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Capital Markets Weekly: African supply reopens successfully with sovereign conditions improving

16 June 2020 Brian Lawson

African debt reopening

Sub-Saharan African supply has reopened with two successful deals:

On 12 June, Nigerian-based multinational development bank Africa Finance Corp sold a USD700 million 3.125% five-year deal with demand reaching "over USD2.1 billion". MENA buyers took 30% of the deal, with the UK, Switzerland, Germany and Asia taking 18%, 16%, 13% and 11% respectively. According to Banji Fehintola, Senior Director and Treasurer of AFC, the deal provides "additional liquidity to continue financing critical infrastructure projects across the continent".

Earlier in the week, Helios Towers, a telecommunication infrastructure company which gains most revenue from Tanzania, with additional presence in Ghana and DRC, placed USD750 million of five-year bonds at 7% with an issue price of 99.439%. Proceeds will fund a tender to redeem all of the company's 2022 outstanding debt and to repay USD75 million outstanding under the firm's term bank facility. CFO Tom Greenwood highlighted on 10 June that the firm initially had planned a USD425 million sale with a more limited repurchase of its 2022 debt, noting that "demand and pricing…was such that we upsized to a USD750 million issuance", which will "significantly reduce our cost of borrowing".

Equity

On 12 June, a secondary share sale was undertaken in London-listed Helios Towers, in addition to its bond sale described above. Two shareholders - Millicom Holding and International Finance Corp - sold 40 million shares at a discounted 150 pence per share, versus 184 pence at the prior close. They retain 13% and 2.8% respectively, with the company not receiving any new capital from the sale.

Implications and outlook

This blog specifically focuses on the three African-related transactions, as a clearly positive indicator amidst ongoing concerns - from representatives of the region and elsewhere - about wider African external debt sustainability.

Economic fundamentals for the region remain highly challenging, given the background of global economic shrinkage, low energy prices, lower remittances and the need for expanded healthcare and other government outlays.

Nevertheless, bond trading levels are much improved. Angola's 9.5% December 2025 issue provides a particularly volatile example: Berlin Boerse data shows that having traded to a peak of 118.13% of nominal value in early 2020, it fell to 34.39% in early April, amidst general emerging market capital withdrawal and specific concern that Angola might be forced to renegotiate its external debt due to weak oil prices and the impacts of the COVID-19 pandemic. By contrast, on 11 June, it reached a recent peak of over 76%.

Similarly, South Africa's EMBI+ index surged from around three percent in yield margin over US Treasuries in January and February to peak at 7.12 percent on 23 March before recovering to under 5 percent in spread at present.

As a third example of the improvement, on 10 June, when last reported by Nigeria's Debt Management Office, Nigeria's Eurobond yield curve extended from 4.31% on its 6.75% January 2021 bond out to 8.49% and 9.08% on its 7.625% November 2047 and 9.25% January 2049 deals.

By contrast, on Friday 27 March, its 2021 deal had yielded 13.33%, with the two longer-dated deals yielding 11.11% and 12.60% - its whole yield curve yielded double-digit returns at the time, an indicator of debt distress. While the subsequent recovery has been sharp and substantial, Nigerian yields remain above their early-2020 levels, when the three above-mentioned bonds yielded 2.97%, 7.85% and 8.10% respectively as of end-January (31 January close).

The improving climate appears driven by the combination of a responsive and accommodative stance by the International Monetary Fund and the wider impacts of global quantitative easing, on which we have commented in multiple reports recently, in restoring confidence and re-establishing liquid primary market conditions in both debt and equity markets worldwide.

In the last few months, the IMF granted Nigeria a USD3.4 billion facility under its RFI program, the largest under the Rapid Financing Instrument arrangements, but also gave Egypt access to a USD5.2 billion standby facility and allowed disbursements to multiple African states including Benin, Cameroon, Ethiopia, Malawi, Mali, Rwanda and Sierra Leone.

Neither of last week's two issuers offer direct risk to a single African country. Helios has relatively weak debt ratings (B2/B) reflecting its locations of business. By contrast, Africa Finance Corp is largely privately owned and enjoys a low single-A Moody's rating, clearly making it unrepresentative for the region's wider credit profile.

Overall, we assess that the three deals are welcome and positive indicators of improving sentiment.

Provision of official support to larger strained countries such as Nigeria and potentially Angola is clearly important in improving their near-term liquidity and reducing the risk of their needing to join Mozambique and Zambia in seeking debt rescheduling.

The recent trading performance of Angola and Nigeria, which have significant debt market presence but are heavily reliant on energy exports, has been impressive and goes a long way to reducing debt distress, while lowering in Nigeria's case the hypothetical cost of new market borrowings to more sustainable levels.

Overall, the combination of IMF help and global QE appears to have had considerable impact in improving scope for African sovereign borrowers to access international financial markets, with yield levels coming back towards levels that would permit sustainable borrowings, following successful recent precedents set by Bahrain and Egypt.

However, the rally seems insufficient at this stage to reopen the market to Angola, which had hoped to raise USD3 billion in March 2020, as this remains at a double-digit yield for five year debt: while its trading levels are much improved, and less clearly at levels implying a need for debt restructuring, it needs further substantial tightening before it can restart fundraising at an acceptable yield.

Posted 16 June 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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