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Will Africa be priced out of Eurobond market?

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For several months, Africa has faced the prospect of higher borrowing costs on international markets, highlighting foreign investors’ concerns over the perception of increased risk of African sovereign debt.
The most recent examples of African sovereigns looking to access the Eurobond market were seen in recent days: Ghana and Angola’s efforts had different results.
Ghana (rated B- by S&P) issued a $1bn, 15-year, Eurobond early this month with a coupon of 10.75 percent, after having initially postponed issuance from a week earlier, citing excessively high yield expectations from investors.
The delay occurred because the government initially expected to pay no more than 9.5 percent on its bonds, while investors were looking for rates of 11.5 percent (or more).
As a result, the government added an additional structure to the new Eurobond – the World Bank agreed to guarantee up to $400 million of the issuance, which gave some investors comfort, while others feared this clause highlighted increased sovereign credit risk.
This resulted in uncertainty over demand. Once the coupon rate was confirmed, demand was reasonable at around $2bn subscription. However, because of the World Bank’s partial repayment guarantee, the bonds are not eligible to be included in the JP Morgan EMBI, which reduced demand from investors that would have bought the bonds if they were included.
The latest Eurobond is priced at considerably more than the 8 percent rate on its 2013 Eurobond, which reflects the deterioration in global investor sentiment towards Frontier (and Emerging) Markets given expectations that the Federal Reserve will soon raise rates for the first time in 8 years.
Ghana has $2.53bn of Eurobonds outstanding that are due to mature in 2017, 2023 and 2026. The latest issuance will be part used to pay down some existing Eurobond debt (as has been done previously) given debt to GDP stands at around 70 percent. Funds will also be used to bolster foreign exchange reserves, which follow the $1.8bn Cocobod syndicated loan – this injection will significantly help stabile the Ghana cedi in the immediate period ahead.
Meanwhile, Angola recently cancelled its plans to issue a debut $1.5bn Eurobond due to economic pressures brought about by the collapse in oil prices that led to a large devaluation of the kwanza – no new date has been set.
As with Ghana’s experience on its roadshow, investors were looking to Angola to offer a double-digit coupon of around 10 percent, which reflects the economic weakening that has taken place since August 2012 when Angola issued a $1bn, 7-year, 7 percent loan participation note.
Angola’s weakening kwanza (down 24 percent year-to-date) has been largely driven by the fall in oil prices (down 55 percent since the June 2014 peak of $107/b). Moreover, oil export revenues account for around 95 percent of total export revenues, which led ratings agency Fitch to downgrade Angola last month to B+ from BB-.
In an effort to fill the gap left by the Eurobond cancellation, the government announced plans on October 7 to issue $2bn in local currency bonds locally, a move which say is sensible both for raising finance (assuming local banks have appetite) but also for helping deepen what is a shallow local capital market.

‘Ghana and Angola’s experiences underline the increased challenge of African sovereigns looking to access the Eurobond market,’ Ecobank said in a research note. ‘Unless sovereigns are willing to pay more, the main option to meet sustained financing needs is to issue more local currency bonds. If this route is taken, it will help deepen local [financial instrument] markets, increase liquidity and boost secondary market price discovery, while also removing foreign exchange risk on servicing external debt,’ it added.

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