Rising cost of debt clouds Africa’s bid for Eurobonds

In a year when a record number of African countries are lining up to join the Eurobond club, membership just got pricier.

After Zambia saw unprecedented demand for its debut $750 million Eurobond last September, some predicted that a rush of African issuers would tap international debt markets in 2013.

Rwanda was first out of the blocks, issuing a $400 million 10-year bond at a 6.875 per cent yield in April despite its B rating and a recent disruption to its foreign aid flows caused by some donors’ displeasure over Kigali’s alleged meddling in neighbouring Democratic Republic of Congo.

Ghana and Nigeria announced plans to return to the market after their debuts in 2007 and 2011 respectively, while Kenya, Tanzania, Uganda, Angola and Cameroon are also potential candidates.

(Read: Treasury to issue Kenya’s first eurobond in September)
But as the global economy comes to terms with a possible end to the US Federal Reserve’s bond-buying programme in 2014 and rising US Treasury yields have sparked a sell-off in emerging market assets any hopes that African governments held of borrowing at cheap rates are likely to be dashed. “The window of opportunity in accessing the Eurobond market by African sovereigns is closing,” said Angus Downie, Ecobank’s head of economic research.

“They’re going to have to face the reality that investors will want higher yields in order to invest in what they consider now to be slightly more risky assets.”

Demand for African Eurobonds is still expected to be solid given their scarcity and investors’ desire for diversification, but without the Fed’s stimulus, the days of outsized order books are probably gone.

(Read: Debut bond at risk from Fed plans)

Zambia, which launched its Eurobond on the same day the Fed announced its third round of quantitative easing, received $11.9 billion of bids, more than 15 times the issue size, while Rwanda’s bond was more than seven times oversubscribed.

“I would say the past 12 to 18 months were God’s gift to issuers and clearly things are slowly normalising,” said Nicholas Samara, vice president in capital markets origination at Citi. “Most likely you’re not going to see these $12 billion order books anymore. Simply put, we’re in a different world.”

Reflecting the new reality, yields on African Eurobonds have climbed significantly in the past month, by more than 100 basis points for Rwanda’s 2023 bond and nearly 300 basis points for Senegal’s 2021 paper.

Nigeria’s 2021 bond is trading at a yield of 5.9 per cent from a low of 3.66 per cent in January.
Africa’s biggest oil producer, which plans to raise $1 billion this year to fund infrastructure in the power sector, completed a European and US roadshow this week but will not issue yet given volatile market conditions.

When it eventually taps the market, it will pay a higher price than if it had done so earlier this year, but its strong fundamentals and familiarity to investors means the bond will be oversubscribed, analysts said.

Its domestic debt was about 18 per cent of GDP in 2012 and external debt 2.5 per cent of GDP, lower than its peers.

Inflation is in single digits and investors are optimistic about power sector reforms, seen as key to unlocking further growth potential in the Nigerian economy.

A dollar bond from Kenya, with its diversified economy and traditionally low levels of external debt, should be well received, but countries like Ghana that are struggling with high budget deficits will face more investor scrutiny, said Razia Khan, Standard Chartered’s head of research for Africa.

Small or mid-sized economies such as Tanzania are likely to face questions about the sustainability of their borrowing. The higher yields investors would demand could put such countries under pressure, potentially creating problems with repayment in the future, said Downie.

“Definitely, we’re going to see smaller sovereigns that may not have accessed the Eurobond market rethink their strategy,” he said.
Samara believes several issuers will still take the leap, especially given their need to diversify their sources of financing and fund infrastructure projects.

Rates are still lower than they were before the global financial crisis, he points out. Ghana and Gabon’s 10-year bonds are yielding 6.95 per cent and 4.8 per cent respectively but both countries issued at yields of more than eight per cent in 2007.

“Today’s markets, historically speaking, are still very attractive compared to where they were pre-crisis,” Samara said. Many African sovereigns will probably issue once they have lined up specific projects that need financing, a difficult task that may have caused some to delay their plans, said Florian von Hartig, head of debt capital markets at Standard Bank.

“It’s a wonderful thing if interest rates are low but if you don’t have an immediate use for the money then there’s no point in raising the money, otherwise you incur massive negative carry,” he said.

But a slowdown in quantitative easing is not necessarily a bad thing, said Khan, as it means pricing for Eurobonds will now take into account a country’s credit standing, discouraging reckless borrowing.

“Now we’re going to get perhaps a finer pricing for risk,” she said. “That, from the perspective of longer term debt sustainability, is a very crucial safeguard to have in place.”