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Bonds, Loans and Sukuks: In search of yield – Nana Phiri
This special podcast is brought to you by RMB and Nanagolo Phiri, Co-head of the Debt Financing Group at RMB. Nana, there’s lots of action happening in the debt markets of Africa lately, and in fact, there’s a big conference in Cape Town in mid-March that will focus on the subject. Do you attend these conferences?
Yes, we have been attending and participating in this conference for the past four years. It’s a phenomenal conference that brings all the people who are active in the bonds and loans sector in Africa. I’m one of the speakers this year and I will be talking about banking in South Africa, priorities and concerns around our capital allocation.
So it brings people together in this field from all over the continent. What are likely to be the major areas of interest?
At past conferences we spoke about difficulties doing business in the rest of Africa – especially in a commodities market that was benign and weak at the time. Many countries in Africa are struggling because of commodities, but I do think that there is a move towards the positives because of the recovery in the commodities market.
The oil price is currently at US$65 levels, so the main commodity economies are starting to look up and not face liquidity issues. There’s a little bit of an upbeat from an African perspective considering the promising macros.
From a global perspective, the wealthy parts of the world seem to be awash with liquidity, but in the developing part of the world there is always demand for liquidity. Are you seeing that, with the growing sophistication of the African market, there are now lenders who wouldn’t in the past have looked at the continent, but are now coming to the party?
We’ve been seeing a lot of liquidity for Africa – even from a Eurobonds perspective. We are also experiencing a definite interest from a lenders perspective. From a yields pickup perspective – there is still significant yield pickups that you can have by investing in the Africa story. These are evident with the recent big issuances in Kenya and Nigeria.
On the loan side – we’ve seen regular issuers such as the DFIs, and even some of the banks that have been issuing in the international markets. Prices dropped on this basis because of more appetite from the market
I think with the other mid-tier corporate and other issuers that are issuing in the international market, when the issue is still new, there is some issuer premium. However that’s mainly because the lenders are not close to the name. But we see that they’re coming in very quickly once the issuer is very known to market, given the liquidity that’s in the market.
I think overall, there is significant appetite for Africa from an investor point of view. From a borrower’s perspective, now’s the time to do US$ or our currency issuances on this basis.
Because the demand is strong and the understanding better, and the money is available?
Exactly. It’s about taking the lenders through a process of understanding the issuer so that they’re able to understand and know the business and become comfortable with the business to invest and support the business from a lending perspective.
Why are they getting more interested? Is it a search for yield or is it because they’re starting to understand better that things are actually happening on the continent?
I think that as little as five years ago, most people were more aware of the African story. There was a little bit of focus on the declining macros, which started two years ago, from a commodity perspective. There was a little bit of a pause, if you like, and a support for more, highly rated, more regular issuers.
However, I think with the macros that are changing – there is now more support from the rest of Africa perspective – mainly for that yield pickup. This is because an issuer in the African space is able to attract or price a very attractive rate for people who actually understand the African market. There is that enticing yield that you can have from an African portfolio which is why I think most people have been more active in the Africa space, regardless of the macro dips that we saw 18 months ago. We’re seeing more and more lenders looking and able to take views even as the macros improve.
What is the difference in yield between what investors into African debt are receiving, and say, what they would be getting in the Northern Hemisphere?
I think is all depends on who’s issuing. The continent is vast so we have investment grade issuers and sub-investment grade issuers – which means it could be anything from B, all the way to BBplus. Given that most of the Africa issuers are actually in the sub-investment grade bracket, you will see that the yields are rising.
It all depends on who you’re looking at. If you are for instance looking at the Government of Kenya, or if you’re looking at Nigeria – that 6% mark is probably where you would see the yields in this space. From a US Treasury perspective, the yields are usually around 1.5% – 2% and as a result, you can see significant pickups from that. Many of the emerging market funds looking for yield pickups will automatically be interested in the African story, given the yield pickup that you can still achieve in this space.
Just so that I understand correctly. US Treasury is 1.5% – 2%. In some of the borrowers from Africa you’d be receiving 6%?
Would that be sovereigns? Would that be the highest rated borrowers?
If you were for example to compare the Kenya sovereign or the South African issue in the Eurobond market with the US Treasury – you are obviously looking at different funds that will fund the rest of the Africa space, versus US$ bonds.
The moral of the story is that from a yields pickup perspective you cannot ignore Africa in that the sovereigns and even the corporates that are issuing in the Eurobond market are actually delivering a higher yield, versus what you will get in the developed market.
Obviously, there’s some risks, but I think the risk reward return is there. From a loans perspective, we’ve been seeing great appetite in the international markets – especially from the Asian side in African issuers delivering significant numbers. I guess it speaks to that fact that people are now more aware of what you can get in Africa, the yield as well as the assets that you can get in Africa.
So, in other words, the Chinese investors (when you talk about from the East (Asia)) are becoming quite a force in financing and providing the finance to develop the continent?
Yes. We’ve been seeing keen interest – from the Chinese markets and Chinese banks.
We need to touch on the Middle-East as well because this conference is called Bonds, Loans and Sukuk Africa. What is a Sukuk?
A Sukuk is an Islamic bond. From an Islamic perspective, it means that you are not charged interest when you are doing business. This is stipulated by an act that dictates that the concept of lending money and earning an interest is against Islamic Law. Such, when we use Islamic issuers or Islamic lenders they prefer that when you structure a deal by buying an asset, such that they are paying a profit. They’re earning a profit on an asset, versus earning interest on a loan.
So a Sukuk is an Islamic bond that meets the Islamic Law of lending in this space. Being a Sukuk Conference there are many Middle-Eastern investors, banks and lawyers attending. I think we have seen some African issuers do Sukuks.
We were involved in the African Finance Corporation Sukuk that was done early last year. We are also seeing a lot more on the Sukuk space in Africa, such as the South African Government doing a US$ Sukuk bond. We also know that in West Africa, the Côte d’Ivoire, Senegal – all have regular Sukuk issuers.
Clearly there’s a lot of cash in the Middle-East that can be invested into these kinds of loans?
Yes, there is. I think it’s a very good diversification tool for issuers who have issued regularly in the international markets and are looking to diversify their investor base. The reason is that the Islamic investor base will not be investing in the conventional Eurobond and those spaces. If you structure something for the Islamic Finance World, you’re actually tapping into a completely different investor base.
Nana Phiri is the Co-Head of the Debt Financing Group at RMB and this special podcast was brought to you by RMB.
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