African Capital Markets News

Record inflows ($9.2 bn) into SA bonds, prospects for the Rand and interest next year

Foreign inflows into South African Government bonds denominated in Rand were R61 billion (US$9.2 bn), up from R26.5bn in 2009, according to figures from the JSE Ltd. (www.jse.co.za), which runs the country’s securities exchanges. Net international investment inflows into equities were R35.6 bn, down from a record R75.4 bn.
A report on Bloomberg news says it is the first time that inflows into bonds have been more than those into equities since 1994, when apartheid ended in South Africa. It was more than the net cumulative bond purchases of the previous 15 years.
Yields are more than double those on US Treasury bonds. Bloomberg quotes Leon Myburgh, a fixed-income strategist for sub-Saharan Africa at Citigroup’s Johannesburg office: “South African bonds offer some of the highest yields around. Slowing inflation and declining interest rates made them a very attractive investment.”
It has been a year of massive inflows into emerging markets bonds and debt denominated in local currencies, driven as investors searched for higher returns when interest rates in developed nations have been near zero. According to Bloomberg data, “the spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points (4.8%), from almost 535 (5.35%) at the start of the year”. Put simply, bond prices in secondary trading increase when interest yields fall.
Bloomberg quotes Jacques Theron, portfolio manager at Absa Asset Management Private Clients, as saying the inflows could continue in 2011. Because the benchmark South African interest rate is at 5.5% (November’s cut was the 3rd in 2010 and the 9th since December 2008) and inflation is near its 5-year low (averaging 3.5% in the 5 months including November), investors may believe that the SA Reserve Bank (central bank) could be one of the few that could cut interest rates further in 2011.
Bloomberg says the combination of low inflation and falling interest rates meant that the bonds returned on average more than 26% in US dollars in 2010, 3rd-best performer after Colombia and Indonesia based on available index data from JPMorgan Chase & Co. Equity investments in South Africa’s FTSE/JSE Africa All Share Index returned more than 29% in 2010, measured in US dollars. Stocks were boosted by takeovers, including US Wal-Mart Stores Inc. acquriing a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp. purchasing Dimension Data Plc.
Net foreign inflows into SA bonds helped the Rand (ZAR) gain 42% against the dollar, making it the best-performing emerging market currency, over the year.
Trevor Barsdorf, an analyst at Econometrix Treasury Management, is quoted as praising prudent debt management. Finance Minister Pravin Gordhan said on 27 Oct. that the country will keep its budget deficit to 5.3% of gross domestic product (GDP), down from a February estimate of 6.2%, and aims to reach 3.2% by fiscal 2014. Greece’s fiscal deficit was 15.4% of GDP and Ireland’s 14.4% in 2009.

Prospects for 2011
On the contrarian note, Bloomberg cites Manik Narain, emerging-markets strategist at UBS AG in London. “The best of the inflows into South African bonds is behind us.” Inflation has bottomed and will begin to pick up. and it is possible SA could raise interest rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, cutting the currency to an estimated R7.60=USD1.00 by the end of 2011.
However, most remain optimistic. ETM’s Barsdorf says it will strengthen to R6.00=$1 over the year and it could climb as far as R5.50=$1. That would push inflation to below the SARB’s target lower limit of 3% and the bank could cut interest rates by 50 to 100 basis points during 2011.
Werner Gey van Pittius of Investec Asset Management told Bloomberg there could be another $4 billion of foreign inflows into South African bonds in 2011 just from dedicated local-currency emerging-market debt funds: “I can’t see too many reasons not to be bullish on South African bonds. We can’t see an aggressive sell-off on the horizon, unless there’s a massive risk-aversion event.”

