Eurobonds: Appetite Strong But Little Long-Term Value

Recent bond issuances by Côte d'Ivoire and Senegal demonstrate that appetite for Sub-Saharan African (SSA) eurobonds remains strong.

  • That said, we think the asset class offers little value at current levels over a one- to five-year time horizon.

  • Zambian dollar debt is facing downside risks related to policy issues.

  • Yields Heading Lower For 2014 Issuers
    Africa - Yields On Select Eurobonds, %
    • Recent bond issuances by Côte d'Ivoire and Senegal demonstrate that appetite for Sub-Saharan African (SSA) eurobonds remains strong.

    • That said, we think the asset class offers little value at current levels over a one- to five-year time horizon.

    • Zambian dollar debt is facing downside risks related to policy issues.

    There have been two issuances since our last update on regional eurobonds. Both were heavily oversubscribed, confirming our view that investor appetite would be strong  (see 'Long-Term Challenges For SSA Eurobond Issuers', July 16). On July 23, Senegal issued its second 10-year eurobond, following its maiden launch of May 2011, with the USD500mn issue being eight-times oversubscribed. This followed the return of Côte d'Ivoire to international capital markets a week earlier with a USD750mn issue which was itself six-times oversubscribed. Kenya and Zambia have also both raised dollar bonds in 2014 with the former issuing five-year and 10-year bonds totalling USD2bn in June while the latter issued a USD1bn 10-year bond in April.

    Yields Heading Lower For 2014 Issuers
    Africa - Yields On Select Eurobonds, %

    Yields on all the bonds issued in 2014 have headed lower since their debut. Côte d'Ivoire is providing investors with the lowest returns, currently at 5.5% down from 5.6% at issue. Kenya and Senegal are trading at 5.9% and 6.0% respectively (down from 6.6% and 6.2% on debut), both of which are inside Zambia's yield of 6.5% (8.3% at issue). The decline in yields over the course of 2014 for these instruments reflects the broad trend for SSA eurobonds, which have almost uniformly performed well during the year. The chart below shows the bond prices for several SSA countries, rebased to one year ago.

    Prices Are Almost Uniformly Higher Than They Were A Year Ago
    Africa - Prices For Select Eurobonds Rebased, 19/08/13=100

    All of these SSA instruments, save Ghana USD2023, are trading at higher levels in price terms than they were a year ago. Despite this performance, we maintain our view that SSA eurobonds offer little value at current levels and we are bearish on the asset class as a whole on a one- to five-year time horizon (see 'Long Term Challenges For SSA Eurobond Issuers', July 16).

    Ghana's divergence from its peers is not surprising given the many economic challenges the country is facing. The USD2023's performance over recent weeks in particular is a stark illustration of investors' lack of confidence in Ghana's macroeconomic profile. The bond has traded sideways since the start of August in spite of the government's decision to turn to the IMF for support on August 4 (see 'IMF Involvement Will Boost Markets Temporarily', August 4). The contrast between the performance of Ghana's eurobonds and those of Zambia - which has also faced macroeconomic difficulties and announced that it would be seeking IMF assistance - is also stark. As the charts below demonstrate, the spread of the yields between the two countries has widened markedly over the past four months. 

    More Confidence In Zambia Than In Ghana
    Spread Of Ghanaian Over Zambian Yields, Basis Points

    This demonstrates that investors have more faith in the Zambian authorities' ability to deal with economic challenges than they have in that of their Ghanaian counterparts. In many ways, we agree with the market's assessment as the Zambian authorities have shown themselves to be far more proactive (see 'ZMW: Cedi-Like Spiral Possible But Unlikely', June 5 2014). However, we also believe that there are political and policy risks in Zambia that are not reflected in Zambia's eurobonds  (see 'Sata's Health Issues Pose Risks To Stability', July 21). Admittedly, these risks relate to political issues and are not structural in the way that Ghana's are, and could therefore easily be mitigated by market-friendly pronouncements by the government. However, we believe that the threat of economically disruptive policy and the uncertainty surrounding President Michael Sata's health and succession poses downside risks to Zambia's dollar debt.

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    This article is tagged to:
    Sector: Country Risk
    Geography: Africa, Cote d`Ivoire, Gabon, Ghana, Kenya, Senegal, Zambia
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