African Sovereign Eurobond 2015 Review: Eurobond issuance steady at $6.75billion, but with a higher premium

Lagos, Nigeria, Capital Markets in Africa — The year 2015 was a challenging year for African economies as a result of falling commodity prices, lower demand from China and the hike in the US Fed rates. In spite of this, the Eurobond issuance by African sovereigns still came to US$6.750 billion for 2015 compared to the record US$8.7 billion issued in 2014.  The market value weighted average issue yield is at 7.90 percent (a higher premium compared to other emerging economy Eurobonds).

In March 2015, Cote D’Ivoire was the first African sovereign to test the Eurobond market by issuing US$ 1 billion in bonds maturing 2028 at 6.375 percent. It was four-times oversubscribed and the proceeds of the Eurobond will go towards fulfilling goals in the Country’s National Development Plan (NDP) which focuses on infrastructure, improving education and healthcare and reducing poverty. As at 31 December, the yield on the Cote D’Ivoire’s 2028 Eurobond was at 7.48 percent after widening by 70.1 basis points since issued date.

In June, both Egypt and Gabon issued 10-year bonds with the amounts issued at US$1.5 billion and US$500 million respectively. The Egypt bond was issued at 5.88 percent and has widened to 7.85 percent at the end of the year. Likewise, Gabon’s 2025 closed at 10.32 percent yield compared to 6.95 percent at issue date. Zambia which is rated at B by S&P, five levels below investment grade, raised US$1.25 billion in bonds maturing in 2027 at 9.375 percent in July with spread widening by 168 basis points to close at 12.38 percent at the end of December.

Ghana issued a 15-year Eurobond maturing in October 2030 at 10.75 percent annual coupon rate and an issued amount of US$ 1 billion with 40 percent guaranteed by the IMF. The spreads on the bond had narrowed by 24.10 basis points since the issued date to close at 10.75 percent at the end of December. While Namibia issued US$750 million dollar-denominated Eurobond paying an annual coupon rate of 5.25 percent and maturing in October 2025. As at 31 December, the yield on the Namibia’s 2025 Eurobond was at 6.13 percent after widening by 32.02 basis points since issued date.

The republic of Angola launched its first 10-year benchmark Eurobond in November. Also in November, Cameroon sold its debut Eurobond at the high end of its target yield as some investors stayed away because of the slump in commodity prices. The country raised $750 million of securities due in November 2025 at 9.75 percent.

The total amount outstanding of Eurobond issued by African sovereign entities was recorded at US$47.2 billion at the end of December 2015. Out of which US$1.8 billion (Egypt: US$1 billion and South Africa: EUR 750 million) and US$1.2 billion will mature in 2016 and 2017 respectively.

The spreads on the African sovereign Eurobond widened at the end of December 2015 compared to the December 2014 yield, with some exceptions: Ghana’s 2017 (year-to-date spread of -38.0 basis points), Morocco’s 2017 (year-to-date spread of -55.60 basis points) and South Africa’s 2016 (year-to-date spread of -9.0 basis points.  The table below shows the yield to maturity and spread movements for some selected African sovereign Eurobonds at the end of December 2015.

What is the Prospect for 2016: African countries are  sitting on a large funding gap and there are more questions about how these governments are going to raise the money to plug the gap. The funding gap can theoretically be filled from domestic as well as international sources. Can it be locally funded? Africa’s ability to finance rising fiscal and current account deficits locally is limited by its mainly small and illiquid domestic debt markets.  In many countries, an exclusive reliance on domestic markets for financing large deficits would quickly crowd out credit extension to the private sector and further cloud the growth outlook. Additionally, most African currencies are pegged or under a controlled currency regime, hence foreign investors are unwilling to invest in local bonds even at a higher premium. As a result of currency control both JP Morgan and Barclay have excluded Nigeria from its local currency government bond index in 2015.

So, most African countries will have to tap into the Eurobond markets as a result of its unregulated nature but these countries will have to demonstrate to investors how the fund will be used and offer at a higher premium. Nigeria may sell debt for the first time since 2013 to fund a record spending plan according to the Finance Minister Kemi Adeosun in a statement last month while the Democratic Republic of Congo also plans to issue a Eurobond of nearly a billion dollars to invest in projects that will help stimulate economic growth.