According to Miranda Abraham, co-head of loan syndication at Rand Merchant Bank, the perfect storm of inflationary pressures, aggressive monetary tightening from central banks, combined with a worsening of the Russia/Ukraine crisis, has made capital raising via traditional bond markets particularly expensive for African countries whose governments have been forced to find creative ways to raise capital.
“While the quality of African sovereigns hasn’t declined, typical bond investors’ risk appetite certainly has,” said Abraham. “This has driven pricing up to prohibitively high levels.”
In the past, African government bonds have provided issuers with long-term, fairly priced debt that also offer investors enticing returns.
The banker noted that investor preferences have changed recently. “But sentiment has changed; in a risk-off environment, investors generally prefer to buy investment grade credits, and inflationary pressures mean that for investors, there are many opportunities, which are perceived as lower risk and which now offer higher yields,” he said.
African countries have started to investigate alternate possibilities, such as syndicated loans, which are often provided by several enders, as the global bond market becomes less alluring.
Another opportunity is provided via bridge finance. Meanwhile, until a long-term financing solution can be established, it is a sort of flexible interim finance. Usually, it is first priced fairly affordably. As long as the bridge is refinanced within the anticipated timeframes, borrowers profit from a much lower cost of funding.
Abraham noted that as a substitute for conventional bond market funding, African banks have seen an increase in interest from sovereigns in these loan products. Banks have extra money and are aggressively looking for ways to use it as several loan market deals have not been refinanced.
Alternative, competitively priced funding sources are now possible as a result of the decoupling of the bond and loan markets. The lending markets have a lot of robust liquidity, she noted.
As a result, credit insurance, which has long been a common tool in the banking industry for reducing credit risk, is now more prominent as lending banks adjust to a more difficult credit environment.
Abraham stated, “When individual banks join a syndicated loan, credit insurance is often organized on a separate and private basis to protect them from borrowers who might default.
Recently, an increasing tendency for loans that include some type of credit risk reduction built in the loan upfront has been observed. This can take the form of a guarantee from a development finance institution or an Export Credit Agency (ECA).
The profile of the syndicated loan is altered by the inclusion of risk mitigation upfront. A stronger credit profile indicates that a larger pool of investors will find the project attractive.
The benefit of a lower funding cost for the borrower is another advantage of an improved credit profile.
Abraham predicted that the bond markets would likely remain quiet even while inflationary pressures persisted.
“However, it is significant to highlight that numerous African sovereigns, like Kenya, Nigeria, Angola, Gabon, and South Africa, to name a few, have previously issued bonds effectively in the post-COVID-19 context.
There is also relatively little pressure on the majority of African sovereigns because there aren’t many approaching bond maturities. Although technically sovereigns might still issue, the current price structure makes it exceedingly difficult for any possible sub-Saharan issuers to compete.
Therefore, Abraham said, “We anticipate more sovereigns turning to short-term bridge or syndicated loan funding in the coming months.”