Yields climbing on Cote d’Ivoire international $2.3 bn bond

Markets are nervous about the Cote d’Ivoire bond, worried that the country may not meet a payment deadline. Reuters reports today (27 December): “Ivory Coast’s $2.3 billion bond due in 2032 fell to a record low last week as investors worried the country would not meet a $30 million bond payment.”
Chaos and civil war is threatening as 3 West African presidents flew in to tell former president Laurent Gbagbo that he should leave or the country’s neighbours could use “legitimate force” to shift him. He retaliated by warning of war this morning, according to a VOA report. The 28 November election was internationally held to be won by Alassane Ouattara but a crisis was sparked on 21 December as Gbagbo supporters over-ruled the results and he refused to go. Outtara is in a hotel, protected by UN peacekeeping troops who have refused Gbagbo’s threat and stayed on in the country.
There have already been clashes which have left 200 dead and death squads and kidnappers are targeting Ouattara supporters.
The West African central bank for the CFA zone last week cut Gbagbo from Ivorian accounts, making it hard for him to continue paying the wages of the military, a key in his bid to cling to power at all cost to his countrypeople and the region.
The World Bank has frozen some $800 million in committed financing. Turmoil has pushed cocoa prices to 4-month highs, disrupting export registrations and raising fears that fighting could block transport and shipping.
By 21 December, the dollar-denominated 2.5% bonds had fallen for a 4th day as investors bid 44.25 cents on the dollar, down from a close of 46.06 on 20 December, according to data compiled by Bloomberg. It was the lowest since the bonds were issued and the yield hit a record 14.479% from 13.943%.
Stuart Culverhouse, chief economist at brokerage Exotix Ltd. (www.exotix.co.uk) told Bloomberg: “People are just getting a little bit anxious” on 21 December, forecasting that the bond could fall as low as 42 cents on the dollar, raising the yield to about 15%, with the prospect of a rebound if there is an indication that Gbagbo will step down: “If there is some positive noise and some action, then the bonds will recover to the low 50s.”

Plans for Nigeria’s $500 mn Eurobond

Citigroup (www.citigroup.com) expects to see strong demand for Nigeria’s $500 million debut Eurobond despite volatility in global capital markets, Chief Executive Vikram Pandit told reporters in Lagos on 8 December, according to a report on Reuters: “We believe that there will be significant demand for a bond offering from Nigeria and it is evidenced by demand from not only from investors … in developed markets but also emerging markets”.
Citi is the lead book-runner for the 10-year bond, which aims to establish a benchmark for Nigeria in the global market and allow local companies to follow suit, enabling them to raise long-term funding more cheaply than at home.
Pandit declined to comment on the timing of the issue.
Reuters says “banking sources” have said Nigeria plans a roadshow to the U.S. this week (the week starting 13 Dec) and may talk to some European investors directly in a bid to complete the deal before the end of the year, though the timing will depend on market conditions.
Pandit said “It will be a question of how you price the bond so that it is not only priced to create the right benchmark at the tightest price but also trades well in the after-market.”

Kenya regulator cuts bond charges, banks still push for bond OTC market

Kenya’s Capital Markets Authority (www.cma.or.ke) has cut the cost of trading bonds from 0.04% per cent (KSh400 for every KSh1 million transacted) to 0.035% (KSh350 for every KSh1 mn) in order to pass on the lower costs due to automated trading on the Nairobi Stock Exchange (www.nse.co.ke), according to a report in Business Daily (www.businessdailyafrica.com).
The NSE can now benefit from the booming market for bonds through levying a transaction fee of KSh35 on every KSh1 mn traded (0.0035%), according to a notice in the Kenya Gazette on 3 Nov. However stockbrokers are losers as their brokerage commission is cut to 0.024% from 0.04%.
New fees on secondary bond fees accrue to the CMA, (0.0015%) the Central Depository and Settlement Corporation (www.cdsckenya.com) (0.0002%) and the CMA Investor Compensation Fund (0.0004%), earn fees on the secondary bond trade. Previously they only earned fees from listings.
Commercial banks are the biggest traders of fixed-income securities at the NSE. However, they still want an over-the-counter (OTC) bond market to operate alongside the exchange. Duncan Kinuthia, a fixed income dealer at the Bank of Africa, was reported as saying: “I am not happy that I will now be paying less, CMA should just have allowed banks to have their OTC market. If they are allowed to by-pass stockbrokers and the NSE and to trade bonds among themselves directly, they would expect to save the commission of 0.04%.”
Government bonds account for more than 90% of daily bond volumes traded at the NSE. Gino Ndung’u, a fixed-income dealer at Dyer and Blair Investment Bank, said the new rules will slash the brokers’ earnings: “We are looking at almost half the revenue gone, meaning we have to work twice as hard as before to earn the same income. There is no reason why the CDSC should earn a fee on bonds that are not under its custody” he added, as the Central Bank of Kenya is the custodian of the Treasury bonds.

