Gabon Set to Test Demand for African High-Yield Dollar Debt

GABON (Capital Markets in Africa) – Gabon is starting investor meetings Monday for a planned Eurobond sale that will test demand for hard-currency debt from one of the lowest-rated issuers in the region.

The sale comes amid record debt sales by emerging-market borrowers this year as a lull in trade tensions and a rally in U.S. Treasuries spur demand for higher-yielding assets. Average yields on Eurobonds from sub-Saharan Africa are 2.5 percentage points higher than the emerging-market average, promising potentially juicy returns for investors willing to take on the added risk.

Gabon rated seven levels below investment-grade by Moody’s Investors Service, mandated Deutsche Bank AG, JPMorgan Chase & Co., and Standard Bank Group Ltd. to manage its benchmark-sized sale. Ghana, rated just one step higher at B3, named five banks including JPMorgan earlier this month for a $3 billion deal. They would be the first issuers from the continent to tap international markets this year.

“The African Eurobond universe generally has become a bit scarce,” said Jibran Qureishi, an economist at Nairobi-based Stanbic Holdings Plc. “Those kinds of bonds are going to be popular among hard-currency investors.”

Yields on Gabon’s Eurobonds due 2025 fell to a record low of 5.23% last week. The yield jumped 5 basis points on Monday as increasing concern over the spread of the deadly coronavirus gripped global markets.

Dollar debt from sub-Saharan African sovereigns has returned 1.5% this month, more than double the 0.6% average of emerging-market issuers. Average yields fell as low as 6.43% in January, from a high of 7.65% a year ago, even as the Institute of International Finance warned that African nations’ debt loads may be unsustainable, partly due to issuance of Eurobonds in a low-interest-rate environment.

Countries in the region, excluding South Africa, face Eurobond repayments of about $75 billion over the next 10 years while slowing growth is putting increasing strain on governments’ finances, IIF economists Benjamin Hilgenstock and Elina Ribakova wrote in a report.

“An end to the current low-interest-rate environment would have important consequences for debt sustainability,” the economists said. “Large current-account deficits will make it necessary to attract even more non-resident capital.”

Ghana, along with Nigeria, Kenya, Angola, and Zambia face the heaviest repayment burdens, they wrote. Ghana’s Eurobonds due 2029 climbed 30 basis points on Monday to 7.43%, after falling to a record low on Jan. 13. Those on Kenya’s 2028 dollar securities hit a record low on Jan. 17, but have since retraced 26 basis points to 6.05%.