Rwanda Seen Boosting Debut Eurobond After Demand for Zambia

Rwanda, which starts marketing $400 million of debut Eurobonds this week, is counting on investor demand for African debt that enabled Zambia to increase the size of its first dollar bonds in September and Tanzania to lure four times the amount it sought last month.

The East African nation must issue at least $500 million of the debt to make JPMorgan Chase & Co.’s emerging-market indexes used to measure performance, said Stuart Culverhouse, chief economist at Exotix Ltd. in London. Zambia, rated one level above Rwanda at B+ by Standard & Poor’s, increased the size of its maiden dollar bond sale to $750 million from $500 million in September. Tanzania borrowed $600 million in a private issue after luring $2.5 billion in bids.

Rwanda is seeking funds to accelerate growth in an economy that doubled to about $6.4 billion in the nine years through 2010 as it rebuilds from the 1994 genocide that killed more than 800,000 people. President Paul Kagame is boosting transport links and energy supplies and promoting regional trade with the aim of lifting the land-locked tea- and coffee-growing nation into a middle-income economy by 2020.

“When they get investor feedback, I think it will pretty unanimously say ‘well why don’t you increase the size, that will be much better,’” Culverhouse said by phone yesterday.

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Rwanda will debut in the international bond market as African countries from Angola to Kenya plan record maiden issues, while Nigeria and Ghana consider returning to capital markets. Tanzania, East Africa’s second-biggest economy, hired New York-based Citigroup Inc. in February to help prepare for a credit rating before issuing its first Eurobonds. Angola plans to sell $2 billion of bonds after the issue of $1 billion of seven-year debt to selected investors in August.

Rwanda’s bonds “will have to be priced at a premium to other sub-Saharan African Eurobonds given the relatively more fragile fundamentals and the size of the issue,” Samir Gadio, an emerging-market strategist at Standard Bank Group Ltd. in London, said in an e-mailed response to questions. “Rwanda is a landlocked country with a limited export base and relies on foreign aid for its fiscal needs.”

Yields on Zambian notes due September 2022 have climbed 27 basis points, or 0.27 percentage point, to 5.44 percent since being issued on Sept. 17. Rates on Ghana’s dollar bonds due October 2017 have dropped 22 basis points this year to 4.73 percent. Yields on Nigerian securities due January 2021 have declined 10 basis points since the end of 2012 to 4.01 percent by 1:45 p.m. in London.

Investor Meetings

The international bonds from Rwanda, rated B by S&P with a stable outlook, may be priced to yield 7 percent to 8 percent, according to Culverhouse.

While the nation’s external debt is low, “given the modest size of the economy, $400 million is already a meaningful amount to borrow,” Gadio said. Talk of the government increasing the size of the offer is “pure speculation,” Pichette Kampeta Sayinzoga, permanent secretary in the finance ministry, said in a mobile-phone text message reply to questions today.

The government appointed BNP Paribas SA and Citigroup as lead managers for the 10-year bond offering, Finance Minister Claver Gatete said in mobile-phone text messages yesterday. The banks will arrange investor meetings in Asia, Europe and the U.S. starting tomorrow, central bank Governor John Rwangombwa said in comments posted on Twitter.

“If they get the feeling that’s it’s going to be massively oversubscribed in the same way that Zambia was, then they could” increase the debt offer, Shilan Shah, Africa economist at Capital Economics Ltd., said by phone from London yesterday. “They wouldn’t want to overburden themselves, but at the same time, if it’s yielding something low then another $100 million wouldn’t be the end of the world.”

‘Remains Vulnerable’

Rwanda’s economic expansion may slow to 7.5 percent this year from 7.7 percent in 2012, Paulo Drummond, the International Monetary Fund’s mission chief to the country, told reporters in the capital Kigali yesterday. The main risks to growth include aid cuts and project delays, he said. About 40 percent of the country’s budget is financed by grants, making up 11 percent of gross domestic product in 2010-2011, according to the World Bank.

“It is a country that remains vulnerable to shocks, to donor sentiment,” Yvonne Mhango, a Johannesburg-based economist at Renaissance Capital, said by telephone yesterday. “They’re still in a volatile region of Africa.”

Last year a United Nations group of experts accused Rwanda of supporting M23 rebels in neighboring Democratic Republic of Congo’s mineral-rich east, a charge Rwanda denies. Several countries cut aid to Rwanda because of the accusations. The government cut spending in the 2013 fiscal year by 54 billion Rwandan francs ($85 million) following reductions in aid.

Currency Weakness

The country ranks eighth out of 185 countries for the ease of starting a business, according to the World Bank. Rwanda ranks 52nd globally in the World Bank’s measure on the ease of doing business, the highest in sub-Saharan Africa after South Africa. The currency weakened 0.1 percent to 637.36 per dollar by 2:47 p.m. in Kigali, the lowest level since June 1993.

Rwanda will use $200 million to repay loans on the Kigali Convention Centre and a development plan for RwandAir, the national carrier, according to a copy of the prospectus obtained by Bloomberg News. Another $150 million will be spent completing the center and $50 million on a hydropower plant, according to the prospectus.

“The tight valuations of most sub Saharan Africa and frontier market Eurobonds are the product of loose global liquidity conditions that we see persisting,” Gadio said. “Other prospective African issuers should take advantage of these exceptionally favorable market terms.”

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