A Strong Start to the Year for Sub-Saharan Loan Market (By Miranda Abraham)

Increased interest from borrowers and investors should ensure a reversion to the growth cycle in 2022

By Miranda Abraham, Co-head of Loan Syndication at RMB () in the UK

The sub-Saharan African loan market has made a strong start to 2022, after two years of all-time low volumes during the Covid pandemic. Increased interest on the part of both borrowers and investors, should ensure the market reverts to a growth cycle this year, with African-based banks continuing to play an ever more important role in its recovery and expansion.

The loan market enables sovereigns, financial institutions, and corporates to access customised funding from clubs or syndicates of African and international lenders, on terms that are tailored to their needs. It is a private market, as opposed to the public debt capital markets. Lending in the loan market is typically at variable rather than fixed rates, with repayment terms that are more flexible than those of the public listed markets. The syndicated loan market is used by large corporates, countries, state owned entities or financial institutions to raise quantities of funding that are too large to be provided as bilateral loans with a single institution.  Instead, lead banks syndicate these large deals to other investors, including other banks and funds, selling down in order to mitigate the risk.

Often syndicated loans are used by countries or companies making their first foray into international capital markets, ahead of an approach to the public debt capital markets.  For those borrowers already active in the public debt capital markets, syndicated loans are a way of diversifying their sources of financing and increasing investor reach.  The flexible and cancellable nature of syndicated loans and bridge financing mean these products are often used in corporate merger and acquisition financing. They are also a key financing tool for development finance institutions and commercial banks.

A US$1.2bn three-year term loan that multilateral financier Afreximbank closed in December, coordinated by Rand Merchant Bank, First Abu Dhabi Bank and Standard Chartered Bank, set this year off to an encouraging start.  This high-profile loan launched at US$600m and was doubled following a significant oversubscription.  The success of the loan provided significant confidence and momentum to the sub-Saharan African loan market, highlighting the very strong liquidity available. 

Low levels of loan market activity in 2021 were in the part the result of continued uncertainty about the outlook for African economies as the pandemic took hold, with many waiting for market conditions to improve so that they could seek more optimal timing for re-financings or new financing. With US$31bn of issuance, 2021 was also a record year for the international bond market for sub-Saharan African issuers - and the two markets sometimes substitute for each other.

However, potential borrowers could only sit it out for so long before they had to return to the loan market for refinancing. Already 2022 is starting to see many new deals and refinancing as the pandemic recedes and economies recover. At the same time, more volatile macro market conditions at the start of 2022 have led to a reduction in issuance in the public markets. When volatility discourages issuance in the public debt capital markets, quieter, lower profile, loan financings in the syndicated loan market start to hold more appeal.  Moreover, the return of economic growth is driving investment in infrastructure projects, fuelling further activity in the region, with significant activity expected from infrastructure projects, sovereigns and financial institutions.

This pick-up in activity is being met by increased interest from an ever-expanding universe of investors. They are showing much higher levels of interest in lending to sub-Saharan Africa, particularly as other developing markets such as Russia and Central and Eastern Europe falter due to political uncertainties and sanctions.  Sub-Saharan Africa continues to stand out as a clear leader among global developing markets in terms of delivering attractive opportunities for investors. 

International investors see sub-Saharan Africa as one region where there are still opportunities to invest at good yields, one where private capital can be put to work to earn good returns.

Global emerging market funds in search of yield have to look seriously at Africa's loan market. The yields on private lending are often higher than those on publicly listed debt. An unusual nuance of the market is that sovereign loan market borrowers typically have to pay a premium for private debt, because these loans are seen as less liquid than bonds. That liquidity premium has the benefit of unlocking additional interest from non-bank investors who can provide sizeable ticket commitments. Investors looking to Africa are also becoming more sophisticated. Where previously there was little knowledge of the nuances of each of the 46 countries of sub-Saharan Africa, that is changing. As institutional investors' familiarity with the loan market deepens, the pool of liquidity is likely to grow, leading to stronger sovereign loan demand.

Another significant development driving liquidity into the market is that the loan and credit insurance markets are becoming more entwined. Since 2008 the number of credit insurance syndicates has more than doubled to around 80.  These additional players in the financial insurance market have fuelled the market's appetite to provide risk mitigation for banks investing in Africa, expanding the pool of liquidity from banks. The greater use of insurance as a risk mitigation tool has created additional capacity for banks to provide liquidity for new deals.  There is also now a new distribution route for investors to buy loans on an already insured basis, that are sold fully wrapped or hedged by the arranging banks.

 During the pandemic some international banks have departed the sub-Saharan African market, boosting the continent's own African, regional and domestic banks. These local and regional banks are positioned to provide the in-depth knowledge and on-the-ground presence that are often key to a deal's successful execution. The combination of global perspectives and detailed local knowledge is essential in sub-Saharan Africa.

Looking ahead, lending to sovereigns and financial institution is likely to continue to dominate sub-Saharan Africa, with deals already eagerly anticipated for Uganda and Tanzania and various financial institutions.  Infrastructure and telecommunications deals will be another key theme of 2022 and consolidation via acquisitions and mergers will fuel event-driven financing.  It is a positive trajectory for the region, with stronger market dynamics and a far greater pool of liquidity than has been witnessed for several years.

Distributed by APO Group on behalf of Rand Merchant Bank.