PTA Bank bond got $650 million vs $300 million target

The eurobond recently issued by PTA Bank (www.ptabank.org) attracted bids for $650 million compared to a target of $300 million, according to a report in Kenya’s Business Daily (www.businessdailyafrica.com). Standard Bank and HSBC were the joint book-runners. The $300 mn bond started trading on the Luxembourg Stock Exchange www.bourse.lu on 9 November, according to a bank press release.
The report quotes Standard Bank Director of Investment Banking for Africa John Ngumi as saying the warm reception of the PTA Bank Eurobond in global markets is expected to set the tone for sovereign issuers such as the Kenyan Government, which shelved plans of a Eurobond of similar size in 2007 due to a volatile political environment and the onset of the global economic recession: “The deal is a milestone that opens up an important source of debt financing for African corporate entities and governments as they seek to diversify funding and accelerate economic development, especially infrastructure.”
He added that the transaction also illustrates the growing capacity of Africa-based financial institutions to place international financial transactions successfully.
Andrew Dell of HSBC said in a PTA Bank press release that the “deal was very well executed and dropped cleanly into the tight market window. This is a very important transaction for both the issuer and Africa more broadly. Development and trade finance has huge impact on the real economy and hence is a significant enabler of economic growth in and of itself.”
The successful issue followed a series of investor meetings in Zürich, Geneva, London, Hong Kong and Singapore.
Domestic interest rates are higher than international debt in hard currency and there are fears that more Government borrowing from local debt markets could send interest rates even higher. Eurobonds are listed on several stock exchanges including London and Luxemburg.
Eurobonds are typically denominated in international currencies, and the PTA Bank transaction was denominated in US dollars. The bond was priced to yield 7.125% and mature on 9 January 2016. It is the first part of PTA Bank’s new $ 1billion Euro Medium-Term Note (EMTN) whose proceeds will be used to support new trade and project finance lending in Eastern and Southern Africa. According to PTA Bank president Michael Gondwe, the EMTN programme will diversify the bank’s resource base and raise funding to meet financing requirements of small- and medium-size enterprises in the Eastern and Southern African region: “The international bond issue marks an important milestone in the bank’s resource mobilisation programme and is the first step in the implementation of a long-term strategy of engagement with international financial markets to access long term-capital.”
PTA Bank is formally known as the Eastern and Southern African Trade and Development Bank. It has 17 country members in Eastern Africa, plus China and the African Development Bank. It is rated Ba1 by rating agency Moodys and BB- by Fitch.
Aurelien Mali, Assistant Vice President in Moody’s Sovereign Risk Group, was quoted as saying: “PTA Bank’s rating reflects marked progress in recent years in strengthening governance and risk management policies and capabilities, which prevented NPLs from rising along with the recent expansion of the balance sheet,” says. “The ongoing improvements associated with PTA Bank’s strong liquidity have definitely strengthened the bank’s resilience to shocks.”
Moody’s, in its rating report, cites the Bank’s “proven resilience to shocks, which is supported by the Bank’s strong liquidity and its ongoing efforts to strengthen governance and risk management” is one of the key drivers of the positive rating. Moody’s also cites the strong shareholder support, particularly from China and AfDB, as evidenced by the unanimous decision of the Bank’s members to more than triple its subscribed capital base in 2007 as a major rationale for assigning the regional development financier a Ba1 rating.
Extracts from the Moody’s report say that earlier this decade, PTA Bank restructured its portfolio when gross Non-Performing Loans reached a peak of 60% of total assets. Since then, NPLs have continuously declined, dropping to 12% at the end of 2009, or 5% in net terms. The Moody’s report adds that the nominal value of NPLs has been stable for a number of years, and the bulk of the stock of impaired asset is a legacy from before the 2003 restructuring.
“Despite the financial crisis, the bank’s financial performance has been robust in terms of both return on assets (RoA) and on equity (RoE) in recent years. In 2009, RoA was 2.2% compared to the previous seven years’ average of 1.7%, illustrating the bank’s improving financial performance. RoE has been very strong, coming in at 10.1% in 2009. The bank also allowed a substantial allocation of net income to equity over the years, thereby strengthening the bank’s capital base,” says the report.
Moody’s says that the outlook for Bank’s rating “is currently stable, with the risks equally balanced. A continued rise in profitability alongside a decrease in both relative and nominal terms of NPLs “could lead to upwards rating pressure.”

