What do the Nigeria naira, Botswana pula, Tanzanian shilling and Ghanaian cedi have in common?
They are all sub-Saharan denominations in which the African Development Bank has successfully launched a bond – and more currencies are expected to follow as investors warm to the attractions of reforming domestic markets, whose debt has been significantly reduced by HIPC (Heavily Indebted Poor Countries) and other initiatives, and whose big infrastructure and other needs could be met from local financings freed of foreign exchange risk.
African countries have long scared off all but a few niche players in a trend well worked in other emerging markets – some of whom have made big profits on deals involving such unlikely instruments as bundled up Cameroonian public-sector wage arrears. Now, Bloomberg does bond curves for Africa, and hedge funds are minutely examining sub-Saharan deals as they build up the exotic side of their books. And supply of local currency instruments is growing to help meet this demand – while easing domestic financial pressures in the post-HIPC world.
According to Absa Capital’s regional head of investment banking Jeff Midzuk, “We are seeing a range of large companies looking to raise local currency funding, which will stop foreign exchange mismatches and provide more local visibility.” He reported Zambia, Mauritius, Ghana, Kenya and Tanzania as “active for his bank”.
Projects tapping into this debt have ranged from industrial park enterprises to the energy sector to financial institutions. A particularly noteworthy programme, lead arranged by Barclays Bank in 2006, involved Mauritius’ Central Electricity Board (CEB), which is to issue an overall MR5 billion-worth ($161 million) of rupee-denominated bonds to replace its foreign currency loans.
Fixed income investors are piling in, as they seek new asset classes to invest in, and yield curves establish themselves [see previous article]. This includes less fashionable areas, such as the CFA franc zone, whose economic stability is now widely praised, but whose 1994 devaluation still apparently worries some potential investors. According to one CFA bull, Morgan Stanley’s Steve Jennions, “There is nothing foreign investors hate more than maxi devaluations,” but the exchange rate looks stable now, and the franc zone has plenty to get excited about, including very low and stable rates of inflation, which guarantee more attractive rates of return than when compared to the fixed-income market’s favoured regional plays, Egypt and Nigeria.
African governments feel more comfortable with domestic debt too. According to Cote d’Ivoire’s treasury director Ble Lami, whose administration raised CFAFr200 billion on the local market between 2002 and 2006, “CFA borrowing allows us better to manage our debt stocks, and to overcome exchange rate fluctu-ations, one of the most important issues for us.”
BIGGER AND BETTER
As Africa’s local currency operations open up, ever bigger operations with longer maturities beckon. This is important, as most sub-Saharan markets remain very small. As a fixed income investor, “the first problem I’m confronted with is liquidity,” Jennions said: “Not that other African economies are large, but some in the franc zone are extremely small.” Further, CFA zone growth rates may be rising, “but they are very uninspiring compared to other emerging markets.” Jennions also compares West African bond yields unfavourably with those in Turkey, which is paying around 20% on its local government bonds.
Multilaterals are working to help build African markets. The AfDB’s first naira-denominated bond, worth around $100 million and carrying a fixed coupon of 9.25%, was “a remarkable achievement for the bank”, according to treasurer Stefan Nalletamby – who listed its innovations as the first naira-denominated note to be issued by a supranational; the AfDB’s largest local currency issue so far; and its first issue with an Africa-based lead manager, Standard Bank. The note is listed on the Luxembourg Stock Exchange and clears in dollars through Euroclear and Clearstream. It led to an innovative cross-currency interest rate swap executed by First Bank of Nigeria, acting as Standard Bank’s partial hedge counterparty.
Pierre van Peteghem, funding manager at the AfDB, says the next step for the bank will be to issue local currency bonds in local markets, to deepen these markets and create a triple-A benchmark for domestic banks to determine lending costs to the private sector in those countries. “But we are also getting more demand for long-term foreign currency lending, especially in the infrastucture sector,” he tells Emerging Markets.
According to Sarah Mathies of UK-based emerging market private equity investor Actis, “The political environment is absolutely critical.” Speaking on the eve of the April 21 presidential election, Mathies said, “Nigeria a key market for us, where we are looking to treble our investment over the next 18 months.” In this process, “currency rates are is critical, as we are dollar investors.”
PROJECT FINANCE GROWTH
Morocco and Egypt pioneered integrating local currency tranches into major project financings in North Africa, and to the south, the South African rand has long provided a platform for big ticket transactions.
Looking to tap into significant market appetite, Namibia Power Corporation is launching an estimated N$1.5 billion ($200 million) bond to part-finance its N$8.9 billion investment programme, advised by Johannesburg-based Fieldstone. Chief technical adviser Reiner Jagau says the funds are mainly needed to cover a hike in capital spending, on the long-awaited Kudu gas-to-power scheme and the 300MW-600MW Caprivi Link Interconnector, which dwarf NamPower’s investment budget. Fitch Ratings in 2005 assigned an investment grade BBB- senior unsecured foreign debt rating and a BBB+ senior unsecured rand zone debt rating to the Namibian utility.
Looking to benefit from its Common Monetary Area in Southern Africa (rand zone) membership and fast-rising demand for local currency emerging markets issues, NamPower’s debut corporate bond will be denominated in Namibian dollars and rand. Advised on the issue by Windhoek broker IJG Securities (Pty) Ltd and Johannesburg-based Rand Merchant Bank, no less than 26 institutions and groups submitted proposals to lead the issue.
Project finance is a growing business for Johannesburg-based banks, where Absa Capital is arranging a deal in Mozambique and holds the mandate for Songas’ debt refinancing in Tanzania. Absa is also adviser and debt arranger for CIC Energy Corporation’s estimated $5 billion, 3,600MW coal-fired Mmamabula power plant in Botswana, where the target is to close some $3.5 billion-$4 billion in debt in 2007. Much of this is expected to be backed by export credit agencies (ECAs) and development finance institutions – and will be denominated in rand.
Local currency project finance has arrived.