The perfect storm of inflationary pressures, aggressive monetary tightening by central banks, combined with the worsening Russia-Ukraine crisis, have made raising capital through traditional bond markets particularly costly for African countries whose governments have been forced find innovative ways to raise capital.
Miranda Abraham, co-head of loan syndication at UK-based RMB, said: “While the quality of African sovereigns has not diminished, the risk appetite of typical bond investors has certainly diminished. , which pushed prices to prohibitive levels.”
African government bonds have historically offered long-term debt at a fair price for issuers and attractive yields for investors.
“But now the sentiment has turned; in a risk-free environment, investors generally prefer to buy investment-grade credits, and inflationary pressures mean that for investors there are many opportunities that are perceived to be lower risk and now offer higher returns.
As the international bond market becomes less attractive, African governments have begun to explore alternative options such as syndicated loans – usually offered by a group of bank lenders who work together to provide credit to large borrowers such as governments, public entities or large companies.
Bridge financing also offers an alternative solution.
This is a flexible, bridged form of financing used to cover short-term costs until a long-term financing option can be put in place. Its price is usually relatively cheap, at least initially. Borrowers benefit from a significantly lower cost of financing, as long as the bridge is refinanced on schedule.
Abraham added that banks active in Africa have reported an increase in sovereign interest in these lending products as a workaround to traditional bond market financing. And since a number of operations in the loan market have not been refinanced, banks have excess capital and are actively looking for ways to deploy these funds.
“This decoupling of the bond and loan markets has paved the way for alternative sources of financing at attractive prices. Liquidity in the loan markets is very strong,” Abraham said.
And as a result, credit insurance, which has been a popular credit risk mitigation tool in the banking market for many years, is now at the forefront as lending banks also adapt to an environment of more difficult credit.
“Credit insurance is usually arranged on a separate, private basis by individual banks when they join a syndicated loan to protect themselves from borrowers who might default.
“More recently, we have seen a growing trend of entering into agreements with some form of credit risk mitigation built into the original loan. This can take the form of integrated credit risk insurance or guarantees from the Export Credit Agency (ECA) and development finance institutions. »
Integrating upstream risk mitigation transforms the profile of syndicated credit. An improved credit profile means the deal is attractive to a much wider audience of investors.
“This improved credit profile also has the benefit of lowering the cost of financing for the borrower,” Abraham said.
Looking ahead, Abraham noted that even if inflationary pressures continue, bond markets should remain subdued.
“It is important to note however that many African sovereigns have already successfully issued bonds in the post-Covid environment: Kenya, Nigeria, Angola, Gabon and South Africa, to name a few. cite just a few.
“There is also very little pressure for most African sovereigns, as there are very few impending bond maturities looming. Technically, sovereigns could still issue, but the pricing is now very unattractive to any potential sub-Saharan issuer.
“We therefore expect more sovereigns to turn to short-term bridge financing or syndicated loans in the coming months,” Abraham concluded.
Distributed by APO Group on behalf of Rand Merchant Bank.
Rand Merchant Bank
Johannesburg, South Africa
Joandra Griesel | Marketing and Communications | RMB (South Africa)
Rand Merchant Bank (RMB) is a leading African corporate and investment bank and part of one of the largest financial services groups (by market capitalization) in Africa – FirstRand Bank Limited. We offer our clients innovative and value-added solutions in advisory, financing, trading, corporate banking and principal investment.
We offer our clients innovative and value-added solutions in advisory, financing, trading, corporate banking and principal investment.
At RMB, we are passionate about solving our customers’ problems by asking the tough questions. We challenge accepted thinking. We analyze and seek solutions beyond the obvious. We are innovative in our way of thinking and turn challenges into opportunities. We call ourselves Solutionist Thinkers who respect traditional values. Innovative ideas.
Our ability to think differently, our collaborative spirit, our customer-centric solutions, and our belief that great minds don’t always have to think the same way, is what sets us apart.
As the Corporate and Investment arm of FirstRand Bank Limited (which is wholly owned by FirstRand Limited), we have access to a network of retail banks in 25 African countries, including representative offices and branches in the UK, in India and China.
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