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Investing in African Bonds
Monday 22nd November, 2010
An increasing number of African nations and state-owned firms are expected to tap international bond markets in the next few years, helped by investors' hunger for emerging market debt and marking an upswing in fees for Africa-focused banks.
The market may also eventually see issuance by corporations in some of the larger sub-Saharan economies outside South Africa, such as Nigeria and Angola.
South African state-owned power utility Eskom and Zambia are just two expected issuers in 2011. Angola, Tanzania, and Uganda also have dollar-bond plans in the pipeline, while Kenya is seriously considering an issuance if domestic yields rise, a senior Treasury official told Reuters on Monday.
Eskom has said it will tap U.S. and European bond markets as part of a plan to raise up to $6.9 billion over the next three years, while Zambia, Africa's largest copper producer, has said it plans to issue a $500 million overseas bond.
"I am convinced we will see substantial issuance from Africa over the next two, three years," said Florian von Hartig, global head of debt capital markets at South Africa's Standard Bank.
"The sovereigns will take the lead but financial institutions and corporates, maybe from Nigeria, maybe from Ghana, maybe from Angola or Kenya, will follow suit," he said in an interview on the sidelines of a capital markets conference in Cape Town.
With interest rates in the developed world hovering close to zero, investors are ploughing into emerging market debt for higher returns. The yield on Ghana's 10-year Eurobond maturing in 2017 is around 6 percent, while a similar bond from Gabon is offering 5.2 percent.
Given the external demand, issuing overseas can be a cheaper option for African governments and corporations than their relatively small domestic debt markets, provided they can offer a bond big enough to whet foreign appetite.
Ghana's Eurobond was issued with a coupon of 8.5 percent, compared with the 13.95 percent on a three-year note issued locally the same year.
As of last month, emerging market bond funds had attracted more than $41 billion this year, according to data from research firm EPFR Global, and more investors are now looking beyond flagship emerging market issuers such as Mexico or Turkey.
Demand for African overseas bonds will continue to hinge on the creditworthiness of issuers, availability of easy money globally and the level of rates elsewhere, said Razia Khan, head of Africa research at Standard Chartered in London.
She reckons the long-term outlook for issuances is strong, even with worries about global risk appetite.
"That window for African issuance might close rather dramatically depending on what happens with global risk appetite of course, but in the longer term, with African economies making real progress, and emerging in their own right, expect to see much more issuance regardless."
In sub-Saharan Africa, overseas bond issuance remains the domain of governments, state-owned enterprises, and a handful of corporations in South Africa, the continent's largest economy and home to some of its biggest companies.
Naspers, Africa's largest media group and an active acquirer of media and Internet firms in emerging markets, issued a seven-year, $700 million bond with a 6.375 percent coupon in July. The company said some of the funding would go toward acquisitions.
More South African companies are likely to issue overseas debt to fund foreign ventures, reckons Prasanna Nana, head of debt capital markets for South Africa at Absa Capital, the investment banking arm of South Africa's Absa.
"At the moment, the large corporates can borrow at very good rates in rands in South Africa, and the rand is what most of them need, so there is no real push to go offshore. But I think once M&A activity starts picking up, we might see more offshore activity."
Standard Bank's von Hartig is betting that corporations outside South Africa will begin to tap overseas markets, although a necessary minimum issuance of $250-$300 million will deter all but the biggest few firms in the region.
Some of the largest Nigerian and Angolan banks could be likely candidates, he said.
Any increase in bond issuance will be welcomed by international banks, which are pushing to increase their fees and commissions as a weak global economy continues to squeeze revenues.
Sub-Saharan debt issuance totalled $5.6 billion in the first nine months of 2010, down 30 percent from the same period a year earlier, but still well above the $1.6 billion in the first nine months of 2008, according to Thomson Reuters data.
Deutsche Bank took the top spot for bookrunner of debt capital markets deals in the region, followed closely by Standard Bank.
Barclays Capital, the investment banking arm of Barclays, which owns a controlling stake in South Africa's Absa, took the top spot globally for debt bookrunner. In Sub-Saharan Africa, it came in at fifth place.
Third place was occupied by Japan's Daiwa Securities, while Goldman Sachs took fourth.
By David Dolan - Reuters Africa
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