Efficient Securities Markets Institutional Development Initiative. Global Capital Markets Development Department. Securities Markets Group

Efficient Securities Markets Institutional Development Initiative Global Capital Markets Development Department Securities Markets Group Agenda •In...
Author: Jared Heath
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Efficient Securities Markets Institutional Development Initiative Global Capital Markets Development Department Securities Markets Group

Agenda

•Introduction •Bond Markets in East Africa •ESMID

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Introduction • Africa’s housing & infrastructure financing needs are enormous - US$93 billion or 15% of GDP

• Bulk of infrastructure undertaken by public sector using foreign currency loans – Funding inadequate to meet all requirements – Currency risk passed on to consumers

• Private Sector can contribute in bridging the financing gap • Capital Markets can raise long-term local currency financing for infrastructure and housing – Kenya Government raised US$240 million through bond market for infrastructure – Kenya Electricity Generating Company - KenGen raised US$330 million in 10-yr bond for power generation projects 3

Benefits of Well Functioning Local Currency Bond Markets Better risk management for borrowers: • Lower interest rates • Reduced foreign currency risks • Reduced refinancing risks • Longer tenors Improved yields for institutional investors Improved ability to deal with financial crises Financial sector diversification Accelerated private sector development Expanded housing and infrastructure finance

This generates growth and reduces poverty 4

Ingredients for a Vibrant Bond Market

Capacity

Enabling Environment

Market Place

Macro Economic

Trading, Clearing, Settlement, Depository infrastructure

Bankable Projects & Sponsors

Pre-trade and posttrade transparency

Informed Intermediaries

Bond Market Structure

Informed Investors

Environment

Legal & Regulatory - Issuance Process - Market Rules

Tax Regimes

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Bond Markets in East Africa

Tenor of Fixed Income Instruments East Africa Longest

Longest

Treasury

Corporate

Bond

Bond

Rwanda*

3 Years

10 Years

Uganda

10 Years

10 Years

Tanzania

10 Years

10 Years

Kenya

20 Years

10 Years

• Floating Rate instruments

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Treasury Yield Curves Uganda, Tanzania & Kenya as at 30 June 2010 14.0000

Uganda Tanzania

12.0000

10.0000

Kenya

8.0000

6.0000

4.0000

2.0000

O/N T/N 1W 1M 2M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 16Y 17Y 18Y 19Y 20Y 21Y 22Y 23Y 24Y 25Y Source: Standard Chartered Bank Kenya

Tenors have extended and yields have recently declined 8

East Africa Cumulative New Corporate Bond Issues (US$M) Kenya has had record issuance of US$500 million in 2009, over 90% infrastructure related KenGen (US$330 million) and Safaricom (US$100 million)

700.0 600.0 Global Credit Crisis

500.0 400.0

Kenya

300.0 Uganda 200.0 Tanzania

100.0 2004

2005

2006

2007

2008

2009

“The results clearly show that we can raise most of the funds needed to realise the goals of Vision 2030 through our own capital markets,” Kenya’s Prime Minister Mr Raila Odinga on the issue of KenGen bond.

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Corporate Bond Issues - Kenya Ke nya

Industry

East African Development Bank (EADB)

DFI

Faulu Kenya

Year of Issue

Te nor

800

2004

7

7.5% Fixed

Microfinance

500

2005

5

91 day T-bill + 0.5%

PTA Bank

DFI

800

2005

7

7.80% Fixed

Athi River Mining

Cement

800

2005

5

91 day T-bill + 1.75%

Shelter Afrique

Housing DFI

200

2005

7

91 day T-bill + 1.0%

CFC Stanbic Bank (Private Placement)

Banking

600

2005

7

182 day T-bill + 1.5%

PTA Bank

DFI

1,000

2007

7

182 day T-bill + 1.0%

Barclays Bank of Kenya

Banking

1,206

2007

7

91 day T-bill + 0.6%

Barclays Bank of Kenya

Banking

740

2007

7

182 day T-bill + 1.0%

Sasini Tea & Coffee

Agriculture

600

2007

5

11.75% Fixed

Mabati Rolling Mills

Manufacturing

1,200

2008

8

182 day T-bill + 1.75%

Mabati Rolling Mills

Manufacturing

800

2008

8

13.00% Fixed

I & M Bank (Private Placement)

