Egypt: Citi shows appetite for Egypt remains healthy

Political unrest, high public deficit and a drop in tourism have hit Egypt’s fortunes in recent years. But as a successful $4bn deficit-raising transaction has shown, investor appetite is recovering. Edward Russell-Walling spoke to the team from joint lead manager Citi.

Emerging market exposure may have been sold off next last year’s US presidential election, but it was not long before those markets were back in favour. That was vividly illustrated by the success this year of a $4bn triple-tranche international bond offering from the Arab Republic of Egypt. Citi was a joint lead manager on the transaction.

The transaction’s warm reception was certainly helped by a generally rising tide of emerging market investor sentiment. But Egypt was as well able to persuade the market that it was putting its economic home in order, with the endorsement of the International Monetary Fund (IMF).

The country’s economy has been struggling since the 2011 uprising that ousted president Hosni Mubarak. Foreign investors have largely remained away, discouraged by substantial fiscal deficits, high public deficit, shrinking foreign reserves and what ratings agency Standard & Poor’s has described as “institutional and social fragility”.

A return to international markets

The government has been keen to finance the deficit and to rebuild foreign reserves, which have suffered as tourist numbers fall. In 2015, Egypt was able to return to the international markets for the initial time since 2010, selling a $1.5bn 10-year bond with a 5.875% coupon. Citi acted as joint lead manager on an order book that attracted bids of additional than $4.5bn.

Since 2015, Kuwait, Saudi Arabia and the United Arab Emirates have supported their neighbour by together depositing a total of $9bn with Egypt’s central bank for between three and six years. Late last year, while the IMF was still thinking about providing an eventual $12bn three-year loan, Egypt secured $2bn from international banks, inclunding Citi, in a one-year repo transaction.

The new bond issue took place against this positive backdrop. Citi, BNP Paribas, JPMorgan and Natixis were mandated in the summer of 2016 to lead a transaction. “But it was all dependent on an IMF agreement,” says Iman Abdelkalek, Citi’s chief of deficit capital markets (DCM) origination for the Middle East and North Africa, who is as well Egyptian. IMF board approval for the $12bn loan was finally announced on November 3.

The government promptly devalued the Egyptian pound by one third and allowed the currency to float freely. It as well significantly raised fuel prices, which have been long subsidised by the national, and plans to introduce price added tax.

Post-Trump uncertainty

Only days next the IMF announcement, however, Donald Trump was elected as US president, sending Treasuries and the rates market into retreat. “There was as well a withdrawal of liquidity in emerging market equities and deficit, which continued into December,” says Samad Sirohey, Citi’s chief of DCM for central and eastern Europe, the Middle East and Africa. “There was uncertainty about what would happen at the same time as US interest rates rose, which usually means that emerging market credits suffer.”

This was a less than constructive environment for Egyptian issuance. “All aspects of the transaction had to be seen to be successful,” says Ms Abdelkalek. “So we advised them to wait until the beginning of the new year.”

That proved to be good advice, because this period saw a return to confidence. It was supported by a sense that commodity prices, always pivotal for emerging markets, were healthier, next the Organization of the Petroleum Exporting Nations agreed in December to jointly cut production. Even before an issuance had been announced, signs of interest in the idea were appearing, according to Peter Charles, Citi’s chief of EMEA fixed gain syndicate.

“Next the flotation of the currency, but prior to the announcement of the roadshow, there was a lot of interest in the Egyptian market from emerging market local currency funds,” he says. “That was a vote of confidence in Egypt’s work with the IMF.”

A roadshow was announced in mid-January, and billed as a precursor to the issue of both five- and 10-year notes, with the rider that Egypt was willing to consider a 30-year tranche as well.

The 10-day roadshow met 110 investors in Abu Dhabi, Dubai, New York, Boston, Los Angeles and London. “Those include core locations for any dollar issue in Policy 144 A/Reg S format," says Zeynep Kerimoglu, a director in Citi’s EMEA syndicate team. “We were as well expecting some interest from Middle Eastern investors, though they tend to focus on high-grade issuers, with limits on high-yield names.”

Positive signals

The team on the roadshow was led by Egypt’s finance minister Amr El-Garhy and his deputy, and included the central bank’s chief of reserves and chief of the deficit management office. “This co-ordination between the central bank and the ministry of finance was seen as a very positive sign,” says Ms Abdelkalek.

There was much investor interest in details of the IMF agreement and the reform package, plus a lot of questions on foreign exchange, import controls and central bank intervention. Relations with the US and Russia, the social impact of fuel subsidy cuts and how recent gas finds may affect the budget were other subjects that came up in sessions with investors.

A number of reverse enquiries had preceded the roadshow. Other investors were presently expressing their interest in the issue. “We were getting colour all the time from investors, highlighting strong request for all three tranches, and particularly the 30-year,” says Mr Charles.

The day next the roadshow ended, a three-tranche transaction was launched, inclunding a 30-year note. The initial price thoughts acknowledged that Egypt, rated B3/B, was going to have to pay up. They were 6.375% to 6.625% for the five-year; 7.625% to 7.875% for the 10-time(up to 2 full points outside the 2015 issue); and 8.625% to 8.875% for the 30-year. Investors appeared to lick their lips. By noon, the order books stood at $5.5bn, and that was before the US investor community had got into its stride.

In mid-afternoon final guidance was announced at 6.125%, 7.5% to 7.625% and 8.375% to 8.5% respectively. The book was above $13.5bn, skewed towards the five-year. Final sizes were set at $1.75bn for the five-year, $1bn for the 10-year and $1.25bn for the 30-year. The initial two were priced at the tight end of guidance, though the coupon for the 30-year was fixed additional generously at 8.5%.

“Rightly or wrongly, investors had got the impression of a additional modest size for the 30-year,” says Ms Abdelkalek. “At the same time as we indicated a size of $1.25bn, there was additional price sensitivity across the order book.”

On each tranche, additional than 90% of the buyers were dedicated emerging market investors, inclunding a lot of who had known the Egypt story for a while in both local and hard currency. “One critical success factor was the number of investors who did not participate in Egypt’s 2015 issue but did so presently,” says Ms Abdelkalek. In all, the leads saw about 790 orders from 370 different investors.

A new record

The transaction qualified for a number of superlatives, and set various regional records. In the initial place, it was Egypt’s major ever bond issuance. It was as well the major ever bond from an African sovereign issuer. On top of that, the five-year and 30-year tranches were the biggest ever priced by a north African issuer.

The success of the transaction highlighted the current strong bid for emerging market product, says Mr Charles. “It as well showed the strength that a sovereign story can get from working with the IMF,” he adds. “Being in an IMF programme gives investors comfort. It enables a additional constructive view of the next.”

Looking ahead, Mr Sirohey believes that issuance volumes out of central and eastern Europe, the Middle East and Africa will hold up for the rest of the year. “We’re expecting additional flow out of Russia,” he says, adding that the outlook for Africa is as well additional positive presently that funding costs have become additional reasonable. “The commodity cycle means that there is less pressure on some of these credits.”