Institutions react to Cote d’Ivoire crisis

Markets are reacting quickly to the news that Laurent Gbagbo was sworn in as president of Cote d’Ivoire on Saturday (4 Dec). The World Bank (www.worldbank.org) and African Development Bank (www.afdb.org) on Sunday said in a joint statement on the crisis: “The African Development Bank and the World Bank, longstanding multilateral development partners of Côte d’Ivoire, view with great concern and frustration the events unfolding in Côte d’Ivoire in the aftermath of the long-awaited elections which were supposed to usher in peace, stability and a basis for improved governance and inclusive growth that reflects participation of all of Côte d’Ivoire.
“We therefore share the serious concerns expressed by the United Nations, the African Union, Economic Community of West African States and other international partners who have supported Côte d’Ivoire’s development efforts.”
The two institutions are reported on Reuters to be reviewing their lending programmes. They provide loans and grants to support programmes fighting poverty. The World Bank has tied the cancellation of $3 billion of Ivory Coast’s external debt, estimated at $12.5 billion, to the elections. Cote d’Ivoire is the world’s top grower of cocoa – the unrest is pushing up prices – and has a popular $2.3 billion Eurobond on which the yield had not moved much before the election but Reuters reports that it is now up to 11.67%, from 10% after the first election round.
Opposition leader, Alassane Ouattara, was named winner of the vote by an Election Commission and the UN endorsed the results showing him gaining the required 10% lead. Then the Constitutional Council over-ruled this after rejecting hundreds of thousands of votes from Northern areas and gave the election to former president Gbagbo.
Both men have declared themselves president and formed governments and the African Union has sent Thabo Mbeki in Abidjan as mediator. Ouattara warned there was a risk of throwing the country back into a north-south conflict which had for decades paralyzed what previously been a promising economy.
The banks said a prolonged crisis in Ivory Coast would plunge more Ivorians deeper into poverty and hurt stability and economic prosperity throughout the region. “We wish to continue working with the people of Côte d’Ivoire in the fight against poverty but it is difficult to do so effectively in an environment of prolonged uncertainty and tension. Accordingly, in line with our policies, we will continue to closely monitor developments and reassess the usefulness and effectiveness of our programs given the breakdown in governance.”
The African Union, the Economic Community of West African States (ECOWAS), the United Nations, the United States, France and the European Union all rejected Gbagbo’s claimed electoral victory.
Australia’s largest gold mining company Newcrest Mining Ltd., based in Melbourne, has suspended operations at its Bonikro mine in Ivory Coast, reported Bloomberg. The mine is near Hire, about 250 kilometres north-west of Abidjan. Newcrest said in a statement to the Australian Stock Exchange that it produces about 120,000 ounces of gold annually. The company said: “Plans are in place to recommence operations as soon as possible,” the company said. “A detailed security plan is in place and includes provision for temporary evacuation of employees should the situation deteriorate.” previous unrest had forced the AfDB to relocate to Tunisia and many international companies to leave.
Newcrest acquired the Bonikro operation as part of the takeover of Lihir Gold Ltd. that completed this year.

