Hopes are growing financial institutions and multinational corporates in Kenya will follow the sovereign’s tapping of international debt markets to raise funds, amid a bull run in the region’s issuance.
However, decent liquidity in loan markets and the private sector’s modest dollar appetite – relative to oil-rich Nigeria – suggests the volume of financial and non-financial Eurobond issuance in Kenya will be modest, say analysts.
 |
| It’s no surprise that the two largest economies in the region have led in terms of international bond issuance, but others will soon be following Megan McDonald |
Kenya’s $2 billion Eurobond in June was the largest for an Africa sovereign excluding South Africa and was more than four-times oversubscribed, with an order book of $8.8 billion. The five-year, $500 million bond yielded 5.875% and the 10-year $1.5 billion issue yielded 6.875%. Barclays, Standard Bank, JPMorgan and Qatar National Bank were lead managers.
According to Standard Bank, sub-Saharan African (SSA) offshore issuance hit a record $14 billion in 2013, growing at 36% compound annual growth rate from 2010 to 2013, while the emerging-market sector, as a whole, has grown at 21% per annum.
Year-to-date 2014, SSA debt issuance has totalled nearly $10 billion, with around 30% coming from the corporate sector and 70% from sovereigns.
Most notably, South Africa and Nigeria, the largest economies in the region, have dominated the debt capital markets out of SSA.
Nigeria issued its debut Eurobond in 2011 with a $500 million deal and returned to the market with a $1 billion issue in 2013. Nigeria’s latest offering, split over two tranches, was four-times oversubscribed, highlighting demand for the credit amongst investors.
Nigeria’s banks, however, preceded the sovereign and have rushed back into the international debt markets in recent years, buoyed by the sovereign’s success.
First Bank and Guaranty Trust Bank were the first banks to issue Eurobonds in 2007, raising $175 million and $350 million respectively. Both banks have returned to the Eurobond market and have been joined by Access Bank, Fidelity Bank, Zenith Bank and Diamond Bank.
In Nigeria, corporate Eurobond issues have outpaced sovereign issues. According to George Bodo, head of SSA banking research at Ecobank, the outstanding Eurobond stock issued by Nigerian banks amounts to $1.85 billion, 23% more than the $1.5 billion in outstanding sovereign Eurobond issuance by the federal government.
Kenya eager
The trend is spreading to other countries and is supported by robust growth throughout the region.
“It’s no surprise that the two largest economies in the region have led in terms of international bond issuance, but others will soon be following in their footsteps,” says Megan McDonald, global head of DCM at Standard Bank.
As McDonald points out, Kenya is on course to see a similar development.
“After Nigeria and South Africa, Kenya is one of the largest economies in the region and some Kenyan corporates are outgrowing the capacity of local market funding,” she says. “With the Eurobond issue in June, I am sure we will see a number of Kenyan corporates accessing funding from the international debt capital markets over the next 12 months.
“We know that many corporates in Kenya were eagerly anticipating the debut sovereign Eurobond, as it set an important benchmark which will enable them to more easily access funding from international capital markets.”
As of yet, there have been no official announcements of Eurobond issues by Kenyan financial and non-financial corporates. In July, S&P announced it was reaching out to various corporates and banks in the country after the benchmark was set by the sovereign a month earlier.
 |
| Daniel Berman, at Standard Chartered |
Since the onset of Basel II, some banks have been feeling pressure on their capital adequacy ratios and might be forced to tap international debt markets. At the same time, loan growth in Kenya has been growing at a much higher rate than deposit growth and there is not enough liquidity in the market to fill the gap. “Multinationals present in Kenya are more likely to issue Eurobonds because they can leverage off of their global expertise when it comes to bond issues,” says Ronak Gadhia, Africa equity research analyst at Exotix. “And they might be able to get good rates. If we look at T-bills in Kenya, at the longer end of the curve, yields reach about 11% or 12%. For corporates issuing in local currency, yields are about 200 to 300 basis points higher at 13 to 14%.
“We could expect something similar to happen for corporate Eurobonds in Kenya. They could expect to issue Eurobonds at about 8% or 9% around 200bp to 300bp above the sovereign issue. This is what we have seen in Nigeria, where dollar-denominated corporate issues are around 200bp to 300bp above the sovereign.”
Potential issues will likely come from the energy and construction sector, which has huge capital investments, high leverage and large working-capital requirements.
Given the oil sector’s financing needs, Nigeria’s private sector is hungry for dollars. Banks and corporates are answering to the needs of the economy by issuing dollar debt, but the case is not the same for Kenya, where fewer companies have dollar liabilities on their books. The main reason for this is because Kenya’s economy is not resource-driven, but rather highly diversified.
In Kenya, foreign currency lending only accounts for 20% of total lending by commercial banks, while in Nigeria, foreign currency lending, especially dollar lending, accounts for nearly 40% of total lending, says Ecobank’s Bodo.
“Dollar requirements in Kenya are just not substantial enough,” he says.
Daniel Berman, head of capital markets for Africa at Standard Chartered, adds: “The recent surge in sovereign Eurobonds in Africa will increase the ability and attractiveness of other entities hoping to tap the market. Non-government bond issues out of countries including Kenya and Zambia are definitely on the table.
“It’s not a simple case of the Eurobond flood gates opening. The loan market in Kenya will continue to provide the dominant means of funding in Kenya. There may be exporters and other companies with natural dollar hedges that could issue Eurobonds, but, in general, the introduction of the Eurobond market has just broadened the available options open to them.”
Dollar loans
The loan markets in Kenya are some of the most developed in the region, with longer tenors at competitive rates becoming available to blue-chip companies, suggesting domestic Kenyan corporates are unlikely to issue Eurobonds as they have access to dollar loans from local banks.
“In Kenya, dollar borrowing rates are anything between 5% and 6%,” says Bodo. “For instance, Kenya Power recently secured a $100 million funding at 5.6% and Kenya Airways, which has both short- and long-term dollar borrowings, got funding at prices between 4.55% and 5.94%. Both are below the price of Kenya’s 10-year Eurobond.
“The low dollar pricings that characterizes the east African market has been one of the challenges Nigerian-domiciled banks face when they set up shop in the region.”
Moreover, Kenyan banks are pro-active at sourcing funding from development finance institutions (DFIs) – and at favourable rates. The Co-operative Bank, Equity Bank, Kenya Commercial Bank, Diamond Trust Bank and National Industrial Credit Bank have tapped DFIs when they have needed to raise dollars to match liabilities.
“I don’t think Kenyan banks and corporates are going to rush to the Eurobond market,” says Exotix’ Gadhia. “It’ll be another two years before banks in Kenya start to issue dollar-denominated debt.”