Coen Welsh | Nov 14, 2017 | 0
Our very first step into the bigger arena of international capital
The lack of investor support in the local capital market for longer-dated bonds, triggered a response by the Bank of Namibia which certainly carry more risk but at the same time, heralds an entirely new paradigm as far as development financing goes.
A landmark event of unprecedented significance was announced earlier this week when the Bank of Namibia, to many people’s surprise, said it has successfully placed a sovereign bond through Barclays Capital and Standard Bank plc, in London for trade in international capital markets. The boldness of this move, and the success of the placement – five times oversubscribed – opens a financing door for Namibia as a sovereign entity, incomparable with any other source of funding.
The Bank of Namibia somewhat painfully overemphasised that the placement does not constitute an offer in the American capital market, citing some 1933 US legislation prohibiting such placement in New York or Chicago, but in my opinion, that is entirely irrelevant. Designated 144A/RegS Eurobond, placed in London, regulated by the FSA, I see no reason why any American investor, private or institutional, cannot purchase the Namibian bond through a London intermediary. On the US investor’s balance sheet, it will simply be indicated as an offshore investment and that is definitely not against the law in America. Still, the official announcement goes to great length to appease the American regulators by repeating several times, it is NOT an offering in the US capital market.
The mere fact that our Eurobond is denominated in US dollar, makes it tradeable anywhere in the world, as long as the investor is prepared to subscribe through either Barclays or Standard in London.
But it is not the window dressing that impresses me, it is the fundamental aspects of this bond that stand out. And one of those aspects, is risk. In our local capital market, government debt has gone from around N$9.02 billion in November last year to a tad over N$15.2 billion in October this year. That is an increase of about 66% in the local capital market in just under a year. By any standard, that is a substantial increase implying that as exposure by local investors has risen, so has risk. What the Bank of Namibia has done now, is to dilute risk in the local capital market, spreading it into a market where the depth and liquidity is bigger by an exponential factor. In short, by moving a very big chunk of our government’s financing requirements offshore, the Bank of Namibia has removed a significant amount of risk to Namibian pension funds.
The second aspect that puts this bond in an entirely new category is the cost of debt. At a coupon rate of 5.5% and discounted by less than 2%, it brings total financing cost to approximately 5.75%, and that, given what bonds attract in the local market, is a bargain.
To us there is only one risk and that is an exchange rate risk. This is a risk which we have no control over, but the downside is in our favour. Given our par link to the ZAR, I cannot imagine any wild currency swings, although I must admit, over a ten-year period, these may be higher than anticipated. Nobody can really judge an exchange rate ten years ahead, but again, I am fairly confident, considering the direction of the world’s major currencies, that we may be pleasantly surprised when the new Eurobond becomes cheaper to finance over the ten-year period, than even the most pessimistic currency trader would have expected.
The only catch is that we must be able to service a debt of US$500 million, at an annual rate of 5.75%, payable twice a year. As long as we can do that, then we can place another three or four or even five such bonds, at current income levels. And the way I have come to know the Bank of Namibia crowd over the years, I will not be surprised if the exchange rate risk, is hedged in some way or the other. In fact, I actually expect them to have hedged this bond in a rather watertight manner.
A third aspect revolves around the way the paper was placed. This was not done per public tender as is the norm locally (bound by domestic legislation), instead it was a private placement and this is where the role of the two sponsoring agents becomes vital. I suspect what Namibia brought to the table was a solid track record and an unbelievably low national debt rate. What the two brokers contributed, is access to capital markets and investors that we cannot reach on our own. And to top it all, the bond is expected to be rated in the lower investment grade level, meaning no junk bonds for us. The fact that this bond will be rated investment grade, is perhaps the single most important trigger that will enable us to place similar bonds in future.
We only need to ensure that we maintain our position to be able to service it. And I do not think that is in doubt.