The Eurobond market provided a crucial funding lifeline for many African sovereigns over the past decade, allowing them to raise billions of dollars to finance infrastructure projects and plug budget deficits.

However, the last couple of years have presented exceptional challenges in accessing the market.

While Cote d’Ivoire, Benin and Kenya have all issued Eurobonds this year, many African governments remain priced out of that market, or have opted to postpone issuance plans.

Commercial banks fill the gap

This funding crunch has compelled sovereigns to diversify their borrowing sources, increasingly turning to the commercial syndicated loan market for financing.

Insurers have also been beneficiaries of this deal flow, with large volumes of cover offered to commercial and development finance institution (DFI) lenders to mitigate their exposure to African sovereign borrowers, a senior loans banker said.

“The African sovereign lending market has been busy over the last 18-24 months as a reaction to the increasing rates environment,” he noted.

There has been a significant amount of financing provided to African countries through various loan products, the banker said, adding that this lending activity has led many banks to accumulate high exposure to certain nations.

“Loan products originated via bilateral agreements, syndicated loans, and export credit agency deals have been widely seen across the African continent,” the banker said.

This, however, has led to a reduction in the amount of credit and political risk insurance (CPRI) being available for a number of sovereigns, he said.

“This high lending exposure is now becoming evident, as it has resulted in reduced availability of CPRI cover for certain countries, including Angola, Cote d’Ivoire, and Tanzania,” he said.

This reduced availability creates a number of issues for commercial banks, a Johannesburg-based loans banker said. Credit risk insurers reaching their exposure limits means banks will be less likely to extend loans to countries in need.

Without this risk-transfer mechanism, commercial banks may become more constrained in their lending appetites, especially for credits perceived as riskier, where insurance was heavily relied upon, he said.

“Insurance has led to banks being able to participate in sovereign deals they might otherwise choose to avoid. And additionally to do bigger tickets,” the Johannesburg-based loans banker said.  “However, when there is limited insurance available this means that credit discussions are more difficult. It’s either you do less or nothing sometimes.”

Sovereign risk premia and lending constraints

Rising debt levels and deteriorating fiscal positions in some countries have also heightened perceived default risks, a third loans banker said.

Kenya’s recent pursuit of an up to USD 1bn syndicated loan provides a case in point. A number of bankers told Debtwire many lenders are feeling “deal fatigue” when it comes to Kenya, and without an adequate risk transfer mechanism, they are very unlikely to get involved in the deal.

“Kenya is a tricky one,” a third loans banker said. “Last year, there was limited appetite for Kenya, and a lot of banks were cognisant of the fact they had a refinancing due. This is one of the reasons why the syndication took so long.”

For the most recent deal, this banker noted that sentiment is very similar to last year and banks may already have too much exposure to Kenya.

“This time it feels like a lot banks and issuers are ‘full up’ on Kenya, and they’ll have to work extra hard to get lenders on board,” this banker said. “There’s just too much saturation in the market right now.”

Pricing inadequacy, where the premium paid to insurers does not compensate for the risks, can also constrain the supply of new insurance coverage and lending, he said.

“Oftentimes, there is a misalignment between the risk profile and the borrower’s expectations of pricing,” the third loans banker noted. “Sovereigns are reluctant to budge on pricing, whilst insurers want to be compensated by commercial banks for the risk. This makes the net interest margin less profitable for the lenders.”

Providing countercyclical support

While some commercial banks shy away from lending to sovereign borrowers due to insurance coverage challenges, DFIs are doing their part to stabilise the market, the bankers said.

These organisations, with their unique mandates and risk appetites, are providing much-needed financing to developing countries. By leveraging their strong credit ratings, DFIs are also able to mobilise resources and offer financing solutions that mitigate risks for private lenders, they.

“I find commercial banks like doing sovereign deals in general, but there is a bit of a positive knowing a DFI is involved,” the Johannesburg-based banker said.

“What I find is that with a guarantee from a DFI, the loan rating is usually brought in line with the DFI rating, which means that there isn’t really a need to source insurance to improve the transaction rating.”

The Government of Tanzania‘s search for a USD 500m syndicated loan provides a noteworthy example, where a DFI may come in to help close the deal.

The bank has successfully secured two-thirds of the facility, the senior loans banker told Debtwire, adding that a DFI could be brought in to help bring the loan to fruition.

The aforementioned Kenya deal may also involve some form of credit enhancement, such as a guarantee from the Trade and Development Bank (TDB).

“Both sovereigns are exploring different pockets of liquidity to get these facilities done,” the senior loans banker said. “Bringing in a DFI that could provide a partial risk guarantee is one of many solutions under consideration.”

But even this DFI guarantee may not be enough, with lenders looking at the Kenya deal still seeking additional insurance, which is not easily available as country limits are close to being reached.

Going forward, the first senior loans banker sees the reduced insurance availability for African sovereign risk as a temporary trend rather than a fundamental change in the market conditions.

For performing countries, even against a background of increasing insurer aggregation issues for some African sovereigns, cover remains offered across the continent, the senior loans banker said.

“Over time the CPRI market has become adept at balancing supply and demand issues against the backdrop of the changing credit cycle,” the senior loans banker noted.

“Where concentrations build up and appetite decreases, this is a transitory issue, while amortisations and repayments on underlying loans, sometimes combined with new capacity or insurers coming into the market work to balance supply and demand,” the senior loans banker said.