African Sovereign Eurobonds: Recap and Prospects in 2017

LAGOS (Capital Markets in Africa) – Eurobond issuance by African sovereigns was recorded at US$9.726 billion by four countries (South Africa, Ghana, Egypt, and Mozambique) in 2016 compare to US$6.750 billion issued by eight countries (Egypt, Ghana, Gabon, Ivory Coast, Namibia, Zambia, Cameroon, and Angola) in 2015.

In April, the Republic of South Africa successfully priced and issued a US$1.25 billion 10-year Eurobond. The US dollar bond was priced at a coupon (interest rate) of 4.875 percent, which represents a spread of 335 basis points above the 10-year US Treasury’s benchmark bond. The transaction was more than two times oversubscribed and the proceeds of the bond will partially finance the government’s foreign currency commitments of US$6.4 billion over the medium-term.

Also in April, Mozambique came to the market to restructure US$850 million debt, which was issued in 2013 to finance Tuna Fishing but used by the government to buy military equipment instead. The new bond US$727 million was issued at 10.50 percent with principal repayment at the maturity date of 2023. Recently, Mozambique failed to pay US$59.8 million interest on the Eurobond in January 2017, hence technically in default (Fitch ratings had downgraded Mozambique to ‘RD’ in November).

In September, Ghana raised $750 million sinkable Eurobond at a yield of 9.25 percent in an auction that was more than five times oversubscribed (which in excess of US$4 billion). The bond will be repaid in three equal installments between September 2020 and the same month in 2022. The proceeds will be used to refinance existing debt and fund capital investments. The Eurobond settled with a yield of 7.619 percent at the end of December 2016.

Furthermore, the Republic of South Africa placed US$3 billion in new notes maturing in 2028 (12 years) and 2046 (30 years) via an innovative one-day new issue and tender switch transaction in September. The amount was made up of approximately US$700 million in a switch and tender offer and approximately US$1.3 billion in new cash on the 12-year tranche bringing it to US$2 billion while US$1 billion in new cash were raised in 2046. The 12-year bond was priced at a coupon rate of 4.3 percent while the 30-year bond was priced at a coupon rate of 5 percent. The transactions were more than two and a half times oversubscribed.

Egypt issued $4 billion international bonds to plug the budget deficit and boosting foreign reserves in November 2016. The US$4 billion issuances included a $1.360 billion bond with 4.62 percent interest maturing in December 2017, a $1.320 billion bond with 6.75 percent interest maturing in November 2024, and $1.320 billion bonds with 7 percent interest maturing in November 2028. As at 31 December 2016, the yield on the Egypt’s 2017, Egypt’s 2024 and Egypt’s 2028 Eurobonds was at 3.795 percent, 7.061 percent, and 7.602 percent respectively.

Looking at debt level, the total amount outstanding of Eurobond issued by African sovereign entities was recorded at US$45.51 billion at the end of December 2016, out of which US$2.25 billion (Egypt: US$1.36 billion, Morocco: EUR 500 million, Ghana: US$199 million and Gabon: US$161 million) will mature in 2017. The African Eurobond market value weighted average yield settled at 6.1 percent at the end of December 2016 against 7.90 percent at the end of 2015.

What is the Prospect for 2017:
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.

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. Egypt had already sold US$4 billion international bonds in January 2017. Zambia plans to refinance Eurobonds totaling around $2.8 billion that it issued between 2012 and 2015 in 2017. Also, Tanzania aims to issue its first Eurobond in fiscal 2017/18 to fund new infrastructure. Nigeria may sell debt for the first time since 2013 to fund a record spending plan and Tunisia also plans to raise EUR1 billion.