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African debt issuance dries up – for now

The scarcity of corporate bond issuances across Sub Saharan Africa follows a lack of sovereign issuance, with South Africa being the only country in the region to issue on the international markets this year. It appears that many corporates are reassessing their capital expenditure plans and funding needs, while states planning debt sales may wait until after a US interest rate rise.

May 19, 2016 // 5:26PM

The dearth of African debt issuance as of late is driven in part by a slide in commodity prices, which has prompted companies and sovereigns to look at whether additional funding is necessary, according to analysts.

“The recent absence of African entities from the international capital markets should be seen positively, as it is unwise to have a reckless approach to the Eurobond market” said Stephen Charangwa, a Portfolio Manager at Aluwani Capital Partners.

On the corporate side, the larger African companies have been absent because, as Charangwa noted, many of the larger corporates on the continent are owned by parent companies that issue bonds themselves, disbursing the funds through subsidiaries.

“Many African corporates are too small to borrow through a Eurobond given the deal sizes it would need to access these markets; they do not need that level of funding.”

Charangwa said many smaller corporates have begun to borrow privately or access the syndicated loan markets, where rates are lower due to increased competition amongst banks over lending.

The need to borrow cheaply is on the rise in Africa, which may also lead to an increase in the number of concessional loans in operation. Additionally, the fact that the US Federal Reserve may raise interest rates in June could also impact debt issuance across Africa.

Charangwa noted that pressure on yields will likely increase on anticipation of a US rate hike, as the markets tend to overreact.

Nevertheless, on the news of a potential rate hike, it has emerged that both Senegal and Nigeria are planning debt sales. The former is looking to raise between US$500mn to US$1bn in either a Eurobond, sukuk or Samurai bonds, with a target yield of 6% or less. Nigeria is looking increasingly towards issuing sukuk once its regulatory framework is updated. The proceeds of both deals would be used to fund infrastructure projects.

Kenya is also lining up an issuance, and some analysts suggest East Africa as a whole would likely see more debt deals emerge as these countries are in better financial shape than their West African neighbours, which have faced pressured finances as a result of low oil prices.

Charangwa said it is unlikely these sovereigns are rushing to place their deals before a US rate rise.

“It is impossible to chase the Fed, and yields will remain relatively low regardless.”

He said bookrunners would look for an issuing window after any hike, when yields have stabilised and volatility has calmed, adding that the recent lack of issuance will create scarcity demand for any debt, especially for debt emerging from Senegal. The country is currently in the early stages of exploiting newly discovered oil & gas resources, that could play a significant role in boosting its finances.

Africa Energy Projects & Infrastructure Macro

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