Senegal’s $500m Eurobond offers good yield

Senegal has successfully re-priced its yield curve by issuing a more liquid 10-year $500 million Eurobond carrying a coupon of 8.75%. The bond was priced at 97.57 when it was bid on 6 May, the equivalent of a yield of 9.125%. Standard Bank noted it represented a spread of 596 basis points over comparable US Treasuries.
Senegal is rated B+ by Standard & Poors and B1 by Moody’s.
Samir Gadio of Standard Bank Research says the bond attracted a lot of interest, with final demand reaching $2.4 billion. In trading after the issue the mid-price climbed to around 102.75 on 11 May, representing a yield of 8.3% and spread of 508 bps. He adds in an investor note; “further upside is probable as the bond is likely to be included in the EMBI index in late May”.
Stuart Culverhouse of broker Exotix also tips the bond as one to watch: “There are not many places to get 9% yields these days. But we also think it overstates Senegal’s credit risk. We think the offer gives intrinsic value. Moreover, with the new issue likely meeting eligibility criteria for index inclusion (e.g. in the EMBIG) we expect there would be additional technical support for the new bond.
“We think Senegal’s credit fundamentals compare favourably with other B+ rated sovereigns. We think the new bond will offer good value compared to similarly rated peers (eg Ghana and Nigeria) with 200bps-plus upside.”
The bond replaces a $200m 8.75% bond due in 2014 which will be entirely retired. Gadio says the transaction helped significantly reduce Senegal’s credit spread by nearly 100 bps, even as the country extended its yield curve. He says “political risks remain relatively limited ahead of the 2012 general elections”, especially as Senegal’s democratisation process was initiated in the mid-1970s.
Senegal is part of the West African Economic and Monetary Union grouping of 8 West Afrian states formed in 1994, and uses the CFA Franc (XOF) currency linked to the Euro. As a WAEMU country, Senegal cannot independently determine its monetary policy. Gadio says, the Banque Central des Etats de l’Afrique de l’Ouest (regional central bank www.bceao.int) has historically been conservative in its money supply objectives, ensuring a low core inflation and interest rate environment. “The two main economic constraints remain a large current account deficit and a relatively sizeable fiscal deficit, even as public debt is sustainable.”

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