An investment bank perspective on Debt Capital Markets - Economic

Document Sample
An investment bank perspective on Debt Capital Markets - Economic Powered By Docstoc
					An Investment Bank Perspective on Debt Capital Markets in North Africa

Workshop on North African Emerging Capital Markets
March 30, 2004

Executive Summary

 Issues:    Strategic Importance of Debt Capital Market Development Impact of Securitization on Debt Capital Market Development Diversification of issuer and investor base

 Specific Structures & Proven Success Stories:    Case Studies from the Egyptian Bond Market: ECC Bond / OCI Bond Supranatural Issuances Credit Enhanced Local Currency Bonds

Development of Local Debt Capital Markets:

A Strategic Priority for Emerging Markets

 In the aftermath of the Asian and Latin American crises, many emerging market policymakers realized that the existence of well functioning domestic bond markets is critical for the following reasons: 1. Reduce currency risk, interest rate risk and funding exposures and by this mitigate the impact of shocks on their financial markets. Reduce maturity mismatching. Provide an alternative source of funding to bank lending.

2. 3.

 To give you a flavor on how important the development of local debt capital markets is, the ratio of outstanding government bonds to GNP was 6.7% in Korea at the time of the Asian Crisis when the same ratio was 68.8% in the US, 55.8% in the UK.  The ratio of outstanding government bonds to GDP in Egypt is currently 3.25%

Local Currency not Foreign Currency as Preferred Debt Currency

 As emerging markets devalue LCY, losses grow from mismatching FCY debt with LCY revenue based infrastructure / utilities projects.  Egypt / Morocco’s electricity / water concessions have over US$3 billion of FCY debt requiring refinancing into LCY to cap losses as price controls obviate offtakers’ ability to pass on devaluation cost to customers.  ECAs/MLAs/DFIs – key to credit enhancing EM project financing and sponsors want alternative LCY debt as natural hedge (detailed later under CELC bonds).

Capital Market Development is Good for Sovereign Rating
 The concern of rating agencies regarding domestic debt in Egypt was not about the amount as much as the structure of debt.  Total debt of the general government rose to 86% of GDP at the end of 2002/03 up from 62% in 1999/00.  Net domestic public debt, which accounts for around 55% of total public debt rose to 48% of GDP in 2002/03 up from 34% in 1997/98.
Net Domestic Public Debt (EGP billion)

Effect of Securitization on Capital Market Development

Egypt

Poland

Treasury Bills 75%

Bank / Corporate Bonds 7%

Treasury Bills 19% Treasury Bonds 72% Bank / Corporate Bonds CPs 3% 5% Municipal Bonds 1%

Treasury Bonds 18%

Market Size: US$ 12bn

Market Size: US$ 60.7 bn

 

Egypt has $45bn LCY domestic debt with $34bn government debt not securitized as T/bills or T/bonds. Securitization will positively influence the size of the market

Issuer Base

Current Situation • In North Africa, the issuer base remains mainly the domain of governments and a handful of corporates, reflecting a greater recognition of credit risk. • For example in Algeria, there is only one corporate bond listing: Sonatrach, 100% owned by the Algerian government. The Ministry of Finance is actively encouraging state companies to issue bonds, and several potential private sector bond issuances are in the pipeline. • Financial Institutions are usually the biggest non-government issuers in early stages of development.

Suggested Solution • Diversify issuer base with varied credit risk representing different economic sectors. Potential issuers include corporations, banks, housing finance, infrastructure projects and municipalities. • Increasing instrument attractiveness by introducing new features that issuers cannot get elsewhere (larger volumes, quicker access, and better maturities). • Supranatural issuances

Limited Number of Issuances

Absence of a Yield Curve  Because issuances are few, many markets do not have a yield curve to benchmark new issuances.  Reliance on comparable bank loan pricing to deduct a fair price.  Morocco has a relatively sophisticated yield curve if compared to other North African countries

Morocco Yield Curve
3M Yield 2.35 6M 3.20 1Y 3.52 2Y 4.01 5Y 4.97 10Y 5.28 15Y 5.89

Investor Base

Current Situation • Investors are mainly banks rather than individuals. • The lack of diversified investor base and the predominance of inactive investors make emerging countries bond markets more of an investment market than a trading market, resulting in price inefficiencies. • The buy and hold nature of the financial institutions, dominating the investor base, leaves little room for retail investors and results into an illiquid secondary market.

