Title: An Investment Bank Perspective on Debt Capital Markets in North Africa
1 An Investment Bank Perspective on Debt Capital
Markets in North Africa Workshop on North
African Emerging Capital Markets March 30, 2004
2- Issues
- Strategic Importance of Debt Capital Market
Development - Impact of Securitization on Debt Capital Market
Development - Diversification of issuer and investor base
- Specific Structures Proven Success Stories
- Case Studies from the Egyptian Bond Market ECC
Bond / OCI Bond - Supranatural Issuances
- Credit Enhanced Local Currency Bonds
3- In the aftermath of the Asian and Latin American
crises, many emerging market policymakers
realized that the existence of well functioning
domestic bond markets is critical for the
following reasons - Reduce currency risk, interest rate risk and
funding exposures and by this mitigate the impact
of shocks on their financial markets. - Reduce maturity mismatching.
- Provide an alternative source of funding to bank
lending.
- To give you a flavor on how important the
development of local debt capital markets is, the
ratio of outstanding government bonds to GNP was
6.7 in Korea at the time of the Asian Crisis
when the same ratio was 68.8 in the US, 55.8 in
the UK. - The ratio of outstanding government bonds to GDP
in Egypt is currently 3.25
4- As emerging markets devalue LCY, losses grow from
mismatching FCY debt with LCY revenue based
infrastructure / utilities projects. - Egypt / Moroccos electricity / water concessions
have over US3 billion of FCY debt requiring
refinancing into LCY to cap losses as price
controls obviate offtakers ability to pass on
devaluation cost to customers. - ECAs/MLAs/DFIs key to credit enhancing EM
project financing and sponsors want alternative
LCY debt as natural hedge (detailed later under
CELC bonds).
5Net Domestic Public Debt (EGP billion)
- The concern of rating agencies regarding domestic
debt in Egypt was not about the amount as much as
the structure of debt. - Total debt of the general government rose to 86
of GDP at the end of 2002/03 up from 62 in
1999/00. - Net domestic public debt, which accounts for
around 55 of total public debt rose to 48 of
GDP in 2002/03 up from 34 in 1997/98.
6Poland
Egypt
- Egypt has 45bn LCY domestic debt with 34bn
government debt not securitized as T/bills or
T/bonds. - Securitization will positively influence the size
of the market
7Current Situation
Suggested Solution
- In North Africa, the issuer base remains mainly
the domain of governments and a handful of
corporates, reflecting a greater recognition of
credit risk. - For example in Algeria, there is only one
corporate bond listing Sonatrach, 100 owned by
the Algerian government. The Ministry of Finance
is actively encouraging state companies to issue
bonds, and several potential private sector bond
issuances are in the pipeline. - Financial Institutions are usually the biggest
non-government issuers in early stages of
development.
- Diversify issuer base with varied credit risk
representing different economic sectors.
Potential issuers include corporations, banks,
housing finance, infrastructure projects and
municipalities. - Increasing instrument attractiveness by
introducing new features that issuers cannot get
elsewhere (larger volumes, quicker access, and
better maturities). - Supranatural issuances
8Absence of a Yield Curve
- Because issuances are few, many markets do not
have a yield curve to benchmark new issuances. - Reliance on comparable bank loan pricing to
deduct a fair price. - Morocco has a relatively sophisticated yield
curve if compared to other North African countries
Morocco Yield Curve
6M
3M
15Y
10Y
5Y
2Y
1Y
Yield
3.20
2.35
5.89
5.28
4.97
4.01
3.52
9Current Situation
Role of Pension Fund Managers
- CDG, the major Moroccan pension funds company
plays in an important role in driving the market. - CDG has approximately US 5.7MM bio assets under
management, approximately 70 of the Moroccan
pension funds.
- Investors are mainly banks rather than
individuals. - The lack of diversified investor base and the
predominance of inactive investors make emerging
countries bond markets more of an investment
market than a trading market, resulting in price
inefficiencies. - The buy and hold nature of the financial
institutions, dominating the investor base,
leaves little room for retail investors and
results into an illiquid secondary market.
