Why investors have a huge appetite for African Eurobonds – Quartz Africa
A huge appetite for African Eurobonds is sparking a wave of issuance on the continent.
Benin saw its rating outlook is improving after successful Eurobond issues in January. In February, the Ivory Coast raised $ 1.03 billion in Eurobond sale that allowed investors to place orders for the triple the amount offered. (The sale was a reopening of a sale of Eurobonds issued in November, The first in Africa during the Covid-19 pandemic.) Now Kenya is Planning use the debt instrument to raise $ 1 billion by June, and Ghana and Nigeria also prepare their own numbers.
After a pandemic-induced lull in borrowing, governments and investors are feeling more confident in Africa’s prospects, in part thanks to billions of dollars in Help with recovery from Covid-19 from the IMF and other multilateral lenders, says George Ogutu, head of research at Genghis Capital in Nairobi.
African countries had been reluctant to access these markets when Covid-19 hit due to the risk of poor financing conditions, Ogutu says. Those risks are still there, he adds, but as the world begins to plan for its economic recovery from the pandemic, “at least there’s a chance to talk about it.”
African countries pay high rates
Eurobonds are international bonds issued by a country in a currency other than its own. Since most of the local bond markets have low volumes compared to those that trade in other currencies, African countries often opt for Eurobonds as they try to diversify their sources of funding. Using a foreign currency can also allow them to borrow larger amounts, although this carries a substantial currency risk for the borrower.
The Eurobond trend in Africa started with South Africa 1995. But it was not until 2006 that a second country in sub-Saharan Africa, the Seychelles, used the instrument. Since, at least 21 countries followed suit, usually listed on the London and Irish stock exchanges. They include the major economies of Nigeria, Kenya and Ethiopia. Companies in the region have also successfully issued Eurobonds over the years.
African countries typically use Eurobond funds to finance maturing debt and heavy infrastructure projects, and it is no different during the pandemic. Ghana’s planned Eurobond issuance this year is intended to support the country’s budget and manage its debt.
Some have criticized the rates African countries pay for these bonds –5 to 16% on 10-year government bonds, against rates close to zero to negative in Europe and the United States in 2019. Misheck Mutize of the University of Cape Town attributes the high rates in part to poor credit ratings, but also to a mismatch between the duration of the instrument and what it is used for to finance, which can be long-term infrastructure projects.
Eurobonds are particularly attractive to investors looking for higher yields than those offered by developed countries, says Ogutu. “Anything that screams ’emerging market’ or ‘frontier market’, in which most African economies are classified, is also what has led to this attraction or oversubscription of the Eurobonds issued,” he said. .
Like other investments, Eurobonds are risky
Still, investors face risks. The Ethiopian Eurobond dived in February as the country sought to restructure its external debt and saw its ratings downgraded. And Zambia by default on the redemption of a Eurobond coupon of $ 42.5 million at the end of last year as it struggled to fight the pandemic and support its economy.
However, each country’s situation is different, says Martin Kirimi, senior research associate at Standard Investment Bank in Nairobi. “A country’s macros or fundamentals matter,” he said, adding that different countries ‘eurobonds have different returns, depending on the countries’ risk perception.
The Eurobond market has opened a funding tap that could hold promise for African countries. As in the past, a key will be whether governments end up paying too much for their debts.
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