South Africa is opening the market for the continent by selling its first Eurobond in almost two years as it seeks to capture lower borrowing costs to finance a widening budget gap.
The government sold $1.25 billion of notes due in 2026 at 335 basis points over Treasuries, according to a person with knowledge of the plan, who isn’t authorized to speak publicly and asked not to be identified. That’s down from about 350 basis points when it started marketing the deal, the person said. The spread compares with 307 basis points for securities due September 2025, data compiled by Bloomberg show.
Africa’s second-largest economy is tapping the market after the U.S. Federal Reserve scaled back forecasts for interest-rate increases, boosting demand for higher-yielding assets. The nation, beset by the worst drought in more than a century, falling commodity prices and weak demand from its biggest export market, China, is at risk of losing its investment-grade credit rating after President Jacob Zuma’s surprise firing of his finance minister in December followed by a court ruling last week that he violated the constitution by refusing to repay government money. Steve Hooker, managing director and portfolio manager at Newfleet Asset Management LLC, said the selloff creates opportunity.
“We are playing the South Africa new issue from a valuation standpoint,” Hooker, who helps oversee $11.5 billion at Newfleet Asset Management LLC, said by phone from Connecticut. “South Africa is among the places where we might see some identifiable catalysts to snap back.”
Hooker didn’t disclose how much he bought but said he added “across various accounts.”
The sale is first for a sovereign in Africa this year and comes as Ghana and Kenya met investors for non-deal roadshows this week in London, according to people familiar with the plans. The nation hired Citigroup Inc., Rand Merchant Bank, Standard Bank Group Ltd. as bookrunners and Investec Bank Plc as co-lead manager, according to a person with knowledge of the matter.
The government’s budget announced in February planned to raise $1 billion from sales abroad, helping finance a deficit projected to widen to 3.9 percent of gross domestic product in the year ending March 2016 from 3.6 percent the year before.
Moody’s Investors Service last month placed the country’s investment-grade rating on review for a reduction. A downgrade of the Moody’s Baa2 rating would move South Africa to one level above junk and on par with the views of Standard & Poor’s, which has a negative outlook and is reviewing the score in June, and Fitch Ratings Ltd.
The premium investors demand to hold South African dollar debt rather than U.S. Treasuries fell to a four-month low of 368 on April 4, and has since increased to 384, according to JPMorgan Chase & Co. indexes. The spread reached a seven-year high of 525 basis points in January, the data show.
“The price is attractive despite the negative economic outlook and the ratings downgrade risks,” said Koon Chow, a senior macro and currency strategist at Union Bancaire Privee in London. “It is a good window of opportunity because U.S. yields are low, risk appetite for emerging markets is solid at the moment and there have been inflows into EM fixed income since early March.”
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