Until the end of 2005, international investors had limited opportunities to participate in the bond markets of sub-Saharan Africa. The South African rand was one of the few currencies available to issuers and northern hemisphere investors who wished to bet on Africa.
However, the European Investment Banks P500m ($89m) five year Botswanan pula issue in November 2005 changed that. This synthetic deal was hailed as the first Eurobond in a sub-Saharan African currency apart from the rand, and capitalised on international investors demand for exposure to the African continents credit story.
Since that deal, issuers and investors have not looked back. Many more African currency Eurobond markets have opened, including the Nigerian naira, Kenyan shilling, Ghanaian cedi, Tanzanian shilling, Zambian kwacha, Mauritian rupee and West African CFA franc.
"Africa as a continent is now much more visible and tangible than ever before," says Richard Teichmeister, head of funding for Europe (excluding euros) and Africa at the EIB in Luxembourg. "Since our transaction in Botswanan pula in November 2005, we have issued in various other African currencies."
Thomas Schroeder, deputy head of funding at the EIB, says that five years ago, issuance in all these currencies would have been seen as unlikely. "However," he adds, "there is now activity in a range of currencies and also African sovereigns coming to the international bond market, which shows a growing investor interest in the continent."
While most of these markets remain in their infancy, it is not difficult to see why issuers want to borrow in them and why investors want to buy their deals.
"As a large issuer, the diversification of our investor base is very important," says Horst Seissinger, head of capital markets at KfW in Frankfurt. "Our best marketing tool is to be available in as many currencies and maturities as possible."
Apart from the rand, KfW has been particularly active in Nigerian naira. It priced its second transaction in the currency in January this year, a N17bn ($144m) three year issue led by Standard Bank. This was the biggest naira bond by a foreign issuer to date.
Developing local markets
Besides finding new investors, some issuers see it as part of their mission to foster the development of developing country bond markets.
"The impetus for us is to develop local currency markets and therefore to be able to provide financing in local currencies to borrowers who need it, so that they are not exposed to FX risk," says Pierre Van Peteghem, treasurer at the African Development Bank in Tunis.
"We intend to continue to be present as an issuer in the markets where we have already done issues, but also in new markets, depending on the financing needs in different currencies."
The AfDB has been one of the most active supranational issuers in opening bond markets in new currencies. In January 2007 it became the first borrower to launch a Nigerian naira Eurobond, albeit in synthetic format, and it was also the first to launch a Botswanan pula deal fully clearable through Euroclear.
Like the AfDB, the European Investment Bank also wants to foster local markets.
"Under the Cotonou agreement, which governs the relationship between the EU and the ACP [African, Caribbean and Pacific] countries, the EIB has lending operations on the African continent," says Teichmeister.
"As a result, there is a long term goal to be active in these local currencies and this is what drives our activities on the funding side."
Other supranationals such as the International Finance Corp, share the same mission. The IFC has shunned synthetic deals and has focused on ground level work in the countries concerned.
This has involved lengthy discussions with local authorities and so far, the IFC has done two purely domestic deals one in Moroccan dirhams in 2005 and one in West African CFA francs, in November 2006.
"As an institution, we have a deeper interest in the development of local markets, as our clients benefit from the development of those markets and the ability to issue locally," says John Borthwick, deputy treasurer and head of funding at the IFC in Washington.
"Our transaction in CFA francs, a currency shared by eight countries, was the result of requests by many of our clients for the ability to on-lend in CFA francs. The deal was in part hedged for funding purposes and the rest lent directly to our clients."
A very similar rationale applied to the Agence Française de Développement, Frances overseas development agency, which priced its first deal in West African CFA francs at the end of March 2008. The CFAfr20bn ($48m) eight year issue, led by BNP Paribas, was AFDs first issue in a sub-Saharan currency."This issue aims at setting an example or benchmark for what we might do next, and is something we have done to promote long term capital markets in West Africa and to provide adequate funding for small and medium-sized enterprises in this area," Rémy Genevey, chief financial officer at the AFD in Paris, told EuroWeek in March.
Like the IFC deal, AFDs CFA franc bond was sold mainly to local investors, and followed a lengthy process of preparatory work.
The transaction needed approval from all eight finance ministers in the CFA franc zone Benin, Burkina Faso, Guinea Bissau, the Ivory Coast, Mali, Niger, Senegal and Togo.
However, the process is expected to get quicker in future. "The institutional framework is improving and has improved even while we were preparing the issue," says Genevey. "Now finance ministers have agreed that issuers will only need one authorisation from the central bank."
