CEEMEA DCM and syndicate bankers have for years been eyeing Africa as the bond messiah to save them from shrinking volumes.
The continent has huge potential for growth, but it needs investment, which cannot be funded from African savings, but will need to come from the global capital markets.
In the past few years, as Russian bond volumes have been hit by sanctions, half of central eastern Europe has no longer interested EM buyers because it has been trading like western Europe under the European Central Bank’s bond buying programme — and with African yields slamming tighter under quantitative easing, they finally looked to be right.
The issuers wanted to print and the EM buyers wanted to buy. Volumes from Africa have rocketed in recent years and tenors have lengthened. That was always the plan for Africa. And this was only supposed to be the start.
But though there has been no catastrophic sell-off this year — yet, at least — optimism about African bonds is certainly waning. High coupons mean that their total performance for investors is somewhat cushioned as cash prices have fallen, but everyone is aware that refinancing risks are on the rise, as EM currencies weaken against the dollar and underlying rates rise.
No one seems to mind buying these bonds at the point of sale, but it is becoming clearer that fewer and fewer people want to be holding them as they move towards maturity. At some point it is likely that those risks will prove to be real, and then this game will have to stop.
So with everyone well aware of this why do they keep buying them?
Well, recently they haven’t been. Only one bond from Africa was sold in June and July so far — a $500m tap from Angola printed last week — a successful deal, but the only dollar bond from CEEMEA to have been sold since June 7.
The record-breaking volumes issued this year from Africa were mostly printed while all of CEEMEA was flying in the first four months of this year.
Second, those still happy to buy seem to believe that if an issuer isn’t able to meet a maturity, they will have fled well before that and it will be someone else’s problem.
That approach is common enough. But it’s also common in EM for investors to get trampled as they all head for the exit at the same time.
History appears to have taught EM investors very little.
With African bonds, this year investors seem to be playing pass the parcel with a bomb, all convinced that they have the superior skills required to offload it before it explodes.