African sovereign risk has historically been considered a step too far for international banks to take onto their own balance sheets. In search of funding, those issuers have instead been making efforts to tap the international bond markets. A few have managed just that Nigeria, Senegal and Namibia have all placed bonds in the market since the start of last year.
But Kenya's two year syndicated loan, which launched into general last month, is being seen as opening up the prospect of similar deals for others. The size of the financing at $600m shows that loans teams are able to step in with deals that rival bond sizes. Nigeria's bond last year was for $500m.
Kenya had long looked at doing a bond, but wanted better funding costs and a quicker deal than was available in the bond market given the prevailing conditions. Pricing was keen: an all-in that was said to be more than 550bp on the loan is reckoned by bankers to be cheaper than where the sovereign could get a bond away. And African sovereigns are more sensitive to cost than some: there is much capital to be made by opposition politicians accusing governments of getting a bad deal.
Despite all that, a rush to the loan market by others would be shortsighted. First off, the short tenors achievable are not ideal for nations that would benefit from long duration funding for infrastructure.
More significantly, the premium to be paid in the bond market ought to be seen as a small price to pay for the broader benefits. International lenders may well be happy to consider funding sovereigns, but local corporates and financial institutions are slipping further down the list. EM bond investors, however, would be happy to take them on for the right yield but will want a sovereign curve to price off.
Sensible sovereigns, particularly in those markets where private sector bond issuance is at an early stage, recognise their responsibility to foster that funding source. A sovereign bond will ease the path for other credits to follow. A loan will not. Governments need to look beyond the short-term benefit of a lower headline cost if they are to put their economies on the route to sustainable long-term funding.