Banking

600

2008

7

91 day T-bill + 2.5%

Zain Kenya (Private Placement)

Telcom

5,700

2008

3

182 day T-bill + 1.75%

CFC Stanbic Bank

Banking

98

2009

7

182 day T-bill + 1.75%

CFC Stanbic Bank

Banking

2,402

2009

7

12.50% Fixed

Shelter Afrique

Housing DFI

KenGen

Infrastructure

Ksh (M)

Coupon

1,000

2009

3

11.00% Fixed, Floating (182 day T-bill +1.50%)

25,000

2009

10

Fixed 12.5%

7,500

2009

5

Fixed 12.25%, Floating 182-day T-bill +1.85%

Tourism

400

2010

5

12% and 10% fixed

Cement

1,600

2010

5

12.5% fixed and equity upside

Safaricom

Infrastructure

TPS Serena (Private Placement) Athi River Mining (Private Placement)

53,546

Corporate Bond Issues – Uganda, Tanzania and Rwanda Uganda Uganda Telecom East African Development Bank (EADB) Standard Chartered Bank Uganda Housing Finance Bank Stanbic Bank PTA Bank

Tanzania East African Development Bank (EADB) PTA Bank Barclays Bank Tanzania Standard Chartered Bank Tanzania ALAF

UGX 24,000 20,000 23,000 35,000 30,000 10,000

USD 10.5 8.8 10.1 15.4 13.2 4.4

Country

USD

% of GDP

Kenya

653.7

2.1

Uganda

58.0

0.5

Tanzania

45.4

0.3

132,000

58.0

Rwanda

1.7

0.1

TSh 9,000 6,000 24,600 8,000 15,070

USD 7 4 18 6 11

East Africa

758.8

3

62,670

Rwanda Banque Commercial Rwanda (BCR)

Rfw 1,000 1,000

45

USD 2 2

Broad range of sector have tapped the bond market Nongovernment bond markets in East Africa are relatively small ….but potential is significantly large 11

Kenya Pension Funds Investments Size of Industry estimated at Ksh 272 billion

Pension Funds Investments % in Assets Classes 2001-2008 70%

Government Securities

60%

Pension funds are natural investors in long-term assets

Other Fixed Income

50% Quoted Equity

40% Property

30% Private Equity

Diversification in last 7 years has been into equities…and recently into corporate bonds

20% Other

10% Offshore

0% 2001

2002

2003

2004

2005

2006

2007

2008

Data Source, RBA – Excludes NSSF

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Challenges to Bond Market Development – East Africa Weak Regulatory Environment • Issuance process • Tax regimes • Investment requirements • Market rules • Licensing framework

Inadequate Market Infrastructure • Trading, clearing, settlement, and depository • Transparency information collection and dissemination

Lack of Capacity • Regulators • Market participants •Project Preparation gap

• Rating agencies Small and Fragmented Markets • Lack of critical mass of issuers and investors • Inability to take advantage of economies of scale

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Lessons/Issues - – East Africa



Approval process is still long (average 6 months)



Merit based process applied



Not much differentiation with equity issues



No recognition of sophisticated institutional investor base



There is a growing institutional investor base – seeking avenues to diversify and enhance returns

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ESMID

ESMID Africa ESMID: • Efficient • Securities • Markets • Institutional • Development

A partnership between: • Swedish International Development Cooperation Agency (Sida) • International Finance Corporation (IFC) • World Bank

Foster development of well functioning securities markets to: • Broaden availability of local-currency investment instruments • Enable private sector development

INITIAL FUNDING USD 5.5 million from Sida

• Improve financing for housing & infrastructure • Create jobs and improve livelihoods 16

ESMID Africa – Current Operations

• Kenya • Uganda

East Africa

• Tanzania

(Regional Approach)

