Global lenders strike gold in bonds issue

Central Bank of Kenya. The government has defended the issuance of a second bond at the London Stock Exchange on Wednesday with debate raging on the piling national debt. PHOTO | FILE | NATION MEDIA GROUP

What you need to know:

  • Kenya has twice dipped her toes into the Eurobond market for large debt issues, the first being a five and 10-year offer in 2014 that raised $2.8 billion.

  • Citi and Standard Chartered managed Nigeria’s $3 billion (Sh305.7 billion) Eurobond in November last year.

  • In the Kenyan Eurobond of 2014, the Qatar National Bank was a last-minute addition to the list of arrangers, amid claims of ties with influential government figures.

  • It also revealed that sometimes underhand deals can be cut to influence the choice of adviser.

A well-connected group of international lenders have found a rich source of business handling sovereign debt issues by African countries.

This comes as debate rages on the new Sh202 billion bond issued at the London Stock Exchange on Wednesday with limited public involvement in Kenya and no prospectus released.

These large multinational lenders are using their connections to high net worth and institutional investors in Western financial markets to link them to African governments that have in the last decade developed a huge appetite for the international bonds market, the cost of these loans notwithstanding.

Kenya has twice dipped her toes into the Eurobond market for large debt issues, the first being a five and 10-year offer in 2014 that raised $2.8 billion (Sh278 billion at today’s exchange rate), and the second being the $2 billion (Sh202 billion) 10 and 30-year issue concluded this week.

Kenya’s offer in 2014 was handled by US bank JP Morgan, Standard Bank (Stanbic’s parent bank), British lender Barclays Plc and Qatar National Bank’s investment banking arm of QNB Capital. Local investment bank Dyer & Blair also participated as a co-manager, albeit one without an underwriting role.

In the 2018 offer, JP Morgan and Standard Bank were back as co-arrangers of the bond, this time alongside US lender Citi and Britain’s Standard Chartered.

GOOD RIDE

It has, therefore, been a good ride for international banks for the past 12 years, since Seychelles issued sub-Saharan Africa’s first sovereign bond worth $200 million (Sh20.4 billion) in September 2006. Since then, African nations have issued well over $40 billion (Sh4 trillion) in Eurobonds.

Previously, African countries largely subsisted on concessional loans from multilateral and bilateral lenders which, while cheaper, came with tough conditions or were tied to specific projects making it difficult to use them to finance a wider variety of budget items.

It is, however, interesting that it is largely the same banks that have been arranging various Eurobonds across the continent.

Citi and Standard Chartered managed Nigeria’s $3 billion (Sh305.7 billion) Eurobond in November last year.

Egypt has a $4 billion (Sh407.7 billion) bond in the pipeline, to be managed by HSBC Holdings, Citi, JP Morgan, Morgan Stanley and the National Bank of Abu Dhabi.

Ivory Coast is also planning a Eurobond issue this year, although it is yet to announce the identity of the two banks it has chosen and the amount sought.

Other African countries that have issued Eurobonds include Ghana, Angola, Zambia, South Africa, Gabon, Mozambique, Namibia, Senegal, Tunisia, Cameroon, Ethiopia, Rwanda and DRC.

EUROBONDS

After a lull in 2016 for new issuances due to unfavourable market conditions, Eurobonds are back in vogue for African countries, which are also wary of potentially higher costs of issuance next year.

This can only mean more work for the banks. “There is appetite for sub-Saharan Africa sovereign credits but African countries are warily watching US interest rates climb,” said Aly Khan Satchu, chief executive of Rich Management, and an independent analyst.

The investors in Eurobonds are normally high net worth individuals and institutional investors such as pension funds, insurance firms, hedge funds and banks in places like the US and UK.

This class of investors has built relationships with these large banks for many years, and are normally convinced to invest into African countries which would otherwise be considered too risky to touch. The large banks also have the financial muscle to underwrite the bonds, effectively committing to put in their money should the need arise in order to make the issuances successful.

They also handle the documentation and meet the potential investors to gauge their interest in the bonds. It is, however, a fiercely competitive space, and there are sometimes questions raised about the criteria of choosing the banks to manage an issue, or the length the banks will go to in order to secure the work.

ATTRACT INTEREST

In the Kenyan Eurobond of 2014, the Qatar National Bank was a last-minute addition to the list of arrangers, amid claims of ties with influential government figures. The government would later explain the move was made necessary by a need to attract interest from Asia.

Although neither the lenders nor the government disclose the finer terms of their agreement including commissions paid, a bribery case brought up against Standard Bank by the UK’s Serious Fraud Office (SFO) concerning the $600 million (Sh61.1 billion) syndicated loan taken by Tanzania in 2013 revealed the level of fees that the international lenders charge for handling government bond issues.

It also revealed that sometimes underhand deals can be cut to influence the choice of adviser.

In the Standard Bank case, papers filed by the SFO showed that the lender charged 1.4 per cent of gross proceeds in fees for the Tanzania private placement debt issue, with an additional sum of $6 million (Sh611.5 million) paid to a local Tanzanian firm to push for the deal. The case was settled with a fine and a deferred prosecution agreement.

ARRANGERS

At such a percentage, the arrangers would earn tens of millions of dollars from the African bond issues.

The cost aspects of issuing international debt on commercial terms has also frequently come up as one of the more contentious aspects of these debt issuances.

In Kenya’s case, attention has been drawn to large interest amount, totalling $3.2 billion (Sh323 billion) for the Sh202 billion bond just issued.

The bond’s long tenor – not many African countries are able to issue a 30-year tranche bond – is a factor in the high cumulative interest amount.

Egypt, Morocco and South Africa are the only other African nations to have sold 30-year dollar bonds.

Governments, however, argue that accessing these kinds of commercial debts is necessary if the continent is to bridge its huge infrastructure gap, which cannot be sufficiently financed using concessional loans, aid and internally generated revenue.