Safaricom offers $56 million bond

Telecoms giant Safaricom Ltd. (www.safaricom.co.ke), a mobile phone company that is the biggest listing by market capitalization on the Nairobi Stock Exchange (www.nse.co.ke), is selling KSh 4.49 billion shillings ($56 million) of 5-year bonds from 1 Dec, according a report on Bloomberg newsagency.
The agency reports an email statement that the fixed-income securities will pay a coupon of 7.75% a year, the Nairobi-based company said in an e-mailed statement today. “Interest will be paid semi-annually in arrears beginning May 2, 2011.
The bonds will start trading on the NSE on 17 Jan.
Safaricom Public Relations Officer Wachira Kang’aru told Bloomberg the floating-rate coupon is the prevailing 182-day treasury-bill rate plus 185 basis points. Bloomberg reports the Central Bank of Kenya as saying on 25 Nov that the weighted average rate of accepted bids for the T-bills was 2.464% at the most recent auction, while the cut-off rate was 2.8%.
On 7 Oct 2009, Safaricom announced a KSh 5 billion (US$67 mln) bond, also pegged to Central Bank of Kenya rates. It said it was the first tranche of a KSh 12 bln programme approved by the Capital Markets Authority (CMA). The offer was aimed at institutional clients, and closed on 29 Oct 2009.

PTA Bank launched $300 million eurobond

PTA Bank, a multilateral financial institution based in Nairobi, successfully launched a US$300 million Eurobond in November. According to a press release from Standard Bank, this was the only corporate Eurobond from sub-Saharan Africa in 2010, the only one since 2007 and the first Eurobond from an east African issuer, either sovereign or corporate.
Standard Bank Group and HSBC were joint-bookrunners on this debut Eurobond. According to the press release: “The new 5-year Reg S bond was priced to yield 7.125%. This transaction is the inaugural issue under PTA Bank’s new US$ 1 billion EMTN programme and the proceeds will be used to support new trade and project finance lending in Eastern and Southern Africa.. PTA Bank is rated Ba1 by Moodys and BB- by Fitch.” EMTN is defined as a euro medium-term note and is flexible instrument issued continuously rather than in one tranche.
Florian Hartig, Standard Bank Group’s Global Head of Debt Capital Markets, said in the press release: “This is a landmark transaction for Sub Saharan Africa which will have important benefits throughout the region for future sovereign and corporate issuers. The transaction also demonstrates the strength of Standard Bank’s Eurobond distribution platform for Emerging Market issuers together with our expertise in African domestic markets.
“PTA Bank has proven to be a leader among Sub Saharan African bond issuers. Future issuers will benefit substantially from rapidly growing international investor interest in Eurobond issuance from the region.”
The PTA Bank is formally known as the Eastern and Southern African Trade and Development Bank and covers the Preferential Trade Area. It is owned by 19 shareholders, including 17 member states from eastern and southern Africa. The shareholders are: African Development Bank (institutional shareholder), Burundi, China (non-regional shareholder), Comoros, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Malawi, Mauritius, Rwanda, Seychelles, Somalia, Sudan, Tanzania, Uganda, Zambia, and Zimbabwe.

