Bloomberg News

Africa Enthralls Goldman With Record Bond Sales: Credit Markets

May 06, 2013

Nigerian Central Bank Governor Lamido

Nigerian Central Bank Governor Lamido Sanusi said in March that the country, Africa’s second-largest economy, remains plagued by corruption. Photographer: Jason Alden/Bloomberg

Sub-Saharan African nations outside South Africa are selling $7 billion of debt this year, more than in the past five years combined, as yields more than double those of Treasuries lure investors repelled in the past by violence and corruption.

With the International Monetary Fund forecasting growth in sub-Saharan Africa to outpace all regions except emerging Asia in 2013, eight countries from Nigeria to Kenya have sold or plan to offer record amounts of bonds overseas. Average yields on African debt fell 88 basis points in the past 12 months to 4.35 percent, versus 1.75 percent for 10-year Treasuries, according to JPMorgan Chase & Co.

Africa is captivating bondholders as governments take advantage of record-low interest rates to fund infrastructure projects, such as the construction of roads, railways, ports and hydropower plants. Policy makers in the world’s poorest continent of more than a billion people are seeking to reduce reliance on donor aid by improving tax collection and diversifying their commodities-dependent economies.

“It’s a hugely exciting story,” Jim O’Neill, the chairman of Goldman Sachs Asset Management who plans to retire this year, said in an April 23 interview with Bloomberg Television in London. “The only thing one has to be a little bit careful of are many of those markets are still very undeveloped and suddenly there’s a lot of people around the world regarding Africa to be sort of fashionable and trendy.”

Bond Plans

Nigeria, sub-Saharan Africa’s largest oil producer, plans to offer $1 billion of Eurobonds this year and a $500 million diaspora bond, Minister of State for Finance Yerima Ngama said in an interview in London on Feb. 5. Kenya, East Africa’s largest economy, expects to sell sovereign bonds by September, raising as much as $1 billion, Finance Minister Robinson Githae told reporters in the nation’s capital of Nairobi on March 11.

Tanzania has enlisted New York-based Citigroup Inc. to help it get a credit rating before issuing a maiden Eurobond of at least $500 million by year-end. East Africa’s second-largest economy attracted $2.5 billion of bids for a private offering of $600 million in debt in March, Finance Minister William Mgimwa said March 19 in an interview in Dar es Salaam.

Angola plans to sell $2 billion this year after a $1 billion private sale in 2012, VTB Bank OJSC (VTBR) Chairman Andrey Kostin, who helped arrange the first issuance, said by telephone Oct. 31 after meeting President Jose Eduardo dos Santos in Luanda. Miguel Bastos de Almeida, a spokesman for the minister of finance, said May 3 he couldn’t comment on debt plans.

‘Significant Potential’

Uganda and Mozambique may also sell foreign-currency bonds of more than $500 million each over the next few years, Moody’s Investors Service said in a report released in October.

“We see significant potential in Africa,” Kristin Lindow, a sovereign analyst at Moody’s in New York, said in an e-mailed reply to questions May 3. “Investors’ search for portfolio diversity as well as yield contributes to high demand for initial offerings from issuers in a frontier region with demonstrated growth potential.”

While sub-Saharan Africa is getting a fresh look from investors, 11 nations count among the 25 most corrupt of 174 countries measured by Berlin-based Transparency International. Nigeria and Kenya rank 139th, Angola 157th and the Democratic Republic of Congo 160th. Nigerian Central Bank Governor Lamido Sanusi said in March Africa’s second-largest economy remains plagued by corruption.

Political Risks

“The current conditions of a lot of liquidity out there is not going to last forever, but these political risks that are there and perhaps being under-appreciated are not going away,” Mark Rosenberg, a senior Africa analyst at Eurasia Group, said by telephone from New York on April 19. “There are headwinds in all these countries. When the money dries up the risks will still be there.”

Ivory Coast, the world’s biggest cocoa producer, defaulted on dollar bonds two years ago after ex-leader Laurent Gbagbo refused to cede power to Alassane Ouattara. Zambian President Michael Sata fired the governor of the central bank and its board, reversed a foreign takeover of a bank and halted mineral exports within two weeks of taking office in September 2011.