Role of Pension Fund Managers • CDG, the major Moroccan pension funds company plays in an important role in driving the market. • CDG has approximately US$ 5.7MM bio assets under management, approximately 70% of the Moroccan pension funds.

Case Study: Egyptian Cement Company
Largest Ever Corporate Bond in the Egyptian Market

Refinancing Solution
Instrument Amount Credit Rating Tenor Repayment Interest Rate Features Underwriter Advisor LCY Bond LE 1,000MM A- (upgradeable to A upon execution of mortgage) 6 years Amortizing / Cash-flow-matching 60 % Fixed @ 13% / 40% Floating @ CBE + 2% Callable Citibank – Banque Misr – CIB Citibank N.A. Egypt as Sole Structuring Advisor

Achievements
Egyptian Cement Company

 Elimination of FCY risk  Cash flow matching repayment profile  Breathing space to face intense market competition  More favorable and flexible terms and conditions

 Largest non-sovereign local currency bond issue in Egypt  First complete refinancing of existing corporate debt  First bond with an amortizing repayment profile  First bond with a tranched pricing structure  First bond to reactivate the local bond market in 3 years
Challenges

Success Factors

  

Superior credit positioning and distribution capabilities Appointment of leading support institutions (Legal / Audit / Rating)

Support and cooperation of senior Company champions

  

Exhaustive Audit and Rating processes Extensive list of legal documentation requirements

Escrow arrangements

Case Study: Orascom Construction Industries
Another Corporate Bond Successfully Executed

Financing Solution
Instrument Amount Tenor Repayment Interest Rate Features Underwriter Global Coordinator LCY Bond LE 400MM 6 years Amortizing / Cash-flow-matching 60 % Fixed @ 13% / 40% Floating @ CBE + 2% Callable Citibank – Banque Misr – CIB – AAIB Citibank N.A. Egypt

Achievements
Orascom Construction Industries

 Cash flow matching repayment profile  Breathing space to face intense market competition  Partial hedging against interest rate fluctuations  Better assets / liabilities tenor matching

 Transaction oversubscribed 1.9x  Second corporate bond to reactivate the local bond market in 3 years  Citigroup viewed as the lead bank in corporate bond issues  Track record of successful team work

Success Factors

Challenges

    

Excess liquidity in the market Capitalization on ECC previous success story

Comprehensive structure and strong underwriters
Appointment of leading support institutions (Legal / Audit / Rating) Support and cooperation of senior Company champions

  

Exhaustive Audit and Rating processes Extensive list of legal documentation requirements

Longer / slower approval process / new banking law

Introduction of New Products to the Market

Supranatural Issuances Benefits
1. Integrate local marketing practice with the best international standards in terms of structuring, documentation, depository, clearing and settlement operations. 2. Establish a risk-free benchmark in countries without a benchmark issue. Opening markets to non-resident issuers fosters the development and deepening of the swap market (as the issuer will need to swap the local currency to the currency of its balance sheet). 4. Introduction of best market practice.

Case Study
European Investment Bank PLN 3 billion Domestic Debt Issuance Programme on the Polish capital market The EIB program is a biggest non-government public DI program in the history of Polish debt capital market Based on experience with EIB issuance, banks which operate on the Polish capital market originated other public debt instruments issuances for their clients. National Deposit for Securities (NDS) upon advice of EIB and Bank Handlowy (as Arranger for the program) created and simplified its procedures and documentation requirements. After their experience with EIB NDS and Warsaw Stock Exchange decided to modify their fee structure

3.

Introduction of New Products to the Market

Credit Enhanced Local Currency Bonds (“CELC Bonds”) Product Description  Covered by a full or partial guarantee from one or more export credit or multilateral agency (“Agencies”)  Issued in local currency  Marketed primarily to local investors  Governed by local capital markets regulations Benefits of CELC Bonds  Access alternative investor base, enhancing financing capacity of existing local banks  Limit recourse to shareholders  Reduce Agency premia (by mitigating convertibility and transferability risks)  May extend commitment of Agencies beyond their usual country limits  Generates publicity in the international arena  Develops local capital markets (generating support from key players)

 Floating or fixed rate
 Fully secured  Amortising


				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:73
posted:1/31/2010
language:English
pages:13