An update on the loan market in sub-Saharan Africa

6 MARCH 2023

Amelia Slocombe, Head of Legal at the Loan Market Association (LMA), spoke to Miranda Abraham, Co-Head of Loan Syndications at RMB about the sub-Saharan Africa loan market. The interview was published in the LMA's newsletter on 3 March 2023.

Sub-Saharan Africa Market Update: an interview with Miranda Abraham

Miranda, published syndicated loan volumes for sub-Saharan Africa don't always give a complete picture when it comes to lending to large corporates and sovereigns on the continent. Can you tell us the types of financings you have seen over the last 12 months and how you expect this to evolve during the course of 2023?
In 2022, sub-Saharan Africa (“SSA”) saw the lowest international bond issuance for over a decade, whereas conversely the SSA loan market saw issuance double from USD 28bn to USD 56bn over the same period, with 2021 representing the lowest year of issuance in the last decade for SSA loans.  Undoubtedly the fall in bond volumes was a contributory factor to the increase in loan volumes, however the entwined, nuanced and highly complex nature of the relationship between loan and bond markets is also illustrated, somewhat counterintuitively, by the fact that pricing between bond and loan markets also completely decoupled over 2022.  As bond pricing soared to almost unprecedented, double-digit levels, issuers, horrified by sky-rocketing costs brought about by significant rises in base rates, an increasingly challenging geopolitical risk environment and bearish global macroeconomic sentiments, retreated completely from international bond markets.  The loans market however, stoically carried on, filling in many of the voids created by the more fickle bond market, and yet surprisingly pricing barely shifted.  In fact, it was only towards the end of 2022 that pricing in the SSA loan market actually began to move noticeably.

With bond markets effectively shut, many banks reported being “inundated” with requests from African sovereigns looking to put in place “loans”, that looked and felt more like bonds, and a clear trend for bespoke, long tenor, private instruments, driven by liquidity from the private debt markets and the institutional investors active there, began to emerge.  However, while there was much discussion and debate about loans to African sovereigns (and undoubtedly huge amounts of work and pitching took place) the route to market for these deals has been slow, with relatively few actually reaching a successful conclusion.  Hopefully 2023 will be the year when many of these deals finally do launch to the wider market.

Another related theme of 2022 was the trend for loans to have some kind of embedded risk mitigation, such as an insurance wrap, ECA backing, guarantee from Development Finance Institution or elsewhere or even just a Development Finance Institutional tranche, offering some “halo protection” to the loan.  Given the more challenging risk environment we find ourselves in, it seems inevitable that loans with some form of credit risk mitigation will remain an ongoing feature of the SSA loan market.  In addition to opening up pools of new investors, embedded risk mitigation can also enable current investors to commit significantly larger tickets to deals, while also having the added advantage of lowering the borrower’s cost of funding. 

Is the SSA market now catching up with other jurisdictions with regards to sustainable finance and ESG? What are some of the challenges in this regard?
It is true that the African bond market did lag Europe, and even other emerging markets, on its first green bond issuance in 2017 (10 years after EIB and the World Bank first pioneered green bonds in the wider market).  Similarly in the loan market, SSA was perhaps also a little slower to contemplate the ESG market.  However, this more considered approach to ESG lending has perhaps also carried some advantages.  Africa has observed some of the pitfalls and challenges Europe faced, and African banks have taken time to establish strong, experienced ESG teams, with sound knowledge and solid credentials.  Thus, Africa has benefitted from some “second-mover advantage” in the form of side-stepping the “en-vogue” spate of ESG loans that rushed to market in the aftermath of the Covid Crisis, and any associated accusations of green-washing that came with them.

The other challenge Africa faces is that some sectors that fit well with ESG, such as solar and wind farms, are less developed on the African continent, while on the other hand Africa is also inextricably entwined with various other sectors that do not appear to naturally lend themselves to ESG financing.  The situation is further complicated when you consider that while from an environmental perspective, sectors such as oil & gas can present challenges, from a social perspective African communities may be hugely reliant on these types of industries.  Furthermore, many would argue that good governance (probably the least vocal element of “ESG”) is actually the most important element for the African continent to get right.  Happily, Africa’s first social loan came in August 2021 with the financing of 2 Ghana hospital projects.  Hopefully the trend for loans that focus on social and governance KPIs, as well as environmental ones, will continue into 2023.

How focused are SSA borrowers and lenders on US$ Libor transition, and how successfully is the market transitioning?
Libor transitioning is another example of where the European market has “tested the water” for Africa.  After all the hard work done by the European markets and in particular the LMA, LIBOR transition in Africa has felt pretty smooth to date.  Few SSA borrowers have been overly concerned about the transition and definitely far fewer workshops or teach-ins have been requested by borrowers (and banks alike).  The market has shown little interest in amending existing deals to transition to SOFR, instead, the focus is on refinancing in due course with new RFR language.  It is true that some banks have faced some operational challenges, caused partly by smaller agency teams and capacity issues etc, and there is definitely a preference for Term SOFR, but as is often the case in the loan market, resilience and tenacity have prevailed!

End.