In our new AAT series, ECONAfrica, Pr1merio economist Peter O’Brien discusses corporate debt issues on the continent.
Debt debates on Africa nearly always talk about sovereign debt. But in economies which are growing, even if with plenty of ups and downs, firms need to finance expansion. Banks can help, yet this is often not so easy to organize. Another option is to issue corporate bonds (‘CB’). Since rating agencies generally assess clients on a three letter basis (sometimes with a + or – at the end), we will make our 3R assessment of African CB. What’s the reality, what’s the regulatory situation, and what are the risks and rewards?
First, a thumbnail sketch (admittedly based on limited evidence) of the stylized facts:
- So far, all African countries (including the Middle East) account for less than 5% of the value of all CB issued by Emerging Market Economies (EME).
- Within that, South Africa, Mauritius and Egypt add up to around two thirds, with South Africa alone as one third.
- Most CB in Africa have maturities no more than 10 years
- Over half of the bonds are fixed interest
- Roughly 30% of the CB are considered high yield (another way of saying that investors reckon the risks are substantial)
- It seems as if there is more or less an even split between CB issued in local currency (hence with local currency coupon rates) and those in foreign currency (nearly all $ or euro)
- The investors are in the main a group of 50-60 funds
- In South Africa, as of October 2015, foreign holdings of local CB were 35% of the total
- In a number of African countries, the leading corporate borrowers are parastatal firms
- Corporate debt, measured as a percentage of GDP, is far lower in African countries than in most others. While many other places, especially some of the big EME, are vulnerable to macroeconomic damage stemming from corporate debt, Africa (including South Africa, where this percentage has remained remarkably stable) should be fairly safe
What does this picture tell us? Its principal message is surely that this is an area certain to experience major changes, and quite possibly major expansion (not only in volume but also in the players involved).
Now to regulation, both internal and external. The country that seems to have explicitly made provision for corporate debt, and its restructuring, is South Africa. In Companies Act 71 of 2008, enacted in 2011, there are clauses that set out possibilities for Corporate Debt restructuring. Since enactment, over 400 companies have applied for these methods of handling the problems, and there are upwards of 80 entities offering specialized advice in the field. This prudent approach no doubt stems in part from the size and significance of corporate borrowing in that country. Elsewhere, legal and regulatory issues seem, on balance, to hold back greater reliance on CB. In part there are accounting and corporate governance standards which local companies may not yet meet. In part, it appears that the disclosure requirements that must be met before recourse to CB can be made may constrain the actions of companies (bank borrowing generally requires less disclosure). On the external side, the Basel 111 stipulations matter, in particular because they limit the possibilities for underpricing of CB (a practice that has been fairly frequent till now).
What is missing in the regulatory environment, however, is any overall examination of what might be done to stimulate the prudent use of CB. If this were to be done, such regulation would need to assess financial, economic and anti-trust issues.
The risks and rewards of the CB approach to corporate funding, and indeed the opportunities to use it, are very different across Africa. From economies such as Kenya and Botswana, where the phenomenon is on the rise, to those of the Maghreb, where political uncertainties in very recent years seem to have stunted what was a promising growth, to many parts of West Africa, where to date there is seemingly little activity in this area, each country has its own environment. However, the ever greater integration in the various regions means that there may well be prospects for making better use of private regional funds and of sovereign funds. Either way, African companies should look forward with optimism to utilizing more local capital. It is the job of regulators to ensure this is done in a sound way financially, and that these markets operate competitively.