Global capital markets buoyant, but African deals down

Global investment banking has been doing remarkably well, despite the restrictions imposed by Covid-19, but African deals are down. Rafiq Raji reports.

Global investment banking has been thriving despite the pandemic. According to market data provider Refinitiv, global investment banking deals by volume peaked year-to-date (August 2020) in April, with loan syndications and debt capital markets (DCM) dominant. Mergers and acquisitions (M&A) picked up significantly in June and July, but halved subsequently in August.

Bankers almost certainly miss the excitement of the travel and socialising associated with making deals in the past. Even those who probably complained about the jet lag, the monotonous hotel rooms, and many missed anniversaries and birthdays, are likely to be feeling nostalgic about ‘the good old days’. The pandemic has not got in the way of getting work done, though.

Pitch decks, which with the benefit of hindsight were needlessly printed in hard copy for distribution, are being availed electronically but with enhanced security features, to mimic the restricted viewing of the paper versions. This was increasingly so before the pandemic in any case. Face-to-face meetings and roadshows are also being conducted via online video conferencing.

Securities trading also continues with little hitch, albeit with more anxious executives, as traders place bets from home, away from close scrutiny and using less sophisticated equipment. Still, not a few managing directors probably wonder at how much they have been able to get done with less fuss. Undoubtedly, many of these new practices will endure after the pandemic, although it is quite likely that there will be a renewed desire for in-person social interactions at the point of onboarding new clients and striking new deals.

As it is usually the case that most deals are with existing clients, however, the hearty laughs and back-slapping during meetings, over meals and playing golf are in general likely to be much reduced, if not entirely a thing of the past.

Buoyant global capital markets

Despite myriad Covid-19-related challenges, global debt and equity capital markets have actually recorded significant annual increases in deals in the year-to-date.

Global debt proceeds of $6.8trn from 17,714 issues were recorded for the year by Refinitiv (as at 20 August), up 31% from $5.2trn for the same period last year.

Global initial public offerings (IPOs) have been quite decent as well. As at late August, the industry total was $87.4bn, 9% lower than the $95.6bn of IPO proceeds in August of the preceeding year.

M&A and loan syndications have understandably not been similarly buoyant. But that is likely to change from Q4-2020 onwards. Global announced M&A totalled $1.7trn in value YTD (20 August), down 32% from $2.5trn the same time last year.

Global loan syndications are down significantly as well, by a quarter at $1.9trn YTD from $2.5trn in the same period in 2019.

That said, fees have been generally decent, as suffering firms restructure their operations to fit with new realities. Global investment banks earned about $65bn in the year to August, just 7% shy of the $69bn earned industry-wide by the same time last year.

With many corporates unlikely to survive on their own even with the best advice, there are realistic expectations of an impending M&A boom.

African deals down, prospects robust

Except for Equity Capital Markets (ECM), African investment banks have had a poor year thus far, even allowing for the pandemic-instigated losses. African ECM transactions of $1.9bn in 2020 thus far to August are quite remarkable, though, when juxtaposed with the 2019 total of $4.7bn, when equity deals were at a 10-year low.

M&A deals are down by half relative to last year. Debt Capital Market (DCM) deals are picking up but still down about 10% from 2019 levels. Loan syndications are also down a fifth in the year.

There will probably be a pick-up in M&A activity later in the year. But there is not likely to be significant movement until next year.

DCM may end up being at par with last year’s performance or actually do better, however. Activity in Africa’s secondary equity markets is varied. At a webinar titled “Review of Africa’s Capital Markets Between 2010 and Q1 2020”, hosted by the Making Finance Work for Africa (MFW4A) Secretariat and PricewaterhouseCoopers (PwC) Africa in May 2020, Geoffrey Odundo, chief executive of the Nairobi Securities Exchange, asserted “capital markets in East Africa have taken a hit, with a 20% decrease in trading volume since the beginning of Covid-19.”

In contrast, trading volumes increased threefold on the Ghana Stock Exchange between January and April 2020, says Daniel Ogbarmey Tetteh, director-general of Ghana’s Securities and Exchange Commission (SEC), albeit buoyed by domestic investors.

According to analysis by PwC using data from Dealogic, $41.6m was raised via IPOs on the continent in the first quarter of 2020, with Airtel Malawi raising $28.6m and Emerald Co. securing $12.9m. $1.4bn was raised via follow-on (FO) offerings in Q1-2020 as well, with South African firms dominant at 84.3% ($1.18bn) of FO capital raised.

Morocco was a distant second at 9% ($125m), and Tunisia third at 5% ($70m). Ghana recorded $22m FO deals in the period too, coming fifth.

The top five Q1-2020 Africa ECM deals were for the following South African companies: Brait SE ($375bn), Gold Fields Ltd ($251m), Sibanye-Stillwater Ltd ($155m), Foschini Group Ltd ($130m) and Transaction Capital Pty Ltd ($108m).

In February, Nigeria’s Bank of Industry raised a €1bn syndicated loan, arranged by Afreximbank and Credit Suisse, deservedly winning African Banker’s Debt Deal of the Year Award in late August.

The Government of Ghana also raised a three-tranched $3bn eurobond in the first quarter of the year. Understandably, there was a lull in activity in Q2-2020. But even then, Nigeria’s Dangote Cement Plc issued a 12.5% fixed rate bond in April of about $400m in local currency.

According to GCR Ratings senior analyst Funmilayo Abdulrahman in Lagos, “This debt issuance, which is the largest by a non-financial institution corporate in Nigeria, indicates the capital market’s depth amidst the macroeconomic challenges.”

Abdulrahman believes “the prevailing low yield environment and the excess financial system liquidity provides the necessary support for capital raising.” 

Without a doubt, medium to long-term prospects for African investment banking remain robust. Moody’s senior vice president and banking analyst Constantinos Kypreos tells African Banker that while “deals are expected to be scarce in the current operating conditions, longer term the potential for capital markets development, consolidation within the banking sector, initiatives to address Africa’s huge infrastructure gap, and potentially higher FDI and implementation of the Africa Continental Free Trade Area (AfCFTA) agreement, to mention a few [factors], will support growth and related investment banking deals.”