Tighter Liquidity Opens Door to More Corporate Issuance in Africa

The Kenyan and Nigerian debt markets are poised for growth following a turbulent few months, says Standard Bank.

An increase in capital requirements for the public sector and the need for more sophisticated products by financial institutions have been major drivers of debt capital markets across key regions in Africa.

The markets in Nigeria and Kenya are creating the building blocks for future growth, especially after a difficult few months in 2015.

According to Standard Bank which operates as CfC Stanbic Bank in Kenya, 2014 proved to be the busiest year for corporate bond issues in Kenya after six corporate bonds worth 30 billion Kenya shillings were issued whilst notes worth nearly Kshs 14 billion were issued in 2015.

Wegoki Mugeni, CfC Stanbic Bank Head of Debt Capital Markets (East Africa), says the Kenyan market started this year “in quite benign fashion”, with interest rate levels below 10% at the shorter end of the market and about 13-14% for 10 year yields.

There was one corporate bond issuance from East Africa Breweries Ltd of about $50 million in the first quarter which was arranged by CfC Stanbic.

“The interest rate environment then changed in response to the strengthening of the dollar and interest rates moved up quite dramatically across the East African region,” she says. In Kenya, Treasury yields for tenors of 1 year and below rose to average levels of 22% in October 2015 while interbank rates and averaged about 29%. In Uganda the 7 day repo was at about 29%.

This may have led to the delay in the Government’s domestic borrowing programme. “But even so, interest rates were trending upwards quite aggressively and then there was the added effect of international investors cashing out, which added additional pressure on the Kenya shilling,” says Ms Mugeni.

The number of fixed income securities issuances decreased dramatically, though a few issuers did still come to market.

However, the challenges also present a clear opportunity. ”The changes and upheaval are actually important from an investment banking perspective as it means domestic institutional investors in particular are now more conscious of credit reviews and going forward there will be a more discerning investor base and more differentiation in pricing,” says Ms Mugeni.

There is still is room for corporate issuance to come to market, but more work is needed to prepare them and for investors to assess them. “There is a lot of liquidity in East Africa and we believe you will still see, if not the same number of corporates, a higher number of corporate issuers in 2016,” she says.

The total size of bonds outstanding in Nigeria, excluding federal government issuance and Eurobonds, stands at approximately US$ 24 billion, (N4.8 trillion), with financial institutions as the main issuers of bonds among the country’s corporate institutions. Four corporate bond deals, 24 commercial paper issuances, (from six borrowers), and one supranational Eurobond have closed in Nigeria this year. The bond issuance activity was driven mostly by Fidelity Bank Plc, First City Monument Bank Ltd, the Nigerian Mortgage Refinance Company Ltd and Transcorp Hotels Plc, whereas Nigerian Breweries Plc, Guinness Nigeria Plc Skye Bank Plc and Stanbic IBTC Bank Plc dominated the issuance of commercial paper.

Kobby Bentsi-Enchill, Head of Debt Capital Markets (West Africa), confirmed that two further bond issuances are likely to close before year end in Nigeria, adding to this impressive tally.

According to Mr Bentsi-Enchill, a lot of investment and capital raising activity was put off ahead of the March 2015 elections. However, the expectation of a more prudent fiscal and regulatory regime now being established by Mr Buhari’s new government is leading to renewed confidence in Nigeria’s economic prospects and therefore interest in accessing the capital markets for funding.

“Positive outcome of the elections gave a boost to the market following low activity in the first quarter and then again in the second quarter, when the currency came under pressure.”

Liquidity “became tight” after Nigeria’s central bank imposed strict conditions relating to sourcing of hard currencies and companies became more reticent to come to market for long term funding at the elevated interest rates, preferring to raise money only for shorter periods.

“Corporates switched borrowing behavior to take money for the short term in anticipation of rates coming down in the future. But by the third quarter, market participants became more comfortable with conditions again and began to raise more funding. We saw more commercial paper programmes being established, for example,” he says.

Interest rates started to come down in the fourth quarter as the central bank introduced a series of measures which decreased cash reserve ratios, providing banks with more liquidity.

“Borrowers could then take advantage of improved liquidity and we are now seeing more interest in local currency borrowing,” he says.

More activity can be expected in the year ahead if current levels of liquidity are sustained. “We think this is likely because of current government policy. The new administration is committed to transparency and fiscal prudence and any leaks are being plugged and more money is now in the mainstream of the market. For at least the next 9-12 months, we see the level of rates being maintained, which makes a good business case for local businesses to consider borrowing local currency,” says Mr Bentsi-Enchill.

Outside of Nigeria, two corporate bonds and one sovereign Eurobond issue have been closed in Ghana in the year to date and two corporate bonds and one domestic sovereign bond are expected to close before year end.

For the Francophone West Africa region, there were sovereign Eurobond issuances out of Cote d’Ivoire, Gabon and more recently Cameroon. The UEMOA region (western francophone bloc) historically had a vibrant debt capital market, with issuances being listed on the regional exchange, La Bourse régionale des valeurs Mobilières (BRVM). However market activity was significantly dampened in the aftermath of the Ivorian civil war, although there are encouraging signs of market recovery underway.