Companies favour bonds as bank credit remains tight
Corporate bond issuance is on the rise across all sectors of the Egyptian economy as companies increasingly turn to the debt markets to overcome continued tightness in bank credit.
The Egyptian Exchange (EGX) ranked globally as the tenth best-performing exchange by value of bonds traded during the first half of 2010 over the same period last year, recording a 33.4 per cent increase, according to the World Federation of Exchanges (WFE) whose 69 regulated members comprise the major global exchanges.
“We’ve seen a huge revival in the corporate bond market in the last twelve months,” says Simon Kitchen, strategist at Egyptian-based investment bank EFG-Hermes.
“Its activity had been virtually non-existent over the last few years. But we’ve seen some big companies issue corporate bonds in 2010 and that’s because they’re having difficulties raising money from the banks.”
Aside from the tight credit markets, the Central Bank of Egypt imposes a ceiling of 22 per cent on each bank’s lending capacity to a single corporation.
“As a result, companies who are seeking new financing have gone directly to the bond market to get around this restriction,” adds Kitchen.
Egyptian heavyweights mobile operator Mobinil and car distributor GB Auto have issued bonds this year to the respective tune of £E1.5bn ($263m) and £E1bn that were very well-received.
The first tranche of Mobinil’s issue was 1.5 times oversubscribed as institutional and high net-worth investors placed orders for 21 million bonds against the 14 million on offer.
A second tranche of £E100 offered to retail investors was oversubscribed in excess of 11.4 times. The five-year bonds were issued with a fixed annual yield of 12.25 per cent.
“They were priced very attractively so they traded well on secondary markets,” says Kitchen. “There was a particularly strong interest from retail buyers in the Mobinil bond because the yield was so good.”
Egyptian corporate bonds are exempt from tax, which has served as a very large incentive to issue corporate paper in the current financial climate. Earlier this year, the Ministry of Finance amended the Capital Market law to reduce both the time and costs of issuance.
The changes include relaxed requirements on financial estimates for the lifetime of bonds and permission for international institutions and quasi-state bodies to issue bonds. The government hopes these amendments will help develop a fully functioning secondary debt market, which would help reduce the cost of borrowing and make overall debt pricing easier.
These amendments have already had a positive impact in encouraging issuance.
State-owned National Bank of Egypt (NBE) completed a £E3.4bn sale of five-year bonds on 7 August with a yield of 5.25 per cent, which were oversubscribed. This marked the first debt issue by an Egyptian bank on the international capital markets.
Meanwhile, government-run New Urban Communities Authority (NUCA), which is responsible for developing satellite cities around Cairo, also issued £E5bn worth of bonds and is planning a second issue of medium-term Eurobonds denominated in Egyptian pounds in the next two months.
Orascom Construction Industries (OCI), the Middle East’s largest publicly traded construction company, is also planning to list a £E1.65bn bond in the coming months.
“This is going to be an increasingly popular trend in the future,” says Kitchen. “There’s a lot of appetite for these bonds – especially from insurers, pension and fixed-income funds. But also from retail investors as well as foreigners.”
The total value traded of listed securities amounted to $3,227.28m in July this year. Bonds comprised 33.28 per cent of this value.
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