Afren Bond Ignites Market

Afren, a London FTSE 250-listed oil exploration and production (E&P) company with a strong African representation in its management and board, caused something of a sensation by becoming the first UK-listed independent E&P company to raise $800m with successive bond issues, the latest being in February this year. What will be the impact on the African bond market?

US INVESTORS ARE USED TO FUNDING OIL producers with high-yield debt but previously few had Africa on their map, despite the fast-growing volumes of production and huge discoveries. Afren’s issue of high-yield bond is a rarity from a European-listed exploration and production (E&P) upstream oil company as they tend to seek other forms of finance. Meanwhile investors in emerging markets have been warming to Africa after well-received sovereign bond issues including Gabon and Ghana, but were not so familiar with oil.

Afren’s success in raising a total of $800m before issue costs with its first international high-yield bond was the first successful international bond by a UK-listed independent E&P firm.

Afren was founded in 2004: over its short history it has succeeded in developing its assets in record time and at a lower cost than its peers. Its cash flow has grown 63% and it expects to produce between 42,000 to 46,000 bopd this year. Afren has a diverse portfolio of 29 assets in 12 countries, although fields in Nigeria remain the principal producing assets.

Planning for the bond issue started in 2010 when the government of Nigeria was also planning a sovereign bond issue. In June 2010, Afren picked Goldman Sachs, Deutsche Bank and BNP Paribas as joint book runners to work on the issue. One target was to secure a good credit rating for the company and the bond issue, eventually resulting in B-/B ratings from Standard & Poor’s and Fitch. It also launched a roadshow in the UK, Switzerland and the US, at a time when many of the investors in emerging markets would have been talking to Nigerian delegations during their own roadshow to sell the concept of their Eurobond issue. Afren decided to go ahead with the issue in the third week of January 2011, before the 2010 results became “stale”.

The Nigerian government issued its $500m sovereign Eurobond on 21 January 2011 with a coupon at 7.0%. It was 2.5 times oversubscribed and eventually issued at a yield of 6.75%. Fitch rated the sovereign bond issue BB- and S&P rated it B+.

According to Afren Group Finance Director, Darra Comyn, it helped that the Nigerian government was in the market at the same time: “They were educating the market” he told African Banker. He says sovereign debt issues help companies raise lower-cost finance – “any exposure in the market helps”.

Emerging market specialists invest

Other E&P companies in emerging markets were yielding 10%-11% and, at the end of January, Afren decided to issue $450m in bonds due 2016, with an 11.5% coupon yield but issued at a yield
of 11.75%.

The majority (85%) of investors were emerging markets specialists; 40% of the investors were based in UK and US and 11% in Africa. The price climbed in secondary trading, and Afren then opted to return to the market for another $50m at a lower price of 11.125%, with US investors snapping up 63% of the issue this time.

The bond was partly used to repay $171m of shorter-term debt facilities and reduce potential overreliance on a relatively limited number of lending banks during the global crisis and credit market uncertainty.

Lenders included Nigerian banks such as First City Monument Bank plc (FCMB), which had a balance of $33.3m at LIBOR plus 4.45% in December 2010, which was paid off two months later. Nigerian banks, pensions and other institutions are active holders of the bonds.

Afren also turned to equity markets and raised another $184.5m in July 2011 from an equity placing at 135 pence per share to support expansion into the Kurdistan region of Iraq (Ain Sifni and Barda Rash licences).

Since the issue, the bond price climbed and the yield dropped in secondary trading although it spiked up sharply in January 2012 as unrest grew and strikes in Nigeria in connection with the ending of fuel subsidies threatened production.

Investors hunting projects

In mid-January, Afren announced a significant new find at the Okoro field, which came onstream in 2008. Afren returned to the market in March 2012, successfully raising $300m with a second secured high-yield bond, also listed on the Luxembourg Stock Exchange, priced at a coupon of 10.25% and due for redemption in 2019.

The issue was 13 times oversubscribed. The proceeds have been used in March to repay the outstanding $95.9m of a $200m corporate credit facility from BNP Paribas and VTB Bank which had been raised for the Kurdistan purchase. The bond price has since climbed – by mid-June, the 2016 issue yielded 9.73% and the 2019 yielded 9.66%.

Comyn adds there are significant funds available for appropriate investments: “Investors are looking for opportunities and there is a real shortage of opportunities to invest in Africa.”

He adds that Afren was more attractive as it meets London regulatory and disclosure requirements and has excellent investor relations and disclosure of information on its website. Comyn believes that a London or New York (or Hong Kong) listing is essential to reach international investors. However, at international debt conferences he still sees only “one or two” African issuers.

Afren has no further plans to tap debt markets as existing fields, including Ebok and Okoro, are producing more than enough cash to fund planned exploration.

According to Comyn: “Afren transformed its capital structure in 2011 – cash flow from operations strengthened with the start of production at Ebok. The January 2011 bond issue enabled the group’s debt to be restructured such that it is better aligned to future investment needs and production cash flows.”

He advises other African corporates to follow the firm’s example as large funds are looking for emerging market debt: “There’s a very good market out there with a lot of investors.” He says the key is good management and building a track record in debt markets: “You need to get the proposition right. We took what we needed – we could have taken a lot more.”