Investors are waking up to African corporates that offer relatively high yields and a way into sustainable investing. At the same time, businesses across the continent are seeking capital to fund their business plans and, opening up to innovative financial structures. Furthermore, several African countries are also deepening their financial systems to make additional sources of financing available, and new classes of investors. These forces offer opportunities for institutional investors in a market that is ripe for growth.
While corporate bond markets remain relatively underdeveloped across Africa, they are increasingly being viewed as a realistic option for companies seeking growth on the continent or diversification of debt funding. Increased local and international investor interest and the backing of development finance institutions is helping to overcome previous stumbling blocks, like the rate of return, poor liquidity and geopolitical risks.
The African corporate bond market1 – defined as bonds issued by companies incorporated in an African country – was around USD149bn in July 2020, according to the International Capital Market Association (ICMA), dominated by businesses incorporated in South Africa, which made up more than USD95bn of the total. Other markets underscore the scope to grow: the US corporate bond market2 is USD10.9tn, while China’s is around USD7.4tn, ICMA data shows.
“Innovative financing structures can help mobilise debt capital in Africa and allow corporations based on the continent to thrive,” says Tony Pinches, Executive Director for Standard Chartered’s Financing Solutions Team in Africa. “Like all emerging markets, there are unique challenges and opportunities, so working with experienced partners is essential to understanding the landscape and delivering optimal solutions.”
Spurring private investment
With no dearth of potentially profitable projects to underwrite, both businesses and investors in Africa are searching for new methods of financing.
Working collaboratively to spur investment because private sector capital is vital for closing the funding gap across the continent. Just 60 per cent of the financing needed3 to achieve the United Nations’ 17 sustainable development goals4 in low-and middle-income countries is being met, and in Africa this is as low as 10 per cent.
The success of Liquid Intelligent Technologies’ (LIT) recent USD620m bond sale5, which was led by Standard Chartered as a Global Coordinator, illustrates how Africa’s corporate bond market now has a global investor appeal.
The company, which provides communications solutions in 13 countries, mostly in Eastern and Southern Africa, sold the bonds with a coupon of 5.5 per cent, three percentage points lower than its inaugural 2017 bond sale, and the lowest ever for a single-B issued in Africa. It was also more than five times oversubscribed.
“This shows the role global credit markets can play in funding Africa’s digital future,” says Rob Mason, Senior Originator, Debt Capital Markets Africa at Standard Chartered. “Many African corporate bond issuers are best in class in terms of the consistency and quality of their investor communication, accessibility to investors and ratings agencies and their prudent financial management.”
The participation of Development Finance Institutions, or DFIs – specialist organisations that are usually owned by national governments – can also help bring investors along on projects. Even amid the pandemic, investor confidence in these institutions remained strong and African DFIs have raised capital in loan6 and debt capital markets using innovative mechanisms, like subordinated loans, which they have been in a position to deploy.
The inclusion of three DFIs – the International Finance Corporation, DEG and the Emerging Africa Infrastructure Fund (“EAIF”) – as anchor investors in the books of the LIT fundraising helped give international investors the confidence to join the sale by providing further confidence in the credit and generating deal momentum.
That LIT corporate bond issuance was part of a broader placing of USD840m, including a USD220m equivalent South African Rand term loan.
Such structures can help when local currency fluctuations risk hampering the corporation’s ability to service debt denominated in US dollars. And where there is little or no market for local currency corporate bonds, or such markets are more volatile – as is the case in many African countries – loans can make up any shortfall. Combining bonds and loans in this way helps to keep the overall cost of capital as low as possible.
Although not an ESG bond, LIT were keen to stress their ESG credentials to the market. Since the company is advancing a number of the UN’s development goals, it was able to attract ESG-minded investors, a major theme both now and looking ahead. A robust ESG strategy was also key for the participation of the DFIs.
“African credit markets took a hit during the pandemic, but they’re coming back strongly,” says Mr. Pinches. “The continent’s low COVID-19 mortality rate and strong primary sector, together with higher yields and opportunities for green projects, has bolstered investor appetite in the credit markets, while issuers have been galvanised by low borrowing costs. We have a positive outlook.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.