The Role Of Investment Banks in Promoting Debt Markets

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The Role Of Investment Banks in Promoting Debt
Markets
Martin Essenburg - Global Head of Asset
Securitisation and Head of Fixed Income Africa,
Middle East South Asia

• United Nations Economic Commission for Africa,
  Johannesburg
• Tuesday 28 October 2003

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Contents

• Rationale of the Debt Market
• Players in the Bond Market
• The Role of Investment Banks
• Bond Markets in Africa

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Rationale of the Debt Market

• Make debt investment capital accessible for
  intermediate and long term
• More transparent pricing of credit risk
• Diversity and dis-intermediation of commercial
  banking
• Wider variety of investible products for
  institutional investors
• Improved secondary market liquidity
• Promoting economic stability
• An impetus for the fuller development of Africas
  financial services sector

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Building Blocks of the Bond Market
Prudent economic management
Credit benchmarking
Effective corporate governance
Physical infrastructure e.g. clearing and
settlement
Good government
Active trading of debt securities
A developed domestic debt capital market
Broad and deep investor base
Strong legal infrastructure
Efficient financial derivatives market
High corporate/ parastatal debt issuance activity
Efficient government securities market
Proactive supervisory approach
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Different categories of Debt Securities

• Government securities (treasury notes and bonds)
  
• Corporate bonds (fixed, floating and
  rate-protected coupon bonds)
• Municipal bonds
• Subordinated debt structures
• Asset backed securities
• Islamic debt securities
• Other structured debt obligations
• These debt securities are most relevant / most
  common in Africa

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Players in the Bond Market
Issuers
Investors
Arranger
Regulators
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Players in the Bond Market

• Who are the issuers and why do they issue bonds?
• The issuer base includes governments,
  parastatals, MNCs, large local corporates,
  financial institutions
• Diversification of funding base and increased
  stability in the capital structure
• To secure intermediate maturity funding for long
  term projects and capital expenditure
• Mitigation against exposure to interest rate risk
  through rate protected instruments (cap, floor,
  swaps)
• Mitigation of FX risk
• Funding costs relative to maturity tends to be
  cheaper than rolling over short-term bank
  facilities
• Positive impact on branding through market
  publicity

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Players in the Bond Market

• Who are the investors and why do they invest in
  bonds?
• The investor base includes insurance companies,
  pension funds, asset managers, broker dealers and
  banks
• Higher yield pick-up over government securities
• Diversification of investment portfolio to reduce
  overall risk profile
• Matching duration of assets and liabilities
• To fulfil criteria set by asset allocation
  policies
• Contribute towards development of the domestic
  capital markets

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Players in the Bond Market

• Who are they, what do they do and why?
• Key regulators in the industry are Government,
  CMA or equivalent body, and the Stock Exchange
• Government has overall responsibility to
  institute macro economic measures and a strong
  legal framework that create an enabling
  environment
• The Capital Markets Authority ensures investor
  protection through supervision of the securities
  industry
• The Stock Exchange provides a market place for
  secondary trading activity and approves the
  listing of new issues

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The Role of Investment Banks

• Advisory
• Arranger
• Underwriter
• Structured Products

Primary Market

• Market Making
• Liquidity Provision
• Research
• Post Deal Communication

Secondary Market
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Investment Banks - Primary Market

• Investment Banks can advise on the following
• Issuers on Funding Strategy
• Regulatory and Legislative Issues
• Stock Exchange
• Obtaining Credit Rating
• Migration of best practices eg Systems and
  Procedures for Settlement, Clearing, Custodial
  Services and Reporting
• Development of the swaps, repo and foreign
  exchange markets

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Investment Banks - Primary Market

• What does the Arranger contribute?
• Managing the debt issue to ensure overall success
  of the transaction (structuring, underwriting and
  obtaining credit enhancements where required)
• Assists the Issuer in producing the Information
  memorandum, legal documentation and obtaining
  regulatory approvals from the Capital Markets
  Authority and Stock Exchange
• Education of investors, marketing and placement
  of the bonds (distribution)
• Makes market in the securities to support the
  Issue
• Overtime, looks to also develop interest rate and
  cross currency derivative applications (swaps,
  repos, etc..)

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Investment Banks - Primary Market

• Types of underwriting?
• Book Building
• Best Efforts
• Bought Deal

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Investment Banks - Secondary Market

• Sales Trading
• Trading can be proprietary, market making, client
  driven or reverse enquiry
• Product Innovation through structured solutions
  (eg derivatives, swaps)
• Develop repo / reverse repo markets
• Research would include credit reports on issuers
• Post deal communication would include historic
  bond performance

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Using Investment BanksThe Benefits

• In-depth expertise in each respective local debt
  market environment
• Excellent distribution capabilities (onshore and
  offshore)
• Access to global network of experiences DCM
  professionals
• Access to research teams offering economics and
  commentaries on markets, industries, currencies,
  interest rate

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Bond Markets in AfricaThe challenges

• Most markets in Africa will experience one or
  more of the following
• Chronically high interest rates inflation
• Lack of comprehensive market regulation
• No intermediate maturity benchmarks (yield curve)
• Absence of credit rating agencies (credit
  culture)
• Lack of deep investor base (non-bank FIs)
• Limited market liquidity
• Fear of the unknown by potential borrowers
• Lack of financial strategy in companies

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Bond Markets in AfricaOur view
Deep
Deep II Base LT Yield Curve
Deep II Base ST Yield Curve
Institutional Investor Base
South Africa
Kenya
Nigeria
Bots
Shallow
Tz
Size of Economy
CDI
Cam
Zamb
Ghana
Shallow II Base ST Yield Curve
Shallow II Base LT Yield Curve
Ug
Short Term
Long Term
Fixed Rate Government Yield Curve