An Investment Bank Perspective on Debt Capital Markets in North Africa

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An Investment Bank Perspective on Debt Capital
Markets in North Africa Workshop on North
African Emerging Capital Markets March 30, 2004
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• 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

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• 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
• 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.

• 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

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• As emerging markets devalue LCY, losses grow from
  mismatching FCY debt with LCY revenue based
  infrastructure / utilities projects.
• Egypt / Moroccos electricity / water concessions
  have over US3 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).

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Net Domestic Public Debt (EGP billion)

• 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.

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Poland
Egypt

• 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

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Current Situation
Suggested Solution

• 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.

• 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

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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
6M
3M
15Y
10Y
5Y
2Y
1Y
Yield
3.20
2.35
5.89
5.28
4.97
4.01
3.52
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Current Situation
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.

• 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.

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Refinancing Solution
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

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

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Financing Solution
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

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

• 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

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Supranatural Issuances
Case Study
Benefits

• Integrate local marketing practice with the best
  international standards in terms of structuring,
  documentation, depository, clearing and
  settlement operations.
• 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).
• Introduction of best market practice.

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

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Credit Enhanced Local Currency Bonds (CELC
Bonds)
Product Description
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)

• 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
• Floating or fixed rate
• Fully secured
• Amortising