Nigeria and other sub-Saharan African countries are increasingly issuing hard-currency bonds with staggered rather than one-off repayments, seeking to minimise the risk that volatile commodity prices will play havoc with their finances.
Governments across the continent – from oil-producing Nigeria to smaller, fast-growing economies such as Rwanda or Ethiopia – have taken advantage of rock-bottom global borrowing costs and investors’ hunger for yield.
Issuance of hard currency debt has risen to more than $8bn last year from $67m in 2008, according to Thomson Reuters data.
With the United States Federal Reserve likely to hike interest rates imminently, the cost of servicing the debt is bound to increase while future borrowing is set to rise as low oil and commodity prices squeeze government revenues.
With this in mind, more governments are opting to structure external borrowing differently, by issuing amortising bonds, which stagger repayments of the principal across several instalments, rather than the traditional one-off payment at maturity.
“It is very positive, it is an adult consideration, it makes sense to be organising the maturity profile of an issue and not be gung-ho,” the Global Co-Head, Capital Financing, Global Banking and Markets at HSBC, Jean-Marc Mercier, said.
Having to raise a large sum at a specific point in the future leaves such borrowers particularly vulnerable to unpredictable moves in geopolitics or commodity prices, said Mercier.
But by staggering repayments, “you can have a very balanced maturity profile. It works well for the frontier market, for the BB/B territory,” Mercier added, referring to such issuers’ sovereign credit rating.
Most sub-Saharan African countries outside South Africa are classified as frontier markets, a sub-set of fast growing but less developed and higher risk emerging economies, which generally hold credit ratings in the “B” category.
Last year, six of them – Zambia, Kenya, Ivory Coast, Senegal, Ghana and Ethiopia – tapped international markets, raising more than $8bn in seven issues, only one of which had an amortising structure.
So far this year, Gabon, Ivory Coast and Zambia have come to the market, with the latter two opting for staggered repayments.
Ivory Coast raised $1bn in February at a yield of 6.625 per cent with a 12-year average life issue to be redeemed in three equal payments in 2026, 2027 and 2028.
It drew nearly $4bn worth of orders, reflecting the investor appeal of the structure, said banking association president Souleymane Diarrassouba.
“When it’s one payment, that can put pressure on public finances,” he said. “The repayment of the principal in several instalments allows for stress-free management of the treasury.”
In July, Zambia raised $1.25bn at a yield of 9.375 per cent with an 11-year average life issue and three equal redemption payments in 2025, 2026 and 2027.
Zambia’s Secretary to the Treasury, Fredson Yamba, said on Wednesday policy makers had chosen an amortizing structure to spread the burden of redemption payments with $3bn worth of hard currency bonds outstanding.
Ghana is on track to raise $1.5bn in September, with part of the issue having an amortising structure, Finance Minister Seth Terkper said last week.
“The key goal is to … minimise all of our risk if possible through the years, because if you have a lot of bullets coming together … in the future then the markets will be uncertain whether you will be able to meet all your responsibilities,” Terkper said.
Investors who once preferred single-repayment “bullet bonds” for their liquidity had also become more used to the structure, said Peter Charles, head of EMEA fixed income syndicate at Citi.
In the past two or three years, bonds with an amortising structure had become much more manageable and acceptable to investors, he said.
“Some investors may determine that in a way it carries a bit less risk, because … you are not just relying on refinancing conditions in the last year.”
Even so, staggered repayments also mean more countries might have to return to the market more often.
Looking at redemption profiles, Zambia is due to pay out $750m in 2022, $1bn in 2024 and $417m a year from 2025-2027. Ivory Coast has to fork out between $108m to $900m every year from 2018 until 2032.
“It is a more flexible way to deal with the refinancing and redemption process, but the risk is that you are then in a continuous cycle of financing redemptions,” said Samir Gadio, head of Africa strategy and FICC research at Standard Chartered, adding redemptions of $417m a year for a country like Zambia in three straight years were “not insignificant”.
“Some countries still have room to issue, but in some cases further supply would worry the market,” he added