• Rwanda • Nigeria

Country Approach

ESMID Africa largely works with clusters of countries where changes have the potential to reverberate across several nations, i.e. East Africa

ESMID - Comprehensive Approach Supports all layers of a securities market Regulators MOF, Securities Commissions, Central Banks, Pension Regulators Market Infrastructure Exchanges, OTC Trading System, Clearing & Settlement System, Rating Agencies

Market Participants Issuers

Intermediaries

Investors

•Regulatory advice (issuance, investment, new products) •Institutional capacity building (training, process improvement)

•Advice on market structure and institutional arrangements •Institutional capacity building (code of conduct, process) •Capacity Building (trainings, licensing program) •Transaction support (structuring, approvals, etc.)

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ESMID East Africa Components Legal & Regulatory Assistance

Strengthening the Market Place

Capacity

Primary issuance framework for nongovernment bonds

Market Infrastructure

Certification & Licensing framework

Regulatory Framework

Asset Backed Securities

Pre-trade and posttrade transparency

Securities Training Modules

Market Infrastructure

Bond Market Structure

Bond Market Structure

Regional Training Provider

Issuers & Investors

Building

Regionalization

Transactions Support 19

ESMID East Africa Components Legal & Regulatory Framework • Improve approval process • Reduce costs • Framework for new products

Capacity Building Certification/Licensing • Training

Transactions Support • Active support to issuers and intermediaries for replicable transactions • Introduce new & innovative products

Market Infrastructure • Market Structure • Clearing & Settlement • Transparency & Information Dissemination

Regionalization • Broadening & deepening efficient capital markets • Cross border issues

• Develop regional provider

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East Africa – Achievements ACHIEVEMENTS

ACHIEVEMENTS • •





Comprehensive diagnostics and roadmaps completed Strong relationships with and buy-in from stakeholders



Regional Institute and training curriculum

Buy-in for OTC market model for bonds •

Market structure



Legal & regulatory framework

Buy-in for regionalization strategy •

Legal & Regulatory framework



Market Infrastructure



Issuers & Investors



Establishment of Institute



Development of course material



Supported closing of a US$22 million equity linked note in Kenya



Pilot of courses & training of trainers



Strong Transactions pipeline US$ 600 million.

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ESMID Africa Pilot – Achievements Buy In Strong relationships with and buy-in from stakeholders - reached over 1,000 stakeholders Comprehensive diagnostics and roadmaps completed Buy–in for full disclosure primary marker framework and OTC Bond Market Structure Buy-in for Regionalization Strategy & Roadmap

Training Developed and piloted regional training program – over 550 participants and 67 trainers trained Securities Industry Training Institute (SITI) established by the exchanges with ESMID’s support SITI is now rolling out courses across East Africa

Transactions Support for closing of US$22 million equity linked note in Kenya Monitoring and/or supporting pipeline of over US$600 million

Implementation A recognized authority on capital market development, playing a key role in policy dialogue on financial sector reforms

Support to promising issuers in infrastructure, housing and microfinance

Collaboration with EAC Secretariat on regional market infrastructure project

Leveraged US$1.1 million to support upstream transactions work

Members Bond Market Steering Committee – Kenya

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THANK YOU “ESMID has been very instrumental in coming up with a framework that we can follow in the coming future…” -Pierre Celestin Rwabukumba, Capital Markets Advisory Council of Rwanda, Nov 2008

“We at the NSE support this initiative. We know it will broaden the reach of our members in common competence and standards of dealings in the markets.” – James Wangunyu, Chairman, Nairobi Stock Exchange, Sep 2008

“ESMID has come in and provided a diagnostic on the situation on the ground…it is an independent and objective diagnostic. It is a collaborative process… they have come and brought all stakeholders on…” – Simon Rutega, CEO, Uganda Securities Exchange, Nov 2008

“The [ESMID] project comes at a time when Kenya and other African countries are grappling with the needs of their growing economies and the need to improve infrastructure.” – East African Standard, Sep 2007

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THANK YOU

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