10 Apr

Zambia’s Bonds Plummet on Concern It’s Pulling a Mozambique

Investors fretting that Zambia may have more debt than it’s let on have sent the nation’s Eurobonds tumbling.

Yields on the copper-producing country’s $1.25 billion amortizing bonds due in 2027 rose as much as 54 basis points, the most since February 2016, before paring the increase to 50 basis points on Monday. At 8.45 percent, the yield was the highest in more than a year.

Banks including Nomura Holdings Inc. say the government may have greater external liabilities than the official figure of $8.7 billion.

That’s bad news for holders of Zambia’s dollar securities, which were already the worst performers in Africa year-to-date through the end of last week, losing 2.4 percent, according to the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index.

The risk is that Zambian bondholders could find themselves in a similar situation as investors in Mozambique, where hidden debts led to default and the government is seeking to restructure.

Zambia has been in talks for several months with the International Monetary Fund about a $1.3 billion bailout, but the two sides have failed to strike a deal, partly because of the Washington-based lender’s concerns about foreign borrowings.

This ratchets up risk, according to Robert Besseling, director at political risk advisory firm EXX Africa Ltd., who also believes Zambia’s foreign debt could be much higher than the official number.

“The risk of debt defaults, especially on short-term high-interest loans, is rising fast,” he said in an emailed note Monday. “In the absence of an IMF aid program to boost foreign currency reserves and improve balance of payments, Zambia is quickly headed for a broad economic and financial crisis.”

Not everyone is convinced the debt situation is as murky. There is “no hard evidence” that the risk of hidden loans in Zambia is greater than any other countries with similar credit ratings, according to Gregory Smith, a sovereign-debt strategist at Renaissance Capital who was previously a World Bank economist in Zambia.

To read the full article, click here.

16 Mar

Ivory Coast Is Selling Africa’s Biggest Euro-Currency Bond

Ivory Coast sold 1.7 billion euros ($2.1 billion) of bonds Thursday in the biggest issuance in the common currency from an African government, according to a person familiar with the matter.

The West African nation’s amortizing deal was equally split between a tranche maturing in 2030 and paying 5.25 percent, and another due in 2048 with a yield of 6.625 percent, said the person, who asked not to be identified as they’re not authorized to speak about the matter.

Price guidance was around 5.375 percent for the shorter securities, which have an average life of 11 years, and 6.75 percent for the longer ones, which have a 29-year average maturity, said the person.

That’s the largest amount of euro debt issued by an African sovereign since at least the start of this century, when Bloomberg began compiling the data. It was also the second-biggest transaction in the currency from emerging markets this year, after Romania’s 2 billion euro-deal on Feb. 1. Investors placed 4.2 billion euros of orders, said the person.

Calls for comment to government spokesman Bruno Kone and Finance Minister Adama Kone went unanswered.

The world’s largest cocoa producer followed Egypt, Nigeria, Kenya and Senegal in tapping international markets before policy-tightening by the U.S. Federal Reserve lifts borrowing costs.

African sovereigns have now issued $12.8 billion of Eurobonds in 2018, already more than half the record $18 billion they managed last year and exceeding the total for the whole of 2016.

BNP Paribas SA, Citigroup Inc., Deutsche Bank AG and Societe Generale SA managed Ivory Coast’s sale.

Yields on the government’s 625 million euros of securities due in 2025, its only other bonds in the currency, fell four basis points to 4.26 percent by 8:52 a.m. in London.

Source: https://www.bloomberg.com/news/articles/2018-03-15/ivory-coast-is-said-to-sell-africa-s-biggest-euro-currency-bond

07 Dec

It’s Only Been Two Months, But Angola Leader’s a Bond-Market Hit

He’s only led Angola for a couple of months, but bond investors already like what they’ve seen from Joao Lourenco.

Angola’s $1.5 billion of bonds due in 2025 have returned 8 percent since Lourenco was sworn in as president on Sept. 26, replacing Jose Eduardo dos Santos, who had ruled the OPEC member and former Portuguese colony since 1979. That’s a better performance than any other country in the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index, which includes debt from more than 70 nations.

It’s not just down to oil prices rising about 5 percent in the period — the bonds of other major producers such as Mexico, Russia and Saudi Arabia have barely budged. Overall, Eurobonds issued by emerging-market governments returned an average of 0.3 percent.

Lourenco, 63, has moved fast to assert his authority in Angola, which relies on crude for about 90 percent of exports and ranks among the 15 most corrupt countries in the world, according to Transparency International. He has replaced the heads of the central bank, state oil company Sonangol and diamond firm Endiama, and started opening up the telecommunications sector to more competition.

The central bank, under new Governor Jose Massano, raised the main interest rate by 200 basis points to 18 percent last week as it looked to combat inflation of almost 30 percent. It may be a precursor to a weakening of the kwanza, according to Standard Bank Group Ltd., which says the currency is overvalued.

“While one could point to market ebullience due to elevated oil prices as a factor underpinning these bonds, the market might be getting more constructive on the policy outlook,” Dmitry Shishkin, the head of quantitative strategy at Standard Bank in London, said in a Nov. 28 note. The government has “hit some of the right notes, pointing to a desire to improve debt sustainability, cut some expenses, issue another Eurobond and continue with the reform of Sonangol.”

Source: https://www.bloomberg.com/news/articles/2017-12-06/it-s-only-2-months-but-angolan-leader-a-hit-with-bond-investors

17 Aug

Value investing in Nigeria

Active managers in Africa and frontier markets have to counter the perceived higher risk of investing in volatile markets prone to political and economic uncertainty. In response, most investors gravitate to growth strategies, pursuing markets or sectors with attractive GDP growth prospects and predictable policy makers. Inevitably, when investors flock to the preferred country or sector, the top-rated companies command a premium valuation, often justified as buying ‘growth at a reasonable price’.

In contrast, value investors hardly have compelling narratives to justify why they are seeking out the least popular markets and acting with conviction when loading up on beaten-down value stocks. The risk of appearing stupid increases as market prices are trending downwards and there is no shortage of ‘cheap for a reason’ arguments. Despite the rigorous analysis, a value manager’s judgment and conviction is tested when the strategy underperforms. The prospect of client withdrawals is a reality check.

The price you pay counts

Empirical data over long time periods and across multiple markets suggests that stock market returns aren’t correlated to economic growth prospects. What matters is the price you pay, or starting valuations. This is no different in Nigeria, currently the largest country weighting in the Allan Gray Africa ex-SA Equity and Bond Funds, which comprise together about 2% of the Allan Gray Balanced Fund.

President Olusegun Obasanjo’s election in 1999 marked a fundamental transition from military rule to democracy. Nigeria had experienced only 10 years of civilian rule from independence in 1960 to 1999. Since then, Nigeria’s relative political stability, combined with a boom in oil prices, fuelled 9.2% growth in GDP per capita compounded annually; whereas growth in South Africa was 3.2% and in the US it was 3.0%. Over the same 17-year period to 2016, Nigeria’s stock market returned 2.8% (in US dollars), whereas South Africa and the S&P 500 delivered 6.0% and 2.5% respectively, as shown below.

But the real story is the period between the bookends. The notable high volatility in Nigeria’s stock market has offered investors greater opportunities to generate superior returns – by patiently buying stocks that thrived when political or economic prospects appeared dim; and selling the popular stocks when other investors were overly optimistic.

Read the full story: How We Made It in Africa