A review of the continent’s activity in debt capital markets by financial services provider Standard Bank reveals continued growth in issuance, including the evolution of new asset classes, which speak well to both the resilience and future growth prospects of Africa’s debt capital markets.

Debt capital markets across Africa’s subregions have remained robust despite the macroeconomic and political challenges presented, “indicating their growing maturity and depth – along with their ability to develop solutions in the face of volatility and change”, Standard Bank South Africa debt capital markets head Zoya Sisulu outlines.

In Kenya, for example, structural challenges, including two banks placed under statutory management this year, saw investors move out of corporate bonds to the perceived safety of government paper and tier one banks.

Similarly, in response to local growth concerns and increased political uncertainty in South Africa, issuance in the country’s debt capital markets was largely focused on high-quality deals on well-known credit, given the increased risk aversion.

As sentiment improved during the year, liquidity increased significantly and even saw some compression in spreads. The depth of the South African market also attracted many non-South African domiciled issuers seeking to access the local bond market through inward listings.

These included institutions such as the International Finance Corporation (IFC) raising rand bonds for local project funding and Namibia raising a sovereign rand-denominated bond for ongoing deployment in the country’s infrastructure development programme.

In West Africa, Nigeria’s debt capital markets were characterised by volatility driven by higher inflation, high interest rates and low liquidity arising from a drop in global oil prices and the depreciation of the naira. In response, the value of bonds issued in Nigeria in 2016 dropped by 20% – to $2.9-billion, from $3.7-billion in 2015.

A significant corporate issuance in one of Africa’s largest economies on the other hand, saw Nigerian holding company Stanbic IBTC Capital assist construction company Lafarge Africa to raise N60-billion in the Nigerian debt capital markets.

This was a landmark issue in Nigeria as it represents “the largest bond issuance by a corporate in the country – successfully raised in a particularly challenging liquidity and interest rate environment,” says Standard Bank West Africa debt capital head Kobby Bentsi-Enchill.

“Africa’s smaller more diversified economies [also] continued to show an increase in corporate issuance,” remarks Sisulu.

For example, Tanzania’s National Microfinance Bank issued a $19-million three-year senior and unsecured fixed rate retail bond taking advantage of the substantial liquidity with retail investors.

In Namibia and Zambia, issuance continued to be driven by the financial sector. A highlight in the Namibian market was the IFC’s debut bond, pricing at par to the government curve.

Also, despite a volatile interest rate environment in Mozambique, a $4.4-million Bayport transaction marked the first corporate issuance in the country.

REGULATION
Changing regulation was also a common theme across the African debt capital markets landscape this year and will continue to define responses in future.

Opportunities around interest rate capping, for example, could see innovation in Kenya’s debt capital markets as corporates seek to hold loans in bond format.

This is especially so in Kenya’s financial services sector, where “banks will need to get smarter about increasing returns on their loan books and repackaging structures will likely get them rate flexibility that is required to properly assign risk to counterparties”, explains Standard Bank East Africa debt capital markets head Wegoki Mugeni.

Regulatory changes around capital requirements in Uganda and Tanzania are also expected to drive opportunity in these two markets.

Similarly, in South Africa, banks have been key drivers of issuance volumes in response to the implementation of Basel III regulations, much of this historically focused on senior and tier two funding. Further developments in this sector include alternative tier one capital.

Alternative tier one notes are a key instrument in regulators' post-crisis bail-out regimes. They seek to impose principal losses on creditors during firm-level financial distress. “The idea is that this should happen outside the normal bankruptcy process and, in theory, without recourse to the public purse,” Sisulu says.

In Nigeria, regulation has driven the growth of the country’s debt capital markets over the last decade. “Regulatory changes, including pension fund reforms, have seen significant growth in assets under management as pension funds benefit from increased participation from pension fund contributors,” says Bentsi-Enchill.

Specifically, in 2012, Nigeria’s government exempted bonds from withholding tax on interest income, making investments in bonds more attractive.

In addition, assets under management of pension funds increased from $9.5-billion in 2012 to $19-billion in September this year.

That said, corporate bond issuances in Nigeria still only accounted for just over 7% of total issuances in 2015 and 2016, with the Nigerian government remaining the primary issuer of bonds.

Nigeria’s commercial paper market has grown significantly since the first commercial paper issuance by Stanbic IBTC in 2012. Cumulative commercial paper issuance from 2012 to September this year amounted to over $20-billion, with a number of corporates accessing the commercial paper market for short-term funding this year.

Looking forward to 2017, government and banks are expected to be the biggest drivers of new debt capital market activity in Africa.

“In Kenya, for example, Standard Bank expects requirements for longer term, local currency denominated financing structures for power, infrastructure and utilities projects to drive growth in the capital markets,” says Mugeni. 

“Additionally, market changes such as the introduction of over-the-counter trading for fixed-income securities should increase secondary market liquidity; something which has been conspicuously absent for corporate paper.”

Similarly, in Uganda, Standard Bank expects increased debt capital market activity as private sector investors look to raise longer term funding to service government infrastructure investment.

Over the longer term, Standard Bank also expects infrastructure build programmes, as well as major capital projects in water and energy, to drive innovation and activity in South Africa’s capital markets.

“There has been much discussion in the market around facilitating the development of the project bond market given the massive infrastructure requirement in the country – particularly in the water and renewable-energy sectors,” Sisulu reveals.