but it is accepted that work being done with the IMF and management consultants PricewaterhouseCoopers and Ernst & Young is leading to much greater openness about the country’s financial position.
Of particular concern was the level of the government’s commercial arrears, which last year were revealed at $6.8bn – higher than they had previously appeared to be. Those who take a positive view of the government’s approach point out that these debts have now all been paid.
It is also true that the government’s total external debt-to-gross domestic product ratio, which is estimated by the IMF to be 20%, is low by regional standards and that it has a good record in paying off its international obligations. Both its London and Paris club debts were settled without the need to forgive any debt beyond some late payment penalties. Now that this has been achieved, Angola is in a position to obtain new credits with export credit agencies.
Fitch Ratings also points out that the external debt service fell from a peak of 26% in 2004 to 13% in 2009, reflecting the phasing out of commercial oil-backed loans that were relatively costly and short term. That figure could fall to as little as 7% by the end of 2011, meaning that Angola has been below the ‘BB/B’ medians since 2007, while the liquidity ratio has been higher than 100% since 2007.
Timing is everything
While the bankers wait for the timing of the Eurobond, some efforts are being made to accelerate the development of the local debt market. The local fixed-income market is at an early stage of development although efforts are being made to develop a market in which the only issuer at present is the government.
Currently, says Pedro Coelho, chief executive of Standard Bank de Angola, “there is virtually no local bond market. The only market of any substance is in treasury bills. The banks buy and hold short- and long-term maturities, so there is very little active trading.”
The range of instruments consists of bills and bonds, which are over a range of maturities and include inflation-linked instruments. The bonds, which were initially used to pay domestic arrears, are issued in US dollars and the local currency, the kwanza, and they can be bought by foreign investors. There are no intermediaries, the bonds are issued directly by the government to commercial banks and there is a very limited secondary market.
