Tuesday, 29 July 2014

Despite security challenges, Ngeria tops other African countries on Issurance

Bond issuance volumes from sub-Saharan African have already surpassed last year’s levels with the promise of more to come and Nigeria leading the trend of corporate issuance.

African issuance has dominated CEEMEA supply over the past month, with at least three more transactions possible over the coming next couple of weeks.
African and African-related issuers excluding South Africa and the Maghreb region have already raised US$9.35bn, as of July 25 according to IFR data. That compares with US$8.28bn in 2013.
The increase in issuance out of sub Saharan Africa reflects investors’ search for higher yielding assets as well as portfolio diversification. And while new or rare sovereign borrowers are leading the way, Nigerian banks as well as energy companies are taking advantage. A recent deal from Helios Towers Nigeria shows that other industries are also becoming more open to bond market financing.
In July alone, seven issuers with Sub Saharan African interests have issued bonds raising US$3bn (South Africa and Tunisia have also sold bonds this month).

And the issuance spree is to set to continue with potential deals from Ecobank Nigeria, which is eyeing a Tier 2 bond via Deutsche Bank and Standard Chartered, and Nigerian oil and gas corporate Seven Energy, which has hired Deutsche Bank, Morgan Stanley and Standard Chartered as global co-ordinators.
The Nigerian sovereign is also likely to be in the bond market soon with a unique local currency bond offering that will be sold under a GDN format and will be Euroclearable.

But as well as the strong technical backdrop, bankers say investors are also being swayed by Africa’s growth potential.

“They want to know what the money is being issued for. They want to buy into the African growth story, and the focus for them that the use of proceeds are viable investments that return high profits in a quick amount of time. Investors are not just looking at comparables when looking at Africa now, they are investing in the fundamentals, and this can prove to be good value for those searching for higher yielding returns,” said Nicholas Samara, vice president, CEEMEA debt capital markets, Citigroup

It’s a view shared by Mahan Namin, portfolio manager at Insparo Asset Management. “Sub Saharan sovereign borrowers have recently been able to issue 10-year paper at yields around the 6% level, which is very good by historical standards, particularly given the increased pace of issuance out of the region in the last couple of months. Also, many of the borrowers are no longer debut issuers, another reflection of how the landscape has changed and why investors are more comfortable buying.”
Senegal returned to the market last Monday to print its second issue – a US$500m 10 year deal that has a coupon of 6.25%. That compares with a coupon of 8.75% on its outstanding 2021 notes.
Samara believes that if the deal was issued before the “taper tantrum”, especially in January 2013, Senegal could have achieved even tighter pricing.

Clearly, there are risks and investors need to be selective. While the big sovereigns should have no problem pricing, the more higher-yielding credits in the FIG and corporate sectors need to pitch their appeal carefully. Nigeria’s First City Monument Bank, for example, shelved a deal earlier this month after failing to get sufficient investor support at its targeted pricing levels.

Still non-sovereign activity is expected to accelerate, particularly in Nigeria, according to Namin.
“By country, Nigeria is leading the trend of corporate issuance over the last two months, with successful issuance from the telecoms sector, oil and gas sector as well as financials issuing Tier 2 debt.”
Okan Akin, emerging markets corporates analyst at Alliance Bernstein, agrees that Nigerian names have been an interesting emerging market high yield opportunity for investors.
“The country has a strong sovereign balance sheet, with low external debt levels, current account surplus, provides a positive backdrop. More importantly, this is also supported by relatively better secondary market liquidity with strong local investor base, which is not the case for most other Sub-Saharan African countries.”
Seven Energy will be the next Nigerian corporate to test investor appetite. “It ticks a lot of the boxes, as it has a strong shareholder support, it’s the right sector that investors are looking at, and it has a credible investment plan. The downside with this company however is that it is dependent on only one contract so everything hinges on that.”



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