With global volatility and rising yields making it difficult for emerging market sovereigns to access international markets, now would be a good time for African borrowers to push ahead with their plans to launch green, social and sustainable issuance programs, according to a recent OMFIF workshop.
In the first half of this year, only two African sovereigns entered the international market: Nigeria and Angola. Since then, the intensification of the Federal Reserve’s strategy against inflation has pushed emerging market debt yields higher, closing the primary market. “A rule of thumb is that when yields cross the 10% level, the window for new issuance is closed,” said an investor at the workshop on promoting sustainable sovereign bond issuance in Africa. According to data provider Tellimer, the debt yields of 22 countries (excluding those in default) had exceeded this threshold by the end of May.
The workshop brought together over 70 officials from African Ministries of Finance, Debt Management Offices and Central Banks. It was organized by the OMFIF in partnership with the African Development Bank and with the support of Moody’s, Société Générale and Absa. Discussions included input from a number of sovereign borrowers who have previously issued GSS bonds.
In response to their restricted access to international markets, African sovereigns have refocused on opportunities in their local capital markets and explored other sources of overseas financing. These range from capital market niches such as samurai bonds, to syndicated loans and facilities from national and multinational development finance institutions.
Another potential alternative would be the GSS bond market, which has been very accommodating to emerging market sovereigns in 2021. Last year, according to figures recently released by Amundi and the International Finance Corporation, emerging market GSS issuances nearly tripled to $159 billion. .
Africa still accounts for no more than 1% of global green bond issuance. This is a disappointing share, given the scale of Africa’s sustainable financing needs.
It is also surprisingly modest, given that borrowers at the June workshop reported that their experience of accessing the GSS market had been uniformly positive. One said that when her country issued its first green bond, strong demand from new investors as well as those who had previously purchased the credit in the conventional format enabled the borrower to increase the size of the bond. the transaction.
It also allowed the sovereign to price its green issue within the original price direction. This, she added, proved that borrowers who engage with investors in the GSS market are able to earn so-called greenium – a shorthand for a discount on their curve in conventional markets.
This price advantage is entirely justified, said a panelist from a developed market DMO who recently issued a first green bond, about a fifth of which was placed with new investors. “Investors in GSS bonds are privileged to receive detailed reports on allocation and ongoing impact,” he said. He added that the preparatory work for his country’s green issue required eight to nine months of hard work by more than 50 people. These additional resources, he suggested, justified the greenium ordered by this borrower.
But investors have warned that the demonstrable strength of international demand will still not be enough to tip the price balance in favor of African GSS issuance in today’s hostile rate environment. “You may be able to reduce the price of a new issue by a few basis points,” said one. “But it won’t make much difference if your benchmark bonds yield 14% in the secondary market.”
Bankers attending the workshop insisted that neither unfavorable financing conditions in the international market nor weak regional demand should deter African sovereigns from seizing GSS market opportunities. Quite the contrary. As one banker put it, “Given that the issuance window is closed, now is the time for sovereign borrowers to develop green or sustainable bond frameworks. It is a time-consuming process and requires considerable collaboration between issuers, advisers and investors.
Investors echoed this view, advising that even if borrowers don’t have immediate financing plans, they should maintain engagement with existing investors and initiate relationships with new ones. “The reality is that too often we have only been approached by African sovereigns when they wanted to issue,” one investor said at the workshop. “I urge them to communicate with us more regularly. This will be beneficial in the longer term, as the more transparent they are, the better their pricing will be.
Although this advice is applicable to the entire bond market, it is particularly relevant in an asset class that is still in its formative phase, such as GSS bonds. “The market has grown rapidly,” said the head of the sovereign council of a European bank. “But its development has been bumpy, which means it’s still a market under construction.”
The consequence, adds this banker, is that investors are likely to demand increasingly irreproachable standards of transparency and to be more punctilious about the use of products. “Investors will take a closer look at the programs, digging deeper into what is included in a labeled bond,” he predicted.
A finance official cautioned, “With a thematic link, you have to coordinate technical data collection across multiple ministries, which is a long and difficult process. So my advice to other sovereigns considering the GSS market would be to hold start-up workshops with other government departments.
Another felt that identifying eligible projects to use the funds can be the most difficult part of the issuance process. But issuers and investors agreed that the effort was worth it for several reasons beyond the environmental and social impact. Other benefits include lower funding costs, diversification of investor demand, the enhanced governance that GSS issuance encourages, and – in an ideal world – the pricing and best practices it establishes for other borrowers. .
Philip Moore is editor-in-chief at OMFIF.