Picking and choosing African dollar debt
The end of the era of cheap money need not spell disaster for African governments looking to raise money at affordable levels. While an eventual scaling back of the Fed’s $85 billion-a-month bond-buying programme will spark a reshuffling in investors’ portfolios, it will not shut African governments out of the international debt market altogether.
But as investors adjust for a world with less stimulus, African governments will not be able to entice them with high yields alone, according to bankers meeting this week at a conference organised by Thomson Reuters news and markets information service IFR.
Alex von Sponeck, head of CEEMEA debt origination at Bank of America Merrill Lynch, said:
We had a very frothy four to five months at the start of the year…but investors have become a lot pickier.
Investors are increasingly looking at the economic fundamentals of countries before investing in African sovereign bonds.
According to Melissa Butler, partner at law firm White and Case:
There is nervousness around accumulating debt and the way sovereigns are going into that.
Factors such as fiscal discipline and the use to which the money is being put all weigh on investors’ willingness to buy sovereign debt, bankers say. When Rwanda issued its debut sovereign bond in April for $400 million with a yield under 7 percent it tied it to a specific project so that investors knew exactly where it was going.
But transparency and efficient pricing remain an issue. Governance issues and lack of clear data, as well as doubts regarding its reliability, mean it is hard for investors to gauge what an appropriate price for a sovereign bond should be.
The widening of spreads on African debt over the summer this year was therefore a step forward in terms of pricing transparency, the bankers add. It enabled sovereigns to gain a better understanding of their price fundamentals and to judge whether a particular project warranted tapping the international debt market.
As African governments become more frequent issuers and establish their own yield curves, the pricing of their bonds will become more efficient and make them a more attractive investment opportunity, said Adil Kurt-Elli from CEEMEA debt capital markets at HSBC.
Kenya and Tanzania have already announced they plan to raise dollar debt, maybe before the end of 2013, and the level of interest they will be able to garner will be a useful gauge of investors’ appetite for sovereign African debt. According to von Sponeck:
For sovereigns overall there is always going to be a bid. The question is at what price.
(Reporting by Julia Fioretti)