African nations planning to issue Eurobonds are set to pay higher rates and face more scrutiny from buyers as the Federal Reserve cuts back on cheap money that drove record bond sales in 2013, Standard & Poor’s said.
“The heydays of bond offerings from newcomers or from frontier markets, like the African issuers we have seen over the last couple of years” have ended, Konrad Reuss, head of S&P’s sub-Saharan Africa unit, said in an interview Thursday at the African Development Bank’s annual meeting in the Rwandan capital Kigali.
Periods of “oversubscribed bond offerings and very narrow, very tight spreads are over,” he said.
Deficits in Ghana, West Africa’s second-biggest economy, and Zambia, the continent’s number two copper producer, led to creditworthiness downgrades and debt selloffs.
Ghanaian bonds returned 0.7 per cent in 2014 and Zambia’s earned 6 per cent, less than the emerging-market average of 7 per cent, according to Bloomberg indexes.
Growth in at least five nations with dollar debt is set to lag the sub-Saharan African average of 5.4 per cent this year, according to the International Monetary Fund.
Issuance in sub-Saharan countries may reach $6 billion this year, after a record $6.25 billion in sales in 2013, Fitch Ratings said.
Reductions in the Fed’s monetary stimulus that pumped cheaper cash into developing-nation assets is changing the conditions of issuance for countries with struggling economies, Reuss said.
“We are going through a phase of tapering,” he said. “The very benign market environments we had two or three years ago when we had the first kind of flood or wave of Africa bond issues has changed.”
Senegal is hiring banks for its second debt sale of as much as $500 million by July, Finance Minister Amadou Ba said on May 21.
Kenya may offer its debut bond this month after settling court-awarded payments linked to a corruption scandal that blocked the issuance, Treasury Secretary Henry Rotich said the same day. Ghana and Rwanda have also discussed offering Eurobonds this year.
Investors demand 418 basis points more to hold Senegal’s dollar-denominated bond rather than similar-dated Treasuries. The premium on Gabonese notes due December 2024 rose nine basis points to 280 since reaching a record low on May 12.
Rising African yields may be a reflection of more realistic risk pricing, Reuss said.
“I don’t think that the markets will shut down for African issuers,” he said. “There will, however, be more risk differentiation and investors will focus more on what the underlying credit story is.”