A small but definite trend has emerged with African corporations listed outside of South Africa, tapping medium-term capital in local currencies from fledgling bond markets.
The development of debt capital markets in some sub-Saharan African (SSA) countries--Botswana, Kenya, Namibia, Tanzania and Zambia--is further proof of Africa's steady integration into the global financial markets. This bodes well for future increases in foreign portfolio investment.
Before discussing the growth of capital markets in SSA, it is worth looking at the nitty-gritty of debt securities in general--both their advantages and disadvantages.
A debt security is any instrument that is traded more or less freely among investors in the marketplace. Securities are either said to be payable to the bearer or state entitlement with a reference to a register of holders. Bearer securities are usually 'negotiable instruments'. By contrast, securities in registered form are not themselves documents of title and in the event of loss or theft the register must be produced to establish the identity of the true owner or owners.
There are a wide variety of securities including those that are convertible into stocks and shares, known appropriately as convertibles and those linked to an index or price of a particular commodity. Unlike a conventional bank loan, debt securities are mostly unsecured assets unless forming part of securitisation transactions or structured project financing.
Securities--carrying a fixed or a floating rate of interest, or non-interest bearing termed zero-coupon--may be used for short, medium or long-term financing. Securities with the shortest maturities, under one year, are referred to as commercial paper while securities with maturities of more than a year are called bonds or medium-term notes.
Generally speaking, debt-security markets are only open to blue chip companies whose names are best known to potential investors--unless collateral, such as a bank guarantee, is provided.
Pros and cons
There are many benefits for a company in raising capital by issuing bonds. These can include the favourable pricing terms to be found by tapping the market directly (known as 'disintermediation') rather than borrowing from commercial banks. Disintermediation, essentially cutting out the middleman or banker, is especially interesting to larger multinationals whose credit-ratings in global capital markets may be superior to the banks from which they would otherwise seek funding.
Secondly, issuing bonds contributes to raising a company's profile within the financial community. Offering securities to the market puts a spotlight on the issuing company, its corporate strategy and overall financial situation, as well as its medium-term projections for sales and pre-tax earnings.
In short, debt placements offer the issuers opportunities to enhance their public image and expand future market share.
Thirdly, by diversifying their sources of funding, companies can spread their debt around the market instead of relying upon a relatively small number of banks.
Finally, the terms of the formal agreement of a bond issue is generally more straightforward than that of a loan as prospective investors in debt securities focus specifically on the issuer's overall financial standing, i.e. the company's debt service capacity.
But as with nearly all-financial instruments, debt securities have some negative points. Commercial bank lending is based on a prudent assessment of credit-risks. Most bankers have an informed knowledge of a client's business. In contrast, investors in debt securities do not enjoy similar direct contacts and must rely on information supplied by the issuing company.
There are also substantial costs involved in the issuing of bonds. Interest rates on debt securities are generally lower than a bank's term loans, but transaction costs are quite expensive. …