Nigeria Eurobond set to spur other African issuance, Posted by Menelik Zeleke

January 19, 2011 12:56:52 PM

* Successful Nigeria Eurobond seen spurring others to issue

* Kenya, Tanzania, Zambia, Uganda all possible issuers

* Domestic debt offers higher returns but with currency risk

By Ed Cropley, African Investment Correspondent

JOHANNESBURG, Jan 19 (Reuters) - A debut Nigeria Eurobond due at the end of this week should reassure other African governments of the strength of demand among global investors, convincing them to press ahead with similar but delayed plans.

"If this goes down well, I would imagine that this is going to encourage the other guys to have another look at their proposals," said Dean Theron, a sub-Saharan debt analyst at Rand Merchant Bank in Johannesburg.

"It may well set the tone for everybody else."

At least five other frontier sub-Saharan governments -- Kenya, Uganda, Tanzania, Zambia and Angola -- were contemplating debut foreign-currency debt offerings in 2008, but their plans were blown off course by the global financial crisis.

With that crisis less pressing and international investors hungry for high-yielding debt that does not carry any currency risk, the external environment looks favourable for them to revive the proposals and take the plunge.

This view is further supported by the lack of any damage for existing frontier African Eurobonds -- mainly Ghana and Gabon -- from the political crisis in Ivory Coast that looks set to trigger a default on the cocoa producer's $2.3 Eurobond.

Yields on Ghana and Gabon's 2007 issues were unmoved even as that on Ivory Coast's issue, the continent's biggest single foreign currency bond, soared from mid-December as Abidjan looked increasingly unlikely to make a repayment due at the end of the month.

"So far, so good," said Konrad Reuss, head of ratings agency Standard & Poor's for sub-Saharan Africa.

"We haven't seen any contagion from Ivory Coast, and certainly a successful Nigerian bond would be another important milestone to open up the market for African issuers again."

WHAT PRICE NIGERIA?

Nigeria has not yet priced the benchmark 10-year, $500 million Eurobond, which will be issued on Jan 21 after a whistle-stop roadshow this week in Europe and the United States.

However, most analysts expect healthy demand from international investors that should result in a coupon comparable to or lower than Ghana's issue, now yielding 6.3 percent, and Gabon's 5.3 percent.

"You've got governance concerns in Nigeria and the elections coming up but the debt stock is so low that the ability to repay looks more robust than it does in Ghana even," said Graham Stock, chief investment strategist at Insparo Asset Management in London.

Ghana was the first sub-Saharan African country after South Africa to issue foreign currency debt, with a $750 million bond issued in late 2007 with an 8.5 percent coupon. Gabon followed shortly after with an issue carrying an 8.2 percent coupon.

Finance minister Kwabena Duffuor told Reuters this week Ghana was "still working on" a follow-up $500-$700 million issue originally slated for 2010, and stressed that market conditions were not to blame for the delay.

Kenya has also had plans going back as far as 2008 to issue a debut Eurobond, but a senior treasury official said last month it would not take the plunge until next fiscal year at the earliest.

Uganda has had a B+ sovereign debt rating from S&P for two years now, and although its currency has been hammered to record lows in the last month ahead of a general election next month, the prospect of oil revenues arriving in the next two years reduces repayment risk.

Zambia, Africa's biggest copper producer, and Tanzania, which is fast emerging as a serious gold producer, are in the process of obtaining a rating, and lofty commodity prices should support the case for a relatively low interest rate.

Angola, the continent's number two oil producer behind Nigeria, floated the idea of a $4 billion Eurobond in November 2008 and last year obtained the same B+ rating as Nigeria, but has since gone quiet on the issue.

Furthermore, oil prices at nearly $100 a barrel ease the funding squeeze that first prompted the noises from Luanda two years ago, suggesting there will be little forthcoming from one of Africa's most exciting but impenetrable economies.

Even if Eurobond plans never materialise, African domestic debt is still attracting considerable outside interest on account of the high returns on offer.

Nigerian 3-year debt is yielding around 11 percent, probably a far juicier return than any Eurobond.

"We think there are better ways to play the Nigeria story than the Eurobond, but there will definitely be benchmarked investors who will find it attractive," Insparo's Stock said.

(Editing by Ron Askew)