By Miranda Abraham, Head of Loan Syndication at RMB (www.RMB.co.za) in London.
In recent years, African debt markets have faced significant challenges due to a combination of factors, including soft global economic conditions, the COVID-19 pandemic and related supply chain failures.
These factors led to a reduction in demand for African debt and a dramatic increase in borrowing costs, putting sovereign borrowing in particular in a difficult position.
In fact, in 2023, there was no issue in Sub-Saharan Africa, marking the first time since 2008 that this has happened.
The global bond market was virtually frozen for Africa.
The squeeze on financing and the closure of the bond market forced African countries to look for alternative sources of financing, such as domestic capital markets, multilateral organizations and bilateral agreements.
But in January and February 2024, everything changed.
Suddenly there was a rush of deals. First Cote d’Ivoire reopened the market with a $2.6 billion bond issue. Even more encouragingly, the sale was more than three times oversubscribed, with total demand of $8 billion.
Benin then came to market with a smaller $750 million issue yielding just under 9%. Kenya issued a whopping $1.5 billion at a yield of 10.4%, the proceeds of which will be used to buy back most of its debt maturing in June this year. First Quantum Minerals issued $1.6 billion, closely followed by Kenya.
Furthermore, these bonds actually priced lower than initial guidance – indicating that investor demand was much stronger than initially expected. The release was proof positive that the market had turned and confidence had returned.
This confidence spread to the loan market, with banks suddenly rushing to bridge loans for bond issuance and/or medium-term financing at more attractive loan rates than those offered to borrowers in the past 2 years.
As we approach the middle of the year, the prospect of further interest rate cuts from central banks is looking less and less likely. However, debt capital markets issuance continues with recent deals for Puma Energy for $500m and phosphate miner OCP SA successfully completing a $2bn bond issue in international markets. There is more in the works to suggest that African markets bonds are alive again.
These recent debt sales in Africa show that investors are buying riskier bonds. This trend is likely to continue as more high-yield borrowers return to sub-Saharan Africa, seeking to tap into the region’s growth potential.
Borrowing costs remain high in Africa, but with most central banks expected to cut their key hard currency rates, borrowers will immediately start to see the benefits as costs come down.
It is also encouraging that debt levels in sub-Saharan Africa have largely stabilized at around 60%, and this could start to decline slightly from 2024, reversing an upward trend of almost a decade.
We are also hopeful of an uptick in event-based funding this year.
Event-driven financing refers to strategies where investment decisions are made based on specific corporate events, such as mergers, acquisitions, spin-offs, and bankruptcies.
In the context of Africa’s economic development, event-driven finance can play a critical role. We expect event-driven finance in Africa to leverage innovative financing instruments to mobilize private climate investment and support sustainable development and green initiatives.
Importantly, the African Development Bank Group has actively promoted the use of philanthropic and other forms of capital to create a green growth ecosystem.
This approach was highlighted at the World Economic Forum (WEF) earlier this year.
In addition, the African Union hosted the Conference of Ministers of Finance, Planning and Economic Development (COM2024) in Victoria Falls, Zimbabwe, on financing Africa’s green and inclusive transition. The event brought together experts to discuss ways to mobilize climate finance at national, regional and global levels.
Events such as the launch of the African Economic Outlook 2023 and the Conference Internationale De Lome Sur Le Financement also focused on venture capital and infrastructure financing for African projects and businesses as the continent looks towards a new economic landscape to support green industrialization and sustainable development.
African countries seek to address global development challenges and call for an equitable financial system to handle climate shocks and implement their development agenda.
Debt remains a headwind and inequalities in the international financial architecture make access to finance inadequate and costly.
In other developments, the African Union has highlighted the need for global reforms, concessional financing, Special Drawing Rights and Africa’s voice in decision-making to address debt, risk assessments and cost of capital.
We are also seeing a significant uptick in underwriting activity, not only for clients who want certainty of capital for general loans, but also for M&A activity, which clearly shows renewed investor appetite.
While M&A deals tend to take a long time to come to market, they are eagerly awaited and often represent new borrowers and new transactions, along with renewed investment activity in a difficult market.
All signs point to a positive recovery for both bonds and loans in 2024.
There is plenty of pent-up demand from both borrowers and investors, and with the year off to a strong start, there are clear reasons for cautious optimism.
Distributed by APO Group on behalf of Rand Merchant Bank.