A sovereign bond issue by Rwanda took the capital markets into uncharted territory, but the syndicate team at BNP Paribas found investors keen to seize the opportunity to diversify their portfolios.

Yield-hungry investors are lapping up bonds from emerging market sovereigns that once they would not have touched with a bargepole. Countries such as Albania, Angola and Honduras are now joined by Rwanda, which, having almost destroyed itself through genocide in 1994, still depends on foreign aid for 40% of its budget. While some predict this trend will end badly, others insist it merely reflects how the world economy is changing. BNP Paribas, joint bookrunner on the Rwanda issue, is in the latter camp.

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More on Rwanda's sovereign issue

BNP Paribas worked alongside Citi on this emphatically oversubscribed $400m transaction, in which Rwanda was able to borrow more cheaply than many of its continental neighbours. If this was new territory for Rwanda, it was also new territory for the European bank. Although it has acted on the region’s only private sector corporate issues, from oil and gas company Afren and mining firm First Quantum Minerals, this was its first sub-Saharan African sovereign deal, and it spent a couple of years preparing the ground.

BNP Paribas does, of course, have historical links with Francophone Africa, and some members of the debt capital markets (DCM) team have personal connections to the so-called interlacustrine region – the lands among the lakes – where Rwanda lies. A couple of years ago they discussed the possibilities afforded by the capital markets with Rwanda’s Ministry of Finance and Economic Planning, and the bankers suggested hosting a seminar on the bond-issuing process. This was held in mid-2012, attended not only by finance ministry officials but also by delegates from the central bank, the Rwanda Development Board and some of the largest private banks.

Diversification appeal

Rwanda's decision to issue was helped by the fact that international investors have been acclimatising to Africa, buying bonds from countries such as Gabon, Namibia, Nigeria and Zambia. “East Africa is the fastest growing jurisdiction in Africa and Rwanda is part of that regional growth,” says Christopher Marks, BNP Paribas' global head of DCM.

And yet Rwanda is no emerging market stereotype, which is part of its appeal to investors who appreciate the diversification benefits. As it does not have much in the way of commodities, it is not at the mercy of the ‘resource curse’ and the rollercoaster of commodity prices. It exports some tea and coffee, but these do not dominate in an economy where services now play the leading role.

There are hopes of finding oil beneath Lake Kivu, but in the absence of natural resources thus far, Rwanda’s goal is to be the ‘Singapore of Africa’. That means becoming a business hub, most particularly for information and communications technology companies. Today, it is one of the easiest places in Africa to set up a business and, after Botswana, is rated the most corruption-free zone on the continent. The economy has been growing at an average of 8% annually and Paul Collier, co-director of Oxford University’s Centre for the Study of African Economies, says that the country has accomplished the hat-trick of rapid growth, sharp poverty reduction and reduced inequality. While foreign donor aid contributes more than 40% of the budget, it is down from nearly 100% after the 1994 genocide and there are plans to reduce it to zero by 2017.

The funds raised from the bond issue will play their part in that rebalancing. By agreement with the International Monetary Fund (IMF), which has approved a policy support instrument for Rwanda, the money will be spent on a hydroelectric scheme (which will save on diesel imports), the completion of the Kigali Convention Centre (the centrepiece of the country’s business tourism drive) and debt repayment for the state-owned airline RwandAir.

Held in suspense

The banks were mandated in September 2012 and preparations began. The initial plan was to issue before the end of the year, but then the UN accused Rwanda of leading a rebellious militia in the eastern Democratic Republic of Congo. A number of donors suspended their aid. “Our advice was: do not go into the market when there is negative news flow,” says Rajiv Shah, BNP Paribas' head of DCM, sub-Saharan Africa.

A UN-brokered regional peace deal was signed in February 2013 and Rwanda’s 10-year transaction finally went ahead in April. “The market was stronger in April, after the IMF meetings,” says Mr Shah. Indeed, the launch coincided with the primary market’s strongest phase since 2007, with plenty of cash being put to work in high-yielding instruments.

“April 2013 was the busiest month ever for the issuance of CEEMEA [central and eastern Europe, Middle East and Africa] bonds, with both supply and demand in step,” says Nick Darrant, BNP Paribas' head of CEEMEA syndicate. Rwanda was able to field two roadshow teams, one taking in Hong Kong, Singapore, London, Frankfurt and Munich, and another New York, Boston and Los Angeles. The story they told was one of stable government, sound fiscal discipline and monetary policy, and a forward-looking economy.

“When aid to Rwanda stopped, investors were concerned. But when they saw that the aid agencies were comfortable again, that resonated. Both the UK and Germany resumed aid before we announced the transaction,” says Robert Whichello, BNP Paribas global head of syndicate.

Keeping to plan

Rwanda resisted any temptation to raise the issue size to $500m or more, which would have made it eligible for inclusion in the JPMorgan Emerging Markets Bond Index (EMBI) and would therefore have obliged more investors to buy the bonds. There were two reasons for not doing so. One was that the amount and use of the proceeds had been specifically agreed with the IMF. “The other was that Rwanda wanted investors to buy the bond because they believed in the story and not because they were forced to. The result is a better kind of investor,” says Mr Darrant.

Pricing was not exactly off the shelf. The fact that Rwanda is different from other African sovereigns may add to its attractions for investors, but it means there are no easy comparables for pricing purposes. “Like Rwanda, Senegal and Ghana have B/B1 ratings, and both trade around mid-swaps plus 400 basis points. But those transactions were at least $500m in size and therefore eligible for the EMBI. So [the Rwanda issue] warranted some premium to that, as well as a new issue premium,” says Mr Darrant.

The roadshow provided some price discovery, as investors expressed a broad range of views, and the initial price guidance was in the 'low 7% area' (7% represented 510 basis points over mid-swaps). That was later refined to between 6.875% and 7%.

The response was avidly positive, with 250 orders worth more than $3.5bn. That represents roughly half the gross domestic product of Rwanda. Nonetheless, it stuck to its $400m issue size, with a 6.625% coupon priced to yield 6.875%. The investors were mainly dedicated emerging market funds with a handful of banks, and 40% of the deal went to the US, followed by the UK with 33%, Switzerland with 8% and Asia with 6%. That they were the ‘better’ kind of investor is evidenced by the fact the bonds have traded at or around their issue price since then.

While some raise their eyebrows at investor enthusiasm for emerging market sovereign debutants, BNP Paribas maintains that this simply tracks the changing pattern of global growth. “Emerging market specialists have been waiting for Rwanda to issue for a long time. For many years people have been talking about Africa as the next big thing. This transaction completes that idea and shows that Africa has finally arrived in the capital markets,” says Mr Darrant.

The fact that investors have been obliged to rethink the breadth of their portfolios has been one of the happier results of the crisis, according to Mr Marks. He notes that big corporations are investing in these emerging markets, as are some large sovereign wealth funds. So to characterise awakening bond market enthusiasm as a “frenzy” – as some commentators do – is patronising, he says. “It is not a frenzy. It is normal. These are healthy, stable, growing economies; attractive investment prospects that have not been available historically.”


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