Rwanda’s debut in the Eurobond market will offer investors the rare opportunity to buy into one of the fastest growing economies in Sub-Saharan Africa – but don’t expect the country to get carried away.
The sub-benchmark size of the trade, combined with the country’s strong dependence on foreign aid and volatile sectors of the economy, will see some buyers take a step back and demand a reasonable premium to get involved.
The East African sovereign, rated B/B, will wrap up investor meetings for its planned US$400m 10-year bond sale next Wednesday, after conducting a one-week roadshow in Asia, Europe and the US through BNP Paribas and Citigroup.
The last Eurobond issue from the continent, Zambia’s 5.375% US$750m 10-year note offering, generated an order book of US$12bn when it was issued in September, pricing through the curves of the country’s regional peers.
While Rwanda is unlikely to replicate that success, a shortage of African paper in the market will generate strong interest among yield-starved investors.
Despite a US$50m increase from the originally targeted US$350m, Rwanda’s transaction will fall short of the US$500m minimum required for inclusion in global emerging market indices, reducing the notes’ potential buyer base and limiting their liquidity in the secondary market.
“The sub-benchmark size is a problem because it means there is no automatic demand from index followers,” said Graham Stock, chief strategist at Insparo Asset Management. “It is a market distortion created by the importance of the index, but it can’t be ignored.”
Borrowing more for the sole purpose of joining the index league, however, would make little sense for a country with annual GDP of US$6.4bn. “It would be risky for the government of a small economy to borrow more than it needs and thereby increase debt service costs and refinancing risks just to qualify for the benchmark,” said Stock.
While Rwanda’s growth story is compelling – real GDP growth averaged 7.4% between 2003 and 2011 – the country relies on foreign aid to finance almost 40% of its budget. Subsistence agriculture accounts for one-third of annual GDP, employing 73% of the labour force.
Eyeing a 7% yield
In light of these challenges, a syndicate official away from the deal reckons investors are likely to demand a yield of around 7% to buy the new notes. “I see a definite floor of 6%, on top of which you need to add a new issue premium and [an additional concession for] non-index eligibility,” said the banker.
“I think the premium for the size will be significant. A pricing [of] circa 7% is not far-fetched,” said a London-based portfolio manager who specialises in African markets.
He suggested, however, that the rarity value of the name could push the yield even lower. “I would go tighter, between 6.5% and 6.75%, mainly because of the appetite for Eurobonds from the region and current yield levels for SSA names,” he added.
Proceeds from the sale will be used to repay outstanding loans and finance the completion of the Kigali Convention Centre and the Nyabarongo hydro power plant.
KIGALI, April 16 (Reuters) – Rwanda will issue a debut $400 million debut Eurobond in the days ahead to raise funds for the retirement of short-term debt and complete strategic investments, the International Monetary Fund (IMF) said on Tuesday.
Investors have lapped up sovereign bonds by African countries in recent years, thanks to fairly attractive yields and robust economic growth prospects at a time European economies struggle to shake off a persistent debt crisis.
Rwanda will be the first country in east Africa to issue a Eurobond. Kenya planned to borrow from the international market but postponed it repeatedly due to worries over the prospects of violence in polls held last month.
Officials in Nairobi say the government will issue the $1 billion bond this year after the election passed peacefully in contrast with last election five years ago that resulted in deadly post-election violence.
Rwanda had initially indicated that it would borrow $350 million.
The country’s ministry of finance confirmed on Twitter that it had mandated BNP Paribas and Citi to arrange the issue, with road shows set to start on April 18.
Fitch Ratings assigned the issue ‘B(EXP)’ rating in line with the country’s ‘B’ Long-term foreign currency Issuer Default rating with a stable outlook.
“Rwanda’s rating is supported by solid economic policies and a track record of structural reforms, macroeconomic stability and low government debt,” the ratings agency said.
“Rwanda will continue to attract significant budget support flows, reflecting its strong track record in poverty reduction and control of corruption.”
The country had a debt to GDP ratio of 23.3 percent last year, Fitch said. The IMF said in a statement it expected the economy to expand 7.5 percent this year, barely changed from its previous forecast of 7.6 percent.
More companies, both local and foreign, are expected to float their shares on the Rwandan bourse, the Rwanda Capital Markets Authority (CMA) announced Wednesday.
“We expect more cross listing from the region this year as well as local companies since some have shown interest already,” Robert Mathu, the Executive Secretary of CMA said.
He spoke during the signing of a memorandum of understanding between the National Bank of Rwanda and the Capital Markets Authority that seeks to streamline the working relationship between the two institutions. The signing took place at the Central Bank.
The announcement comes as uncertainty surrounds both the primary and secondary markets because companies withdraw from listing their shares to watch market trends given economic volatility in the regional economies.
Mathu stressed that more cross listing would be good for Rwanda as it would facilitate full market integration with regional markets in the drive to integrate the regional economies.
Although MTN government owned shares were bought by MTN
group towards the end of last year, against the initial plan to have Rwandans invest in the telecom company, the privatisation policy is in full force.
“We are carrying out a survey to see how best even Small and Medium Enterprises can raise long term capital through markets,” added Mathu.
Under the pact, the central bank and the capital markets authorities agreed to information sharing between the two institutions while BNR will play a supervisory role of the activities of CMA.
It is also important because it will give guidelines to other
participants of the market such as custodians, stockbrokers and some commercial banks.
Ambassador Clever Gatete, the Governor of the Central Bank said it is important to develop the market because it attracts local and foreign investors which help to comply with international standards.
The Rwanda Stock Exchange would like to announce that it is now adopting a new settlement cycle of T+2 for all securities traded on ththat payment for both securities and funds will be done two days after transactions on the Rwanda Stock Exchange. e Exchange. T+2 means
This settlement cycle replaces that of T+5 for equities and T+3 for Bonds that was being used since the commencement of trading on the Rwandan securities market. From Friday August 5th 2011, both the equity and bond settlement cycles will be on a T+2 Settlement Cycle.
This has been made possible by the implementation of a modern payment system by the Central Bank of Rwanda (BNR). The Rwanda Integrated Payment and Processing System (RIPPS) has now been fully adopted by the market. It is comprised of the Real Time Gross Settlement (RTGS), the Automated Clearing House (ACH), the Automated Transfer System (ATS) and the Central Securities Depository (CSD) that will offer depository services.
The effect of this development will be to make the securities market more efficient by increasing transaction speed thereby making the securities traded on the RSE faster to transfer and convert into cash than before.
The Rwanda Stock Exchange will improve the transaction speed for listed securities and reduce risks associated with long settlement cycles thereby making the market more attractive for local and international investors.
The move to the T+2 Settlement Cycle is in line with international best practice. This means that the sellers of securities will be receiving their money within 3 days and transfer of ownership of securities will be effected simultaneously on the third day.