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Tipping Point for African Capital Markets

Baker & McKenzie – Global, 26 January 2015 – African companies are going public at what could be their fastest ever rate. Thirty initial public offerings by African-domiciled companies are already in the pipeline for 2015*, according to research by global law firm Baker & McKenzie. If just the deals announced so far complete, volumes will spike by a quarter from 2014, which itself saw the highest IPO volume since the financial crisis.

There were 24 IPOs by African domiciled companies in 2014, a 33 per cent rise in volume and a 222 per cent increase in value from 2013, raising a total of just over $2 billion.

For 2015 in sub-Saharan Africa, South Africa, Nigeria and Kenya are the countries with the projected highest IPO value, partly driven by the exit strategies of private equity investors who snapped up assets in the wake of the financial crisis. Mauritius is also a popular destination for structuring deals. In North Africa, Egypt is set to be the most prominent issuer as the economy recovers from four years of turmoil, making long-delayed deals viable, with activity also in Morocco and Tunisia.

“While there have been several false dawns for capital markets across Africa’s diverse economies and making predictions is notoriously difficult, we do see a more sustainable trend developing,” said Koen Vanhaerents, global head of capital markets at Baker & McKenzie. “There are sound footings based on a range of factors, including improved corporate governance, better market regulation and of course reasonable economic growth in many countries.”

Significantly, financials and real estate are likely to be the most active sectors, along with more well-established areas of activity such as energy and power.

African companies are still most likely to go public on their domestic exchanges, with the Egyptian, Kenyan, Moroccan, Nigerian, South African and Tunisian markets set to be the most active in 2015.

But more deals will be cross-border. Listings by African-domiciled companies are currently planned in London and Frankfurt, and more are likely to emerge in the course of the year. Six cross-border IPOs are in the pipeline compared to one completed in 2014 (Seplat) – potentially a five-fold increase.

The climate for cross-border deals within Africa is improving too. The East African Securities Regulatory Authorities have set June 2015 as the deadline to harmonize capital markets laws in Kenya, Uganda, Tanzania, Rwanda and Burundi.

Recent Landmarks

· December 4, 2014 – Ethiopia becomes the latest nation to issue a sovereign bond, with a heavily oversubscribed $1 billion sale.

· December 17 – oil services company Atlas Development & Support Services becomes the first from the UK’s AIM market to gain a full listing on the Nairobi Securities Exchange, raising $5 million from Kenyan investors.

· December 18 – Johannesburg Stock Exchange sets a new record for intraday equity trading volumes, hitting R53.7 billion (US$4.6 billion), 41 per cent higher than the previous record, set in 2012.

· December 19 – Angola inaugurates its much-delayed debt and securities exchange, with an equity trading market planned for 2016.

“The potential of Africa is absolutely clear, and the development of sub-Saharan capital markets has been picking up momentum,” said Edward Bibko, EMEA head of capital markets. “Consumer economies such as Kenya are seeing increased appetite for securities among domestic institutional and retail investors, while the governments of more oil-dependent economies will have to look at international debt issuance and project finance options to meet budgetary promises. It feels like a tipping point. We’ve gone from a handful of international banks dipping their toes in African waters to real momentum in building a pipeline of African cross-border deals.”

In global debt capital markets Tanzania is expected to issue its debut Eurobond in 2015, while Nigeria is introducing an Islamic bond market.  By September 2014 sub-Saharan sovereign debt issuance had already exceeded every prior full year, while in the spring Senegal issued sub-Saharan Africa’s biggest Islamic bond to date. Nevertheless, total international debt issuance by African entities fell nine percent in value and ten per cent in volume, raising $22.6 billion across 63 transactions. While 2014 was dominated by sovereign issuers, corporate bonds are expected to spike in 2015.

“Despite improving local liquidity, almost all debt from African issuers and a significant amount of equity is still bought by international investors, meaning even domestic transactions should be documented to international standards,” said Don Guiney, Senior Counsel for Baker & McKenzie, based in London.

But risks remain. African markets’ disproportionate exposure to global economic sentiment increases volatility, with some forecasters predicting a difficult year for emerging markets worldwide in 2015 due to factors including the falling oil price and strong US dollar. International and domestic investors alike also need standards of corporate governance, market infrastructure and securities regulation to continue to improve.

“South Africa is regarded as a world leader in financial regulation,” said Wildu du Plessis, managing partner of Baker & McKenzie’s Johannesburg office. “But it is inevitable that every financial market is subject to stress. The key is building resilience, so that neither an unexpected shock like a bank failure nor a wider downturn are able to take down the whole system. Resilience will be a major challenge as African markets start to become more interconnected.”

“London and Johannesburg have been the markets of choice for cross-border and domestic deals, respectively, by African issuers over the past decade,” said Chris Hogan, capital markets partner in Johannesburg. “This underlines that issuers and investors alike seek legal certainty and effective regulation, combined with deep liquidity.”

The Bond Market

Selected IPO Outlook: Country Snapshots

Egypt – At least four major companies are expected to list their shares on the EGX in 2015, which would double deal volume from 2014.

Kenya – Following the Nairobi Securities Exchange’s own successful  IPO in September 2014 there is a pipeline of deals for 2015 after several inactive years. Harmonization of listing rules across East Africa is also expected to promote activity.

Nigeria – An improved outlook for IPOs is forecast by the end of 2015 after a tough start due to headwinds from the falling oil price driving stocks down. Key drivers for this projection would be the launch of a premium board, the implementation of the country’s ten-year capital market master plan and the full implementation of the recapitalization of the capital markets operator.

South Africa – Stronger exports and improving labor relations are expected for 2015. South African companies will continue to acquire, consolidate and develop their pan-African businesses. Many are likely to need to issue debt or equity to finance these activities.

For further information, please contact:
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