African dollar bonds recover – Moneyweb

Spreads on African dollar bonds posted a broad recovery Wednesday even as investors remain anxious over how long the Iran war will last.

The African risk premium over US Treasuries fell to 344 basis points Wednesday from 367 basis-points a day before, according to JPMorgan. Wednesday’s tightening is retracing Tuesday’s move, when African dollar-bond yields had the largest increase at the close since October, as the prospect of a prolonged Middle East conflict prompted investors to drop risk.

Dollar-denominated bonds across the region posted gains Wednesday. Notes from South Africa recovered after deep losses. Kenyan notes across different maturities rose, and the 2038 securities added 1.67 cents to trade at 97.79 cents as of 17:21 p.m. in London. That pushed the yield down 23 basis points to 9.09%.

Before the US and Israel attacked Iran, African sovereigns had benefitted from lower spreads that helped lift dollar bond issuances to their highest at the start of this year since 2013. Spreads for African bonds were roughly 322 basis points to start the year, which encouraged borrowing.

Investors reacted positively to fiscal reforms in countries like Nigeria and South Africa, agencies upgraded the credit ratings of Ivory Coast, and borrowers like Kenya and Egypt sought help from the International Monetary Fund.

Dollar-bond issuances so far this year have come from Kenya, Ivory Coast, Benin, Cameroon and the Republic of Congo, helping push dollar-denominated issuances across Africa to $5.95 billion, more than three times the same period last year.

The war could help African credit markets outperform other emerging risk markets because of their distance from the conflict. Africa is also home to several oil producers, and a rise in oil prices could help their economies, said David Austerweil, emerging markets deputy portfolio manager at VanEck in New York.

“We think the uncertainty around Iran will continue for some time, but we look to add to African dollar bonds on future bouts of weakness,” he said. He favors credits from Nigeria, Angola, Gabon, Cameroon and the Republic of Congo.

“We’re opportunistic so will look at what has sold off most at any given moment,” Austerweil added.

Still, African issuers will have to wait for at least two to three weeks to access the global credit markets as investors cut their risk exposure, said Rajeev de Mello, global macro portfolio manager at Gama Asset Management.

“Emerging market sovereign spreads were among the stronger performers over the past six months,” he said. “They have suffered as investors have realised profits.”

Issuers that have capacity to raise money on their domestic market will likely adopt a strategy used by Senegal to borrow in local currency, said Abhimanyu Yadav, head of fixed income and currencies at Mcb Investment Management Co Ltd. Nations including Egypt, Nigeria, Kenya and South Africa could also use that tactic, depending on how long the Iran war lasts, he added.

Borrowers got attractive rates, but it will be surprising to see any new issuance in coming weeks, said Leo Morawiecki, an emerging markets analyst at Aberdeen Plc.

“Its a very uncertain time and its hard to see investors piling into high-yield new issues right now,” he said.

The Democratic Republic of Congo, the continent’s largest copper producer, has planned a maiden $750 million bond sale in April, the finance minister previously said. The fate of that bond is now uncertain, said Morawiecki.

“Those finance ministers who were slow to come this year are looking wistfully at January and February,” said Yadav.

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