Nigeria and Zambia joining African rush into bonds

The African bond market continues to expand, with many countries raising money on world capital markets. They are taking advantage of low global interest rates and many investors turning to African debt, partly fuelled by better economic management in Africa. Yields are near zero in Europe, the U.S. and Japan, and investors are looking to new frontiers.
Africa has massive capital needs to fuel its anticipated long growth run. The temptations to rack up debt again remain. The World Bank estimates that Africa needs to spend $93 billion a year on power, transport and water projects over the next decade to lift growth in the world’s poorest continent.
Bloomberg news agency reports that Nigeria appointed Barclays Capital in October as an adviser for its planned $500 million Eurobond. Zambia plans to raise $1 billion on the back of a planned sovereign credit rating this year.
Other African nations are dusting off plans to sell Eurobonds – bonds issued in an international currency, not the local one – to international investors. Many plans had been shelved in the global financial crisis in late 2008.
Bloomberg quotes Tanzania’s Deputy Finance Minister Omar Yusuf Mzee as saying that Tanzania is returning to work on its bond plan after postponing a sale of $500 million of the securities in 2008.
Angola has been talking for some time about raising $1 billion – $2 bln through international bonds this year. It received a B+ credit rating from Standard & Poor’s and Fitch Ratings in May.
Kenya plans to wait on its planned $500 million sovereign bond as the global recovery is “still uncertain,” according to Geoffrey Mwau, economic secretary in the Finance Ministry reportedly in August.
Sudan is next year to seek investors from the Persian Gulf region for $300 million of Islamic bonds because U.S. economic sanctions have denied the country access to other international markets, central bank Governor Sabir Hassan told the agency in an interview in Khartoum on 6 Sept.
Economic growth for Africa is expected to be more than 5% a year, says Bloomberg, fuelled partly by investment from China and India and partly by its own growing consumer spending. Infrastructure to be upgraded includes obsolete road and rail networks and power generation, where may countries face more power shortages – Bloomberg says that a continent of 1 billion people that has electricity capacity equivalent to Spain.
Bloomberg cites Samir Gadio, an emerging- markets strategist in London at Standard Bank Group Ltd: “The timing is perfect. Global yields are extremely low and that’s pushed a lot of countries to tap international markets. We’ll see good demand for these bonds. There’s just so much excess liquidity across the globe.”
South Africa’s $2 billion bond maturing in March 2020, yielded 3.69% recently (on 11 October), 138 basis points lower than when the securities were sold in June, according to data compiled by Bloomberg. The yield on Ghana’s 8.5% dollar-denominated bonds, due October 2017, has fallen 239 basis points to 5.78% during 2010.
According to the report, David Damiba, managing director in London for Renaissance Asset Managers,says: “It’s a fantastic idea to diversify their sources of funding. It’s important that these countries would want a benchmark bond” so that other assets can be priced appropriately by investors.
Another proponent is Stuart Culverhouse, chief economist of London-based Exotix Ltd., which advises clients on investments in illiquid markets. “Africa is relatively new to investors. After the last 20 to 30 years of really bad news, the past 5 to 6 years have been generally positive. There’s a cash pile just waiting to be invested. African Eurobonds will definitely be well-received.”
Some economic fundamentals have improved in Ghana, Zambia, Nigeria, Tanzania and Uganda. Most of their foreign debt, totaling about $33 billion, was canceled by lenders such as the International Monetary Fund and the U.S. starting in 2000.
Nigeria’s sovereign debt was 15% of gross domestic product in 2009, according to data from the IMF. That compares with 115% in Greece, 77% in Portugal and 116% in Italy. The report cites the IMF’s April 2010 Regional Economic Outlook for Sub-Saharan Africa. as saying in 2009 government debt was 26% of GDP in Zambia, 37% in Tanzania and 60% in Ghana.
Eurobond sellers will have to rein in fiscal deficits and limit any shortfall in their current accounts, to show that they can repay the money.
“It puts the countries on their toes,” said Kofi Wampah, first deputy governor of the central bank of Ghana, which is considering selling its second security in international markets, speaking to Bloomberg in an interview from his office in Accra on 7 Oct: “You have to ensure that your fundamentals are always right.”

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