Cote d’Ivoire stormed its way back into the international debt capital markets on Thursday when its 10-year $750 million issue saw a flood of investors to drive the order book to more than $4.7 billion.
Due to overwhelming demand for the sovereign paper, Cote d’Ivoire was able to push yields towards the tight end of the guide price to 5.625%.
The successful issue priced well within Kenya’s debut sale of $1.5 billion with a coupon of 6.875%, just one month earlier, and only three years after the sovereign defaulted on its $2.3 billion 2032 Eurobond issued in March 2010. BNP Paribas, Citi and Deutsche Bank were joint bookrunners on the deal.
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| Albin Kakou, fixed- income investment analyst at Silk Invest |
“The fact that Cote d’Ivoire priced within Kenya was not much of a surprise, given the country’s strong fundamentals today,” says Albin Kakou, fixed-income investment analyst at Silk Invest.
“You can see that it is a much better credit and an attractive way for investors to access yield and minimize risk. In fact, I actually expected the bond to yield even tighter, perhaps by 30 basis points.”
He adds: “But the difference may have been a supply and demand issue. The original bond was meant to be $500 million. The extra $250 million probably pushed the yield up.”
According to Samir Gadio, head of the Africa strategy team at Standard Chartered Bank, a last-minute deal with the IMF, given the low external funding costs, saw restrictions by the fund lift the cap on a $500 million Eurobond and ensured the government could raise more than initially planned.
Maryam Khosrowshahi, managing director and head of public sector coverage CEEMEA at Deutsche Bank, says: “The levels of excess demand in the bond would suggest that if the sovereign had decided to issue more, the yields may have remained the same.”
Nick Samara, vice-president of CEEMEA DCM at Citi, who also worked on the deal, adds: “This is exactly what we expected in terms of price. If we were in a strong rates environment like we were around 18 months ago, the bond may have priced tighter.
“Solid macroeconomic fundamentals and political stability drew investors in. And investors are betting on a good outcome for the coming presidential elections in 2015. There is plenty of room for the bond to rally.”
Aggressive pricing
The success, and aggressive pricing, signals a turnaround for the once war-torn country. After a disputed election in 2010, civil war broke out for the second time in Cote d’Ivoire in 2011 and the central bank was prohibited from making payments on the country’s first Eurobond, despite ample liquidity.
After honouring the first coupon in June 2010, authorities failed to pay the coupons for December 2010, June 2011 and December 2011, accounting for $98.4 million. After the turmoil, the country’s economy contracted by 4.9% in 2011.
Repayments of that bond resumed in June 2012 and in the following November an agreement was reached with lenders to clear arrears and cancel penalties.
“It was a technical default, and it wasn’t because the country couldn’t afford to pay –there were reserves in the central bank – but the right authorities were not allowed to issue payments,” says Samara. “Investors know this.”
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Since repayments began, growth has been on a positive trajectory. In 2012, growth reached a lofty 9.8%, and in 2013 it reached 9.1%. Some predictions see GDP growth reaching 10% for 2014, firmly placing the country within the top-10 fastest-growing countries in the world.
“The country is also undergoing a re-basing exercise, which will see GDP at higher levels than we see now,” says Samara.
Unlike many of its peers, Cote d’Ivoire has moved past subsistence farming to nurture a relatively dynamic agricultural sector. It is the leading world producer of cocoa –accounting for 40% of overall production – the second-largest global producer and leading global exporter of cashew nuts, the leading African producer of rubber, bananas and tuna, and the second-largest African producer of palm oil.
Agriculture contributes around 25% of GDP and 40% of export revenue, according to rating agency Moody’s.
“What the country has managed since unrest broke out in 2011 has been tremendous,” says Khosrowshahi. “The performance of the bond is a real vote of confidence from the investors in the sovereign’s positive story.”
Aurelien Mali, senior analyst within the sovereign risk group at Moody’s, adds: “Although the country is vulnerable to fluctuations in commodity prices, the country is actively diversifying its economy, underpinned by structural reforms and public investment in infrastructure.
“While there are some concerns, we believe that the country will be able to make repayments on this bond and a risk of a second default similar to that before is low.”
Low debt levels in the country has been supported by debt forgiveness during the past couple of years. Debt was cancelled under the heavily indebted poor countries initiative and some was also forgiven by the Paris Club – an informal group of creditors which helps find solutions to payment difficulties experienced by debtor countries.
The government’s external debt accounted for 21.7% of GDP at the end of 2012 compared with 55.1% in 2011.
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| Source: Moodys |
Moody’s and Fitch rated the sovereign paper B1 and B respectively, both with a positive outlook, highly unusual for a first-time rating, says Samara.
Since July 8, when ratings were confirmed on the sovereign, yields on the Ivory Coast 2032s have compressed from 6.22% to 5.95% as of Thursday market close, a 27bp compression between the rating and now.
“In fact, after the new bond was issued yesterday, we saw a slight rally in all African dollar-denominated credits,” says Kakou.
As economic fundamentals in the region improve, more African sovereigns are joining the international debt markets, despite the threat of Fed tapering.
“There remains a bullish environment in the emerging and frontier market credit space,” says Khosrowshahi. “At the same time, investors closely analyze and follow the economic fundamentals of each country.
“Moreover, supply from the sub-Saharan Africa region is still very limited. Of those that have issued, there are few with more than one international bond outstanding.”