Raising capital through traditional bond markets is particularly costly for African countries, as the risk appetite of typical bond investors has declined, pushing prices to prohibitive levels, writes Miranda Abraham.
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.
While the quality of African sovereigns has not diminished, risk appetite among typical bond investors has certainly diminished, pushing 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 less risky 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.
We have noticed that banks operating 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.
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 export credit agencies (ECAs) 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 advantage of reducing the cost of financing for the borrower.
Looking ahead, we expect that while inflationary pressures continue, bond markets will 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.
Miranda Abraham, co-head of loan syndication at RMB in London. The views are his.