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Monday, 11 June 2012

A $500m Eurobond?

Ministry of Finance recently selected Barclays and Deutsche Bank as book runners for a debut $500 million, 10-year Eurobond. The issue is expected in the next eight weeks of signing the contract with the two banks, making it the first debut by a sub-Saharan sovereign this year.

The issue should attract decent interest given Zambia's 7.7% growth projection, stable inflation at around 6% and on going relative political stability, the Barotse question notwithstanding. Many hedge funds are looking participate, encouraged by the B+ rating from credit rating agencies.

After some concerns of the chaotic signals in the early days of the PF government, that appears to be easing now with much clearer communication. Although uncertainty remains in some areas. The bond would be priced somewhere between Ghana's $750 million, 10-year 2007 issue, which is currently yielding 5.95 percent and Namibia's debut $500 million Eurobond, issued in October, now priced at 5.18 percent.

The big question relates to the turbulence in the Eurozone. People have to feel quite bullish and be willing to take exposure to brand new issuers like Zambia at such a time as this. At the moment the risk aversion looks pretty elevated in Europe. That may raise the price of the issue, which clearly is not where we want to be. So timing may be everything on this one.

The other question of where the money will be spent remains unanswered. No detailed plan has been put forward. The money is being borrowed but it is not ring fenced. This was of course an MMD plan which PF has taken forward. We should also note that PF is borrowing constantly from other sources without parliamentary oversight. We have reason to be concerned about the increasing indebtedness. 

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