Kenyan bond signals a move to more risk

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Carolyn Cohn London

INVESTORS are returning to the riskier, less developed bond markets of Africa and other frontier economies, burying memories of past setbacks and plunging in after global yields fail to rise as much as expected.

Ignoring attacks by Somali-linked Islamic militants in a Kenyan coastal town, they flocked to the country’s debut dollar bond this week.

The $2 billion (R21bn) issue – sub-Saharan Africa’s largest dollar frontier market bond – was seven years in the making, but investors said the timing was right for the junk-rated sovereign borrower.

“There is so much risk appetite; people are being pushed into anything that has yields,” Antoon de Klerk, a fund manager at Investec Asset Management, said. “It seems the market has quite a short memory.”

The 10-year portion of Kenya’s two-part bond yielded less than 7 percent, but this compares with 2.6 percent on US treasuries, 1.35 percent on German Bunds and a measly 0.6 percent on Japanese government bonds.

Even the average yield for emerging market debt is little more than 5 percent.

Fund managers said Kenya had a positive growth and monetary policy outlook, making it an attractive investment proposition, despite the attacks that were hitting tourism. “Security is a concern, but it’s not a showstopper,” said De Klerk.

But bets on high-yielding frontier debt have not always paid off. Shortly before Ben Bernanke, then Federal Reserve chairman, hinted that the US central bank would reduce its bond buying programme, Rwanda came to the market last April with a small debut 10-year dollar bond, also at a yield of less than 7 percent.

The bond’s yield rocketed to 9 percent within weeks as Western investors took their money home, where yields were rising and the outlook was safer. Bonds from Ghana and Zambia also suffered in the months after their launches.

“It’s a pretty good time for the Kenyans to come to the market – six months ago they’d have been paying a lot more,” said Kevin Daly, an emerging debt fund manager at Aberdeen Asset Management.

Kenya’s $2bn bond attracted more than $8bn in orders, over four times the issue size. But this was well below the bubble territory of previous years, such as the 15 times oversubscription of Zambia’s debut $750 million bond in 2012.

But frontier debt market returns of 9 percent this year and spread levels at their tightest suggest there may not be too much more upside. Local currency debt, in contrast, has been underperforming emerging and frontier dollar debt this year.

Salman Ahmad, the global fixed-income strategist at Lombard Odier, pointed to local debt yields in investment grade-rated India of 8.5 percent, comparing favourably with Kenya’s dollar-based yields. “Frontiers are facing… much higher yields in emerging market local currency,” he said.

Such debt also carries a lower risk of default. – Reuters


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