After the debt relief provided to African states during the early 1990s, the balance sheets of many African countries were largely debt free. However, governments were reluctant to take on higher levels of debt, for fear of returning to the debt crisis of the 1980s. Following a period of strong economic growth and increased political stability, many of these countries have recently become prime candidates for capital raising in the public debt market.

The last few years have seen a trend of increased activity in the sovereign Eurobond market emerging in Africa. In addition to improved balance sheets, the reasons for this trend include:

• The need for infrastructure and development of housing, which require sums larger than can be attained through aid or savings;
• The flexibility in spending allowed through the raising of debt via Eurobonds rather than via aid or unilateral agreements; and
• Relatively cheap funding costs as a result of high demand for African Eurobond issues, coupled with the higher cost of local currency funding.

Note: The central circle represents funds raised, while the outer ring represents funds subscribed.

The chart above shows the value of funds subscribed, as well as funds raised for a selection of recent issues, illustrating the high demand for Eurobonds. This demand can be attributed to:

• Low returns in developed markets in recent years, which are pushing investors to emerging markets, such as Africa, looking for more attractive returns;
• Improved understanding of the African growth story, which has lowered the historic perceived risk of African sovereign debt; and
• Investment through Eurobonds eliminating local currency exposure, significantly lowering the risk of the investment.

The terms of the selection of recent issues are presented in the table below, which shows that more than $6 bn has been raised over this period.

The graph below plots the launch yield and sovereign foreign currency credit ratings of the 10 year Eurobond issues from the table above. With the exception of the Nigeria issue, it can be observed that as sovereign credit ratings decline from investment grade (BBB-) to speculate grade (from BB-), the cost of financing increases, to compensate for the additional risk implied by the lower rating.

– Debbie O’Hanlon
Analyst, RisCura Fundamentals

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