“For governments, great, don’t look a gift horse in the mouth,” Charles Robertson, global chief economist at Renaissance Capital, said in an April 25 phone interview from London. “I still don’t believe investors are getting risk-adjusted returns in the dollar-bond space.”

Zambian Woes

Zambia and Nigeria are still dependent on single commodities for government revenue. Qua Iboe, one of Nigeria’s main export grades of crude oil, has declined 13 percent since reaching a 10-month high in February. Copper, which accounts for 80 percent of Zambia’s export revenue, posted its biggest monthly decline since May 2012 last month.

Yields on Zambian bonds due September 2022 have jumped 20 basis points, or 0.2 percentage point, in 2013 to a record 5.66 percent May 3. Lawmakers are seeking to lift immunity from prosecution against former President Rupiah Banda, who is accused of abusing his authority, a charge he denies. Zambia aims to borrow another $1 billion overseas this year, Deputy Finance Minister Miles Sampa said by phone April 16.

While rates for Zambia have been rising, yields for benchmark dollar-denominated debt issued by Nigeria, Gabon, Ghana, Ivory Coast, Namibia, the Congo, Senegal and the Seychelles have declined this year.

‘Money Plentiful’

Nigeria, Africa’s most populous nation, has seen yields on its existing $500 million of dollar debt due 2021 drop 274 basis points since their January 2011 sale to 4.05 percent on May 3, down from a peak of 7.30 percent in October 2011.

Ghana, which has seen yields on its $750 million of Eurobonds due October 2017 fall 343 basis points to 4.82 percent since their October 2007 issue, plans to sell more than $1 billion in dollar debt this year, according to two people with knowledge of the plans. Borrowing costs on Gabon’s $1 billion dollar bonds maturing December 2017 have fallen 478 basis points to 3.13 percent since their December 2007 sale.

Rwanda, whose economy is growing at an annual pace of more than 7 percent just 19 years after a genocide in the country killed about 800,000 people, raised $400 million in a debut Eurobond last month, at a 6.875 percent coupon. Yields on the 10-year notes, which lured demand of $3.5 billion, were unchanged at 6.91 percent by 2:48 p.m. in Kigali, the capital.

Debt Canceled

“Money is plentiful and investors are keen to pick up yield given that yields are internationally very low,” Giulia Pellegrini, a sub-Saharan Africa economist at JPMorgan, said by phone from London on April 22. “Some of these countries have made improvements in terms of macroeconomic stability, to some extent economic diversification.”

The World Bank and IMF seven years ago began canceling $37 billion of debt owed by the world’s poorest countries including Rwanda and Tanzania, Zambia and Uganda. More than half the continent’s population lives on less than $1.25 a day, according to the World Bank.

Programs of debt forgiveness have helped 45 African nations from Angola to Zambia cut debt to about 42 percent of gross domestic product this year from an average 120 percent in 2000, according to data compiled by Bloomberg and IMF estimates. South African debt is forecast by Finance Minister Pravin Gordhan to peak at 40 percent of GDP in 2016 compared with more than 100 percent for the U.S. and an average 93 percent in the euro-area.

Roads, Power

Sub-Saharan Africa needs more than $93 billion a year to overcome inadequate road networks and power and water shortages that shave at least 2 percentage points off economic growth annually, according to the World Bank. The IMF estimates the region will post growth rates of 5.6 percent in 2013, faster than the 1.2 percent expansion in the developed world, according to the Washington-based lender’s World Economic Outlook report released last month.

“A combination of a solid regional growth outlook and improving governance levels suggests that yields should remain reasonably well anchored,” Shilan Shah, an Africa economist at Capital Economics Ltd. in London, wrote in an April 30 report. “This is likely to prompt a number of other countries to tap international markets.”

Default Swaps

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 0.18 basis point to a mid-price of 71.4 basis points as of 11:48 a.m. in New York, according to prices compiled by Bloomberg.

The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, increased 0.62 basis point to 14.45 basis points as of 11:46 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.

Bonds of Charlotte, North Carolina-based Bank of America Corp. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 4.1 percent of the volume of dealer trades of $1 million or more as of 11:49 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

To contact the reporter on this story: Chris Kay in Abuja, Nigeria, at ckay5@bloomberg.net

To contact the editor responsible for this story: Vernon Wessels at vwessels@bloomberg.net


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