Thursday, April 04, 2013

Hunt For Higher Bond Yields Leads To Africa

By Sarka Halas
Wall Street Journal, April 4, 2013

Investors hunting for yield are increasingly buying African sovereign debt. But demand for the infrequent issues has led to lower yields, making some market participants question whether investors are being compensated for the risk they take.

Demand for higher-yielding debt is opening up a new source of funding for some African countries, some of which are tapping the market for the first time. For investors, the debt sales offer exposure to growing economies, with a better return that they would receive in more-developed markets.

Five African countries have raised almost $2 billion of dollar-denominated debt this year, compared with $1.8 billion from three borrowers at the same time last year, according to data-provider Dealogic. In 2012, a total of $7.25 billion was raised from nine borrowers, up from $5.2 billion in 2011.

More deals are in the pipeline. Kenya announced in March that it would make its debut with a $1 billion dollar-denominated Eurobond in the second half of the year to invest in infrastructure. Rwanda has also said it wants to tap the markets for the first time this year for a dollar bond of at least $200 million.

Africa is very appealing to investors because they are buying access to growth and commodity- and consumer-driven economies, said Lauren van Bijon, emerging-markets analyst at First International Advisors, a wholly owned subsidiary of Wells Capital Management, which has $332 billion of assets under management and is owned by Wells Fargo & Co. Its funds hold both Nigerian and South African debt.

With any upcoming bonds, there should be significant investor demand, Ms. van Bijon said, noting that debt sales are usually small”ranging from $500 million to $1 billion”meaning there will be more than enough money to mop it up. She favors Nigerian debt, citing the country's economy, long-term prospects and credit rating.

The last bond issued in Africa was Tanzania's unrated private-placement dollar bond, the first international debt sale by the East African country. Investec Asset Management, which has $105 billion under management, was an investor, saying in a recent note to clients that it bought the issue because of the country's strong economic growth, recent oil and gas discoveries and attractive pricing.

Tanzania's $600 million seven-year bond was sold with a yield of around 6.284%, compared with the 4.23% yield that Nigeria's 2021 dollar bond is trading at. Senegal has a 2021 bond trading at 5.76%, while Namibia has a 2021 bond trading at 3.97%.

But the appeal of African debt is having the contradictory effect of almost limiting the yield investors can expect to receive. International sovereign-bond sales are rare and the premium investors pay, along with the global rush to these markets, has been driving yields lower.

It is getting harder and harder to find yield in the dollar debt space, so investors may look to higher-yielding credit like Egypt, for example, or they may take a defensive stance and look at South Africa, says Graham Stock, chief strategist at Insparo Asset Management, which specializes in frontier markets and has $166 million under management. He said he would look at investing in bonds from Kenya and Rwanda, if and when they come to market.

A rise in U.S. Treasury yields earlier this year also led investors to take a second look at emerging-market credit, in general, and for some market participants to question whether investors in African debt are adequately compensated for risk.

A number of African Eurobonds were trading very tight to begin with. Nigeria's 2021 bond has traded at a spread to U.S. Treasurys as low as 210 basis points [2.1 percentage points]. For a BB- rated country, that's quite exceptional, said Samir Gadio, emerging-markets analyst at Standard Bank.

That's a worry, given the growing pains in Africa. Ghana, which sold its first international dollar bond in 2007, is a case in point. The West African country showed a budget deficit last month that was 12.1% of GDP in 2012 3% over target because of higher expenditure and lower tax income.

Ghana has fallen out of favor. The country has lost a little bit of its shine. It used to be the poster child for the region when it issued its euro bond, said Stuart Culverhouse, London-based chief economist at Exotix Fixed Income, an investment-banking boutique that is part-owned by inter-dealer broker ICAP PLC.

Nevertheless, market participants say demand for African debt will remain.

Investor demand is still strong for African debt, but Africa is not a homogenous continent and there are many local drivers that affect bond yields that need to be taken into account, Mr. Stock said. In some ways, Africa looks more stable, more orthodox than other frontier markets. Among the Caribbean countries like Grenada and Belize, for example, there have been a series of debt restructurings, and parts of Latin America are also a concern for investors.

Either way, limited supply at a time when emerging-market debt is in demand should result in well-received African debt sales, Mr. Culverhouse said.

Even with some yields in Africa around 4 to 5%, the region still has promise. There are also a dearth of issues from the region, so when they do come, emerging-market funds will be interested.
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