Dealmakers are still circling in African markets in preparation for a strong year of corporate and sovereign activity on debt and equity markets.
Abidjan is a city rising back to its former glory. Four years into its post-conflict economic recovery, Côte d’Ivoire is on the verge of issuing its second eurobond, likely to be a $1bn follow-up to last year’s heavily oversubscribed $750m issue.
The African Development Bank is returning to its former home after 12 years in exile in Tunis. A market-friendly government is pushing a privatisation agenda and seeking capital for major infrastructure works.
Deals are on the table and banks have taken notice. Commerzbank of Germany is the latest international player to set up shop in the hope of capturing some of the deal flow.
“We want to improve also our debt capital market recognition. In [Côte d’Ivoire] they came out with a bond last year; this year they will repeat it and they will go on a regular basis to the market,” says Konrad Engber, the head of the bank’s Abidjan office. Engber has previously served as Commerzbank’s representative in Addis Ababa and Tripoli.
“We want to participate, advise and possibly assist Côte d’Ivoire in their next bond issuance,” he says, adding that the bank believes it can compete with the French institutions that traditionally dominate the market. “We have the feeling that the Ivorians and the local banks are eager to work together with alternatives,” he says.
Analysts are split on whether Côte d’Ivoire’s eurobond this year will be an outlier or the start of a fresh wave of debt issuance in Africa, or whether volatile global markets and an uncertain outlook for several of the continent’s major export commodities – in particular oil, gold and copper – will reverse a nascent trend of African sovereigns and corporates taking on private debt.
Boosted by Kenya’s record $2bn issue, African sovereigns went to market with around $15bn worth of bonds in 2014, defying fears that investors’ appetite for frontier debt might be curtailed by an economic recovery in the US and the end of the Federal Reserve’s programme of quantitative easing. That programme of money printing had flooded the markets with liquidity, which investors had then deployed to higher-yielding assets in emerging markets.
Growing concerns over the fiscal situation in two of the continent’s leading issuers, Ghana and Zambia, also worried some investors – although Ghana’s September 2014 eurobond was still oversubscribed.
Corporates also tapped the international markets – in particular Nigerian financial institutions. FirstBank, Zenith Bank, Diamond Bank and Access Bank all issued international bonds in 2014, worth $450m, $500m, $200m and $400m, respectively.
Companies also went to the equity markets in record number in 2014. According to research by law firm Baker McKenzie, 24 African domiciled companies made initial public offerings (IPOs) last year, raising more than $2bn – representing a 33% rise in volume and a 222% rise in value from 2013.
Listed companies also raised further capital on public markets. According to PwC, companies raised a total of $11.1bn on African equity markets in 2014.
Baker McKenzie predicts that the trend will continue into 2015. The firm’s research indicates that there is already a pipeline of 30 IPOs by African companies in place, with South Africa and Nigeria likely to lead in value and volume. A return to relative stability in Egypt should also see activity return on the country’s main board.
Most of this activity will be driven by African companies listing on their own domestic exchanges, Baker McKenzie says, although several cross-border listings in London, Frankfurt and Johannesburg are in the works. Last year only one sub-Saharan corporate listed on a major Western market, the Nigerian oil company Seplat, which raised £500m ($770m) through an IPO on the London Stock Exchange.
Edward Bibko, a partner in Baker McKenzie’s international capital markets group, admits that the slip in oil prices may slow the flow of Nigerian companies to market. Several Nigerian oil and gas companies were rumoured to be planning to list overseas in 2015, but may now put their plans on hold. The country’s banks are now facing challenging conditions due to a falling currency, coupled with a deteriorating macroeconomic environment.
“But people investing in Africa are looking for long-term gains, they’re not worried by cyclical changes in commodity prices,” Bibko says.
The same goes for the banks, who are deepening their presence in frontier markets, aware that building a physical, on-the-ground presence counts in their favour against competitors who are still wedded to the old ‘suitcase banking’ model. “I remember five years ago, you just had a couple of banks roaming around Africa, and at the time there was kind of an unquestioned assumption that Africa would develop to a point where it would become a major capital markets centre,” Bibko says.
“These banks that were wandering around weren’t necessarily making any money, but they were doing some deals to get them on their CVs to set themselves up for the future.”
Banks have always been happy to work on sovereign deals as a way to break into the market – often making fairly tight margins. Thomson Reuters figures show that bookrunners on Tanzania’s $600m issue in February 2013 took home profits of $400,000 – well below the industry average. Nigeria’s 2013, $1bn issue made its arrangers just $300,000.
“Banks are especially happy to do sovereign deals because that’s a way into government work,” Bibko says. “What really has changed is the interest in Africa… You have actually quite a substantial number [of businesses] kind of being groomed for eventual market offerings.
“It may not be translating fully into the number of issues right now, but there is just an unbelievable change in the interest in the continent.”