African Eurobonds 'not lucrative'

The African Eurobond business remains a decidedly low-fee affair, say bankers, who hope their labour will pay off with ancillary business.

This is despite the fact that African sovereigns pose unique challenges compared with higher-rated sovereigns with well-developed yield curves, and fewer bookrunners are prepared to undercut competitors with low fees in contrast to the pre-Lehman heyday.

According to Engelbrecht, global and regional investment banks still charge low fees, within a highly competitive environment for bookrunners. 

As Engelbrecht says: “While volumes and deal size are reaching record levels in Africa, they are still very small compared to global levels. There just aren’t that many issues when it comes to international sovereign debt, so investment banks are competing in quite a fierce environment.”

He adds: “So as it stands, Eurobonds are not a lucrative business for investment banks. More than anything, this is a way for banks to build up a reputation in a region which shows high levels of growth. Investment banks take on this type of low-fee work as it is a low-risk way to build up credentials in a region.”

During the past two years, investors have seen a flurry of Eurobond issuance out of sub-Saharan Africa, with sovereign issues between $400 million and $1.5 billion. This year, Zambia, Kenya, Cote d’Ivoire and Senegal have issued Eurobonds, with Ghana planning an issue later this year.

In July, Zambia's $1 billion Eurobond landed the bookrunners a profit of $1.6 million. One of the lowest profits made from any sovereign Eurobond during the past four years came from Nigeria's issue in July of last year, with a fee of $0.3 million for the $1 billion issue.

Tight yields

And yields on African Eurobonds have remained tight despite the threat of Fed tapering. Senegal’s third offering – and the latest Eurobond out of the region; a $500 million Eurobond at the end of July – priced to yield at 6.25%, 250 basis points below the 2011 issue. Cote d’Ivoire’s Eurobond in July also performed well, pricing inside Kenya’s earlier issue with a yield of 5.625%.

“As Eurobond issues for Africa extends to parastatals and African corporates, the profitability from Eurobond should increase,” says Engelbrecht.

“Therefore, building a track-record in sovereign issuance will be a benefit for when the more lucrative Eurobond business comes to the market. Bonds are also a good way to get a feel for a market and build credentials while the rest of the market for investment banking – such as M&A and equities – is still developing.”

While eastern European sovereigns have, in recent years, developed a reputation as fee-sensitive, with Ukraine's famous zero-fee mandate in 2008 causing ire, African sovereign issuers are largely following in the footsteps of emerging-market issuers, who are seen as more price-sensitive compared with US issuers, and able to command aggressive terms to a global investment banking industry that is still arguably suffering from over-capacity.