Hurdles still to clear
However, true domestic deals remain very much the exception and most issues have been synthetic transactions aimed at international investors.
Only a few currencies, including the Botswanan pula, the Egyptian pound and the South African rand, can be settled through Euroclear.
But settlement issues are only one of the obstacles to further development of African currency markets.
"A lot has got to be done as far as the regulatory framework is concerned as well when it comes to documentation issues," says Van Peteghem.
"Some standardisation and simplification will be required for these markets to broaden further. Furthermore, all of these markets are still quite fragmented and the next step will be some regional integration."
Limited swaps markets are a big hurdle, as are African countries under-developed government debt curves.
"Not many issuers can issue locally and this is one of the reasons for the absence of derivative products," says Van Peteghem. "The government yield curves might go out as far as 25 years but there are no interest rate swaps. Development of deep derivatives markets is a key phenomenon. More and more banks are starting to offer cross-currency swaps, but this is still in its infancy."
Can issuance continue in 2008?
While these framework issues are likely to be solved over time, the question for 2008 is whether the credit crunch will spread as far as Africa and whether investors will lose their risk appetite for more exotic currencies."So far this year, things have been relatively quiet," says Kentaro Kiso, head of frequent borrower debt capital markets at Barclays Capital in London. "We are seeing risk aversion from investors, despite the decoupling of the emerging markets from the credit crunchin general, and the bull run in commodities. There is some anxiety around the liquidity in African markets, to which you have to add political instability in some cases."
KfWs Seissinger agrees. "So far there has been a slowdown this year, as investors are focusing temporarily on the most liquid credits and currencies and avoiding emerging markets currencies," he says. "But this could well change later in the year as investors seek to buy top credit in more exotic currencies."
Pickings for investors have been slim in African currency Eurobonds this year, but there have still been some interesting issues.
One of the highlights of the year was the ZK125m ($33m) three year deal in Zambian kwacha, issued by the European Investment Bank through Barclays Capital and WestLB. This was the first international bond in Zambian kwacha and the EIBs seventh in an African currency.Some investors certainly have bullish views on the region. "I expect 2008 to be a good year, assuming the world does not end," says Francis Beddington, head of research at Insparo Asset Management in London.
"There would have to be a significant collapse in commodity prices before things start to look difficult. We expect emerging markets will continue to remain attractive and Africa remains lowly correlated to the current credit crunch. With these under- developed markets, it pays to have a first mover advantage."This view is echoed by some bankers. Ade Adebajo, head of debt capital markets Africa at Standard Chartered in London, says: "We still expect the multilaterals to be looking to access the local African currency markets. They will be able to execute transactions in the Eurobond format, which should pave the way for these currencies to achieve settlement and, in some cases, denomination status with the clearing systems."Adebajo adds that such deals will provide a good entry point for accounts that are yet to take on corporate risk.
Issuers are also still optimistic, exemplified by AfDBs Van Peteghem."So far Africa has been quite disconnected from the rest of the world," he says. "What was previously a curse could now well be a blessing, especially with growth which we expect will continue to be above 5% in the coming years."
Uridashis pick up the slack in Rand bonds
The South African rand is the most mature sub-Saharan currency bond market.
Borrowers such as the European Investment Bank have been issuing in the currency since 1996 and see it as a core component of their niche currency funding. As well as a developed Eurobond market, the rand also has a developed local market with domestic issuers regularly tapping it alongside the government.
However, the pace of issuance so far this year has been a little disappointing, apart from the issuance in February of two large rand Uridashi bonds in Japan, by the International Finance Facility for Immunisation and Toyota Motor Credit Corp.
"The main reason why things have been so quiet is because the South African central bank is still on a hiking cycle, while the FX continues to weaken," says Martin Nielsen, global head of local market Eurobonds at ABN Amro in London.
"Investors want to see some sign of improvement in the domestic economy before getting involved again. At the moment, inflation numbers continue to disappoint, despite the hike in rates."
Nielsen believes there will be a pick-up in rand issuance later in the year. One of the drivers behind it, he says, will be the widening swap spread. Triple-A Eurobonds have widened to around 100bp over government bonds, making them a very attractive proposition for investors.IFFIm and TMCC priced R1.7bn and R1.656bn deals respectively, taking total rand issuance in Japan in February to over R3bn ($380m). The main driver has been persistently high yields: the IFFIm deal carried a 9.9% coupon, while TMCCs paid 10%.