Printing in the MTN format allows issuers to raise debt in smaller and potentially bite size amounts compared with the $250m-$350m or larger that investors require in the public market. As it gives issuers another funding option away from loans and local markets, it seems the ideal solution for many borrowers on the continent. But it comes with its own set of challenges.
Established banking wisdom is that to set up an MTN programme is in the long run easier and cheaper than repeatedly filing documentation required for a Eurobond. But it is still necessary to provide the same disclosures to dealers that would be required for a benchmark bond. The hurdle of getting disclosures in place may still prevent some African borrowers from accessing international money anytime soon.
Liquidity is also an issue. MTN investors typically like investment grade names because they realise they are vulnerable in the event that the market turns against them — the small sizes in the MTN market make the deals illiquid. An MTN banker said that it would take a larger number of emerging market borrowers issuing frequently to quell fears related to liquidity.
However, the reverse enquiry that already exists for African borrowers is very much on a case-by-case basis, rather than necessarily for any African name. Appetite has been growing for Kenyan, Nigerian and Namibian privately placed MTNs from state-owned entities and some banks, with reverse enquiries of $25m-$100m at a time.
The Turkish private placement market offers an example of emerging markets MTN success and how quickly this product can be adopted by a whole sector.
But Turkey has several similar frequent financial borrowers that issue in similar sizes and maturities, some of which have established themselves through benchmark issues. In addition, Turkey’s proximity to Europe means it is often seen as an extension of the European market.
In Africa there is no such tight-knit MTN market for investors to have already got comfortable. When the MTN market does develop, issuance will be spread over multiple countries and will be fuelled by infrequent, and varied issuers. It will take a large number of investment grade issuers establishing MTN programmes and visiting the market on a regular basis to develop a reliable international investor base.
But despite the challenges, it is worth persevering — the format is a good fit for some issuers and some investors, setting up formal MTN programmes will help issuers deliver the transparency of public filings and scrutiny that the public Eurobond market encourages.
Africa may well leapfrog the Eurobond market and go straight to MTNs, in the same way that much of the continent’s population went straight to mobile phones before becoming accustomed to landlines. Hurdles remain before African issuers can embrace this market’s full potential, but they are ones worth jumping.