Fixed Income Pulse: Supporting African Capital Markets
London Stock Exchange Group is at the heart of the world’s financial markets and has a deep and longstanding connection with Africa. In fact, companies from Africa have chosen London Stock Exchange as their listing destination since the 1930s.
Today London Stock Exchange is actively driving various initiatives to support the development of robust, efficient and transparent capital markets in Africa. We are working toward this goal by developing a broad choice of debt markets in London while also promoting the African currency bond market and working closely with a number of African exchanges to help bring the global liquidity pool of London to Africa.
Eurobonds as a source of financing
A growing number of African countries have been using a wide range of financial instruments, including bonds, to support their significant infrastructure investments or refinance existing domestic debt.
African non local currency debt issuance went from strength to strength in 2017. Debt raised by African governments and supranationals hit a five-year high in 2017, driven by low yields for US and European debt and growing appetite for African sovereign debt. February saw a number of new sovereign bond listings on London Stock Exchange originating from Africa, Egypt, Nigeria and Kenya who all issued bonds in London in the past weeks, raising a combined $8.5bn and attracting an impressive level of demand from international investors.
Commenting on Egypt’s $4bn triple tranche deal, Amr-Al Garhy, Finance Minister, highlighted how partnering with London Stock Exchange has proved to be an important catalyst for Egypt both in terms of outreach to international investors and tapping one of the deepest and most liquid financing venues in the world. Nigeria followed Egypt with a dual-tranche $2.5bn Eurobond offering and an order book that attracted over $11.5bn. The Kenyan sovereign was another successful transaction, with a $2bn bond in 10 and 30 year tenors, attracting $14bn of orders.
These recent sovereign bond listings build on a series of high profile sovereign and corporate bond issuances from Africa on London Stock Exchange. With over $28.6bn raised and 31 African bonds currently listed, London is a natural partner for African issuers. This reflects the City’s ability to provide a deep, liquid and complementary channel of finance for the development of African Capital Markets.
International Securities Market for African Issuers
Compared to domestic local currency listings, international hard currency issuance volume from Africa still remains low. A number of factors explain the relatively reduced volume of international debt issuance from Africa, one of which is the documentation and listing process associated with an international transaction. The international investor community have a set benchmark with respect to disclosure for a Reg S or 144A / Reg S issuance. However, the process of listing has been greatly simplified with London Stock Exchange’s new exchange-regulated International Securities Market.
The ISM is an exchange-regulated market targeted at institutional and professional investors from around the world, designed to provide issuers with all the benefits of London’s extensive experience as a global financial centre, together with an efficient admission process. This new market provides an additional choice of listing venue for a variety of fixed income issuers seeking access to London’s unique deep pool of international capital. As issuers seeking admission only need to liaise with London Stock Exchange, the ISM provides issuers with a very efficient and customer-centric admission process for a diverse range of products (green bonds, local currency bonds, sukuk and structured products). A number of Emerging Markets issuers have already experienced the benefits of listing on ISM, including Ecobank, the leading pan-African bank who issued its first ever convertible bond outside of Africa ($150m) on the International Securities Market in October 2017.
By issuing the bonds in London, Ecobank achieved a larger investor base and increased international visibility. ISM played an important role in the success of this transaction, guaranteeing a fast and efficient listing process. A derogation on the requirement for securities to be eligible for electronic settlement was also granted to Ecobank as trading of the bond was expected to be primarily OTC with bilateral settlement arrangements. For further details on this landmark transaction, click here.
Local currency issuances
African countries are increasingly looking at developing offshore local currency debt markets amid concerns that they will no longer be able to achieve similarly favourable pricing in the future. A number of indicators point to a slowdown in demand for commodities which, coupled with lower oil prices and rising interest rates, will put significant pressure on African debt issuers. As estimated by the African Development Bank, Africa will need around $130–170 billion infrastructure investment per annum. The next couple of years provide African countries an ideal window to start establishing an offshore local currency market. With increasing infrastructure investment requirements, African economies will benefit from a larger capital pool to fund projects, without taking on more hard currency debt.
As a leading international centre for debt finance and innovative products, London Stock Exchange has played an important role in the development of offshore local currency bond markets in India, China and Indonesia. We have spent years working with several market participants, including governments, regulators, issuers, investors and financial institutions in these countries to prepare the ground base for the first issuances and pave the way for more bonds of this kind to follow suit.
Today London is the largest international centre for offshore rupee-denominated Masala Bonds and a key global venue for dim sum bonds. Most recently, Jasa Marga became the first Komodo bond to list on London Stock Exchange, opening up the market for global Indonesian rupiah bonds.
The enhanced liquidity and diversification benefits associated with offshore listings mean that local currency bonds from emerging market countries have the potential to become a key financing tool for local companies, reducing reliance on foreign currency issuance and complementing the development of domestic markets. A number of issuers have also issued innovative products, such as green bonds and sukuk, in local currency.
As the pace of offshore local currency bond issuance increases amid growing interest in developing countries, domestic markets will also feel incentivised to strengthen their infrastructure and remove existing restrictions and distortions.
Another way London Stock Exchange has been supporting the development of domestic capital markets is by working closely with a number of stakeholders to develop innovative cross exchange mechanisms that meet the needs of investors and overcome existing regulatory barriers in local markets. As part of this, we have partnered with a number of African exchanges to enable dual-listing for companies looking to simultaneously list shares in both Africa and London.
For example, utilising a unique cross-border settlement system, Nigerian oil and gas exploration firm Seplat became the first Nigerian company to dual-list equity on London Stock Exchange and the Nigerian Stock Exchange in 2014, raising $500m to further fund the company’s expansion. London Stock Exchange is working proactively to promote similar structures for debt listings to provide a wider capital base for African issuers.
The establishment of the LSEG African Advisory Group in 2016 is another strategic initiative set up by London Stock Exchange to help identify challenges and opportunities presented by the development of the continent’s capital markets. The group is made of business leaders, policy makers and investors from across Africa and will be publishing its new leadership study – delivering empirically grounded, actionable and Africa-specific policy recommendations to positively shape the development of the continent’s capital markets.
Our Companies to Inspire Africa (CTIA) initiative is another milestone in supporting private African companies with the greatest growth potential, demonstrating that these companies are fast becoming the driving force behind African economies. A new version of the CTIA report will be published in 2018. To find out more about Companies to Inspire Africa and read some outstanding stories of innovation and growth across the African continent, click here.