Africa Cover Economy INTERVIEW STORY

Unlocking Africa’s Domestic Bonds Potential

Rony Lam, CEO, MCB Capital Markets

AfDB-MCB Join Hands

Report: Mohammed Abu,Accra

The African Development Bank (AfDB), through its African Financial Markets Initiative (AFMI), recently announced its move to sponsor and act as an anchor investor [USD 25 million] for the African Domestic Bond Fund (ADBF), the first* multijurisdictional fixed income Exchange Traded Fund (ETF) on the continent.

The ADBF will track the performance of the AfDB/AFMISMBloomberg® African Bond Index 25% Capped; an index comprised of African local currency sovereign bonds, and will help provide an important source of funding for local African governments, improve liquidity in local markets and create benchmarks for investors.

The AfDB’s investment is in line with its long-standing commitment to the growth of African domestic capital markets and further enhances the various financing and non-financing activities it has undertaken to provide better market access for governments and corporates.

The AFMI was designed in 2008 to promote the development of African domestic debt markets by strengthening market infrastructure and investing in local currency denominated debt. Through this ongoing initiative, AfDB continues to pursue the goals of encouraging  the creation and adoption of African bond indices,improving  liquidity in African local capital markets,contributing  to the improvement of operational aspects of African bond markets (e.g. settlement systems, data
collection and dissemination through its platform etc. among others.

ADBF will be managed by an external, duly licensed, Mauritian fund manager, namely MCB Investment Management Co. Ltd
(MCBIM or the Manager).

To find out more,ADM’s Mohammed Abu, recently talked to Rony Lam, Chief Executive Officer, MCB Capital Markets

ADM: How is the African Domestic Bond Fund (ADBF) going to work in principle in terms of currency denomination issuance for the bonds? This is in view of the fact that Africa currently doesn’t have one single currency? Is it going to be on individual country basis?

MCB:The ADBF will be the first multi jurisdictional fixed income Exchange Traded Fund (“ETF”) on the continent. The base currency of the fund will be USD and it will invest in bonds of select African countries, denominated in their local currency government bonds, with the aim to track the performance of the AfDB/AFMISM Bloomberg® African Bond Index 25% Capped.

Eight(8) African countries currently constitute the index, namely, South Africa, Nigeria, Egypt, Kenya, Botswana, Ghana, Namibia and Zambia. As such, with one vehicle the fund aims to provide access to the pan African local currency fixed income market.

ADM: What are the terms and conditions for sovereign beneficiaries to be able to access the Fund through bond issuance?

MCB: The benchmark of the fund is independently maintained by Bloomberg and at the moment, the local bond markets of the above mentioned 8 countries are included in the benchmark. The fund will invest in these 8 countries and may invest up to 20% of its AUM in the local currency debt of other African countries not in the benchmark. Other countries are expected to be added to the benchmark in the future.

ADM: Which are the primary beneficiary countries and why?

MCB: South Africa, Nigeria, Egypt, Kenya, Botswana, Ghana, Namibia and Zambia. For the reasons mentioned above.

ADM: What are the terms that do apply with respect to infrastructure financing through the ADBF?

MCB: The ADBF will invest in the bonds issued by African governments regardless of the intended use of proceeds.

ADM: What are the terms and conditions that apply for corporate bond issuance if it is going to be allowed at all? If domestic corporate bonds are not going to allowed initially how long is it going to take before it is allowed and why?

MCB: The ADBF will invest solely in government and quasi-government bonds. Corporate bonds are not part of the fund’s investment universe. By creating a fund and benchmark that provides a transparent, cost efficient.

ADM: Which sectors of economic activity for which funds sourced from the ADBF to be invested going to enjoy priority and for what reason?

MCB: The fund will not finance specific sectors or projects directly. It will be limited to investing in government bonds solely.

ADM: Will education and healthcare enjoy special priority and why?

MCB: The fund will not finance specific sectors or projects directly.

ADM: What is going to be maturity period and percentage yield for domestic bond issuance?

MCB:The benchmark has bonds with a maturity of one year or more (i.e. no bills are included).

ADM: How comparatively cost effective is transaction under ADFB going to be as against EUROBONDS? ADBF is an ETF providing access to a diversified basked of pan African local currency debt.

MCB: We expect the total expense ratio to be approx. 60bps with an AUM of $100mm. Eurobonds can range in cost depending on the credit and the maturity of the bond. Not exactly comparable. In yield terms I can say that Eurobonds are around 4-8% in USD. The benchmark of the ADBF currently has a weighted average yield of 12.88% in USD with a weighted average duration of 4.61 years.

ADM: How more appealing and cost effective is African Domestic Bonds transaction going to be than the Chinese bonds, Eurobonds and sukuks ,issuance of which is gaining popularity gradually across Africa?

MCB: By investing in the ADBF you get exposure to the local currency government bonds of 8 different African countries in a transparent and cost effective manner. This provides the investor with geographical as well as currency diversification. Other asset classes, such as Chinese bonds etc might also have a role to play in a portfolio – can’t comment on them, but the ADBF attempts to provide easy, liquid, transparent, cost effective access to an asset class that currently does not exist.

ADM: What is going to constitute the competitive edge if any of African Domestic Bonds over the other already well known bonds in the global capital markets in the immediate, medium to long term?

MCB: The African local currency bond asset class is a relatively nascent asset class and offers highly attractive premiums and diversification benefits to a global portfolio. As the asset

ADM: Thank you for your time.

Attractive returns Highlights

BADBC – Benchmark of ADBF % Return (USD)
2018 YTD (till May 16th) +5.84%
2017 +20.26%
2016 -13.93%
2015 -1.38%
2014 +3.13%

With significant correlation/diversification benefits to major asset classes.