Angola could join the growing pack of African sovereign Eurobond issuers this year, in a deal that will test investor appetite to finance frontier-market governments amid a strong dollar and weak oil prices.
On February 9, Goldman Sachs, BNP Paribas and the Industrial and Commercial Bank of China were authorized by president José Eduardo dos Santos to lead Angola's debut Eurobond, which has been delayed since 2013.
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There has been a clear shortage of dollars in Angola in recent months on the back of central-bank measures to de-dollarize the Angola economy Tiago Dionisio |
While the issuance of a presidential decree does not mean financing will necessarily be completed this year, analysts are quick to point to the significance of any benchmark deal for the broader African market.
"Angola could be the first Eurobond issuer from Africa in the post oil-price collapse environment," says Stuart Culverhouse, chief economist and head of research at Exotix. "Although there is still appetite for emerging-market debt, it will be interesting to see what investor appetite will be like in this case."
A Eurobond issue would reflect Angola's bid to diversify its sources of capital-raising. The government has approached Goldman Sachs and new outfit Gemcorp – led by former VTB Capital’s international CEO Atanas Bostandjiev, who worked on the previous Angola bond – for loans of $250 million respectively.
Angola is also in talks with the World Bank for a multilateral loan worth around $500 million. It's not clear if these borrowing efforts would be in addition to a Eurobond issue or substitute for the latter.
Analysts suggest Angola's net debt position is sustainable, though credit-rating agencies highlight risks due to the 40% fall in oil prices since early 2014. Standard & Poor's downgraded the sovereign on Friday from BB-/B to B+/B. Fitch and Moody's rate Angola at BB- and Ba2 respectively.
Angola is Africa’s second-largest oil producer after Nigeria and oil accounts for 97% of exports, 45% of GDP and 66% of government revenue.
Anthony Lopes Pinto, CEO at Imara Securities, a local brokerage firm in Angola, says the Eurobond is likely to be well-received in the market.
“My guess is that the bond will be at least $1 billion over 10 years, but it will be eventually determined by the appetite in the market, so it wouldn't surprise me if they end up raising $2 billion or even $3 billion, given Angola’s positive economic growth, positive geopolitical situation, and the search for yield by global investors,” he says, though most analysts expect the deal will be capped at $1 billion.
The $1 billion estimate is based on Angola’s debt history, explains Pinto, citing a 2012 deal that saw Russia’s second-largest bank, VTB Capital, provide a $1 billion amortizing loan participation note (LPN) to Angola over a seven-year period.
"The Angola 2019 amortizing LPN is trading at 7.2% with a spread of 560 basis points," says Culverhouse at Exotix. "Pricing in the maturity extension and taking into account the existing spread, I would predict that the Eurobond would yield at around 8%, but investors may demand a premium because of increased risk associated with oil producing countries."
Samir Gadio, head, Africa Strategy at Standard Chartered, says yields could be lower, adding: "We’re currently probably talking about the low-to-mid 7% area if Angola prints at a premium to Gabon and tight to Nigeria’s long-dated bonds.
"This would actually be only slightly above the 7% coupon that Angola pays on its 2019 amortizing LPN. Ironically, the spread over US treasuries of a new 10-year plain vanilla Angolan Eurobond is likely to be moderately lower than that of the LPN note which suffered from its more complex structure."
He adds: "Obviously pricing dynamics will change in line with the oil price, so there is a chance that the authorities will be able to minimize external funding costs later this year."
Fragile sentiment
However, fragile sentiment towards frontier-market sovereigns, among the real-money investor community, could pressure yields and cap the size of the issue.
As one London-based fixed income investor says: "I would be wary when it comes to picking up Angola dollar debt. At the moment there is so much turbulence in the market as a result of falling oil prices I would be tempted to stay away from this issue."
Tiago Dionisio, assistant director at asset management and brokerage firm Eaglestone, says: “Debt sustainability isn't an issue at the moment. Total debt is worth $48.3 billion and the debt-to-GDP ratio is 35.5% – the international component of which is 24.5%.
"This may appear big compared to African standards, but given the size of the economy this is actually quite low."
He adds: “Angola also has ample foreign exchange reserves at $27 billion, according to the central bank, worth around seven to eight months import cover.”
Culverhouse says: "Angola issuing more debt highlights the country's willingness to look for alternative means to finance itself in a period where oil prices are low. As opposed to waiting for the oil price to correct itself, the government is being proactive and these are positive steps."
Budget cuts
In 2009, Angola received $1.4 billion from the IMF under a 27-month standby arrangement to support policy adjustments and build up international reserves. The final disbursement was given to Angola in March 2012. The IMF support was given in response to the slump in the oil price after the global economic crisis at the time.
Last Friday, Angola’s cabinet proposed a cut of AOA1.8 trillion ($17 billion) from this year’s budget, after the benchmark oil price was slashed from $81 to $40 per barrel. Parliament is due to agree on the revised budget by the end of the month.
Other measures taken by the government to ease pressures on the budget include reducing fuel subsidies, slashing spending by government officials and cutting public-sector employment.
Angolan state-owned oil company Sonangol has reportedly undertaken austerity measures, and last December China Development Bank agreed a loan of $2 billion to Sonangol to support Angola’s oil and gas projects.
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Claire Schaffnit-Chatterjee, |
“Angola’s government has responded quickly to the falling oil price, more quickly than other sub-Saharan African oil producers,” says Claire Schaffnit-Chatterjee, senior Africa analyst at Deutsche Bank.
“But the revised budget deficit is still high, at 6.2% of GDP down from 7.6% in the current budget. The revised budget brings downside risks to real GDP growth, likely to be much lower in 2015 than the government’s forecast at 6.6%, most likely in the 3% to 4% range.”
Culverhouse adds: "Although Angola may suggest that proceeds from a Eurobond will go towards things such as infrastructure, because of the budget deficit the Eurobond will look like it is going towards current government expenditure."
Angola’s currency has also taken a hit. While officially the kwanza has lost 2% against the dollar this year so far to an exchange rate of around AOA104, on the black market the kwanza has slipped further, from AOA110 to around AOA150 against the dollar.
“There has been a clear shortage of dollars in Angola in recent months on the back of central-bank measures to de-dollarize the Angola economy," says Eaglestone's Dionisio. "This is highlighted by the change in the black-market currency rate.
"In the meantime, the central bank has responded by easing some of the restrictions on the demand of dollar notes by commercial banks in the hope of tackling the huge arbitrage still existing in the formal market for dollars.”