By Ben Edwards and Josie Cox
Some of the world's riskiest government borrowers are embarking
on a last minute debt-raising spree before the markets shut for the
winter break, extending a record-breaking year for so-called
frontier bond sales.
Frontier market countries including Kenya, Ethiopia and
Pakistan--each rated at least four notches below investment
grade--all announced debt sale plans Tuesday, seeking to benefit
from still relatively low interest rates and persistent investor
demand for higher yielding debt. The window for issuing new debt
generally closes in the middle of December for several weeks.
"If you wait until January, there's generally a lot of issuance
so if you are a smaller borrower you might be concerned that you'd
get swamped out," said Stuart Culverhouse, chief economist and head
of research at Exotix, an investment banking brokerage that
specializes in frontier markets.
So far this year, frontier borrowers including Kazakhstan, Ivory
Coast and Vietnam have raised about $37 billion from selling bonds,
roughly 50% more than in the whole of 2013 and the highest on
record, according to data provider Dealogic.
Kenya is Tuesday seeking to increase the size of its debut
dollar bonds it issued in June, following details that Ethiopia is
poised to meet with investors ahead of its first-ever dollar bond
sale. Pakistan is also Tuesday pressing ahead with plans to sell
Islamic law bonds, which could be wrapped up as soon as
Wednesday.
Demand is still looking good for this type of debt," said Kevin
Daly, an emerging-market fund manager at Aberdeen Asset Management
in London.
Mr. Daly said he is considering buying some of Kenya's bonds
Tuesday and is planning to meet with officials from Ethiopia
Wednesday.
African debt has performed strongly this year despite a minor
blip last month, triggered by tumbling oil prices and concerns
about the Ebola outbreak. On average, African government bonds
yield 5.25%, roughly 0.75 percentage point lower than at the start
of the year, according to a JPMorgan index. Yields fall when bond
prices rise. That has lifted total returns--which include price
changes and interest payments--to almost 12%.
Meantime, Pakistan's bonds yield 6.84% on average, about 1
percentage point lower than at the start of the year, according to
a Markit index.
Bankers working on the Kenya deal are suggesting the bonds will
price to yield in the area of 5.25% for the debt maturing in 2019
and around 6.125% for the debt maturing in 2024. Those bonds are
currently trading at yields of about 5% and 5.8% respectively,
according to Tradeweb. The original sale in June raised Kenya $2
billion, and was one of the largest first-time issues from an
African nation.
Ethiopia's investor meetings are due to start Wednesday and
conclude Dec. 3., according to a person familiar with the
matter.
Pakistan's Sharia-compliant five-year bond--or sukuk--is being
marketed at a yield in the area of 6.875%, according to a banker
working on the sale.
The deal follows a number of other countries such as South
Africa and the U.K. that have issued sukuk in recent months.
Tunisia and Kenya are also both eyeing that market, investors
say.
Sukuk paper trades, clears, settles and is rated in a similar
way to non-Sharia compliant bonds, but is structured to abide by
Islamic law. This means it is usually backed by assets or cash
flows, as the religion forbids interest payments. As a result,
sukuk issuers are able to tap a different pool of investors than
with more conventional bonds.
Pakistan's sukuk is expected to be rated Caa1 by Moody's
Investors Service, seven levels below investment grade.
Ethiopia in May was handed credit ratings from Moody's, Standard
& Poor's Corp. and Fitch Ratings in preparation for a potential
deal. The country is rated B1 by Moody's and B by S&P and
Fitch, four and five levels below investment grade respectively.
Moody's said at the time that its rating reflects Ethiopia's strong
economic growth over the past decade.
Kenya is rated B1 by Moody's and B+ by S&P and Fitch.
Barclays, J.P. Morgan Chase & Co. and Standard Chartered are
managing Kenya's debt sale Tuesday.
Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard
Chartered are running the Pakistan sukuk sale.
Deutsche Bank and J.P. Morgan are organizing the Ethiopia bond
roadshow.
Write to Ben Edwards at ben.edwards@wsj.com and Josie Cox at
josie.cox@wsj.com
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