10Refinancing Solution
Achievements
- Egyptian Cement Company
- Elimination of FCY risk
- Cash flow matching repayment profile
- Breathing space to face intense market
competition - More favorable and flexible terms and conditions
-
- Largest non-sovereign local currency bond issue
in Egypt - First complete refinancing of existing corporate
debt - First bond with an amortizing repayment profile
- First bond with a tranched pricing structure
- First bond to reactivate the local bond market in
3 years
Instrument
LCY Bond
Amount
LE 1,000MM
Credit Rating
A- (upgradeable to A upon execution of mortgage)
Tenor
6 years
Repayment
Amortizing / Cash-flow-matching
Interest Rate
60 Fixed _at_ 13 / 40 Floating _at_ CBE 2
Features
Callable
Underwriter
Citibank Banque Misr CIB
Advisor
Citibank N.A. Egypt as Sole Structuring Advisor
Challenges
Success Factors
- Superior credit positioning and distribution
capabilities - Appointment of leading support institutions
(Legal / Audit / Rating) - Support and cooperation of senior Company
champions
- Exhaustive Audit and Rating processes
- Extensive list of legal documentation
requirements - Escrow arrangements
11Financing Solution
Achievements
- Orascom Construction Industries
- Cash flow matching repayment profile
- Breathing space to face intense market
competition - Partial hedging against interest rate
fluctuations - Better assets / liabilities tenor matching
-
- Transaction oversubscribed 1.9x
- Second corporate bond to reactivate the local
bond market in 3 years - Citigroup viewed as the lead bank in corporate
bond issues - Track record of successful team work
Instrument
LCY Bond
Amount
LE 400MM
Tenor
6 years
Repayment
Amortizing / Cash-flow-matching
Interest Rate
60 Fixed _at_ 13 / 40 Floating _at_ CBE 2
Features
Callable
Underwriter
Citibank Banque Misr CIB AAIB
Global Coordinator
Citibank N.A. Egypt
Challenges
Success Factors
- Excess liquidity in the market
- Capitalization on ECC previous success story
- Comprehensive structure and strong underwriters
- Appointment of leading support institutions
(Legal / Audit / Rating) - Support and cooperation of senior Company
champions
- Exhaustive Audit and Rating processes
- Extensive list of legal documentation
requirements - Longer / slower approval process / new banking
law
12Supranatural Issuances
Case Study
Benefits
- Integrate local marketing practice with the best
international standards in terms of structuring,
documentation, depository, clearing and
settlement operations. - Establish a risk-free benchmark in countries
without a benchmark issue. - Opening markets to non-resident issuers fosters
the development and deepening of the swap market
(as the issuer will need to swap the local
currency to the currency of its balance sheet). - Introduction of best market practice.
European Investment Bank PLN 3 billion Domestic
Debt Issuance Programme on the Polish capital
market
- The EIB program is a biggest non-government
public DI program in the history of Polish debt
capital market - Based on experience with EIB issuance, banks
which operate on the Polish capital market
originated other public debt instruments
issuances for their clients. - National Deposit for Securities (NDS) upon advice
of EIB and Bank Handlowy (as Arranger for the
program) created and simplified its procedures
and documentation requirements. - After their experience with EIB NDS and Warsaw
Stock Exchange decided to modify their fee
structure
13Credit Enhanced Local Currency Bonds (CELC
Bonds)
Product Description
Benefits of CELC Bonds
- Access alternative investor base, enhancing
financing capacity of existing local banks - Limit recourse to shareholders
- Reduce Agency premia (by mitigating
convertibility and transferability risks) - May extend commitment of Agencies beyond their
usual country limits - Generates publicity in the international arena
- Develops local capital markets (generating
support from key players)
- Covered by a full or partial guarantee from one
or more export credit or multilateral agency
(Agencies) - Issued in local currency
- Marketed primarily to local investors
- Governed by local capital markets regulations
- Floating or fixed rate
- Fully secured
- Amortising