Citigroup Starts Program to Sell Zambia Debt-Backed Notes

Citigroup Inc. said it is opening Zambia’s local bond market to foreign investors with a global depositary note program that will meet demand for higher-yielding securities from Africa’s biggest copper producer.

The program, the second in Africa after Nigeria, offers investors access to yields more than twice that of Zambia’s 5.375 percent Eurobonds due September 2022, with rates on the government’s kwacha-denominated 10-year debt reaching 17.25 percent at an Aug. 30 auction. The notes are backed by underlying domestic bonds, with the principal debt and interest payable in the local currency.

“There’s a population of investors that have expressed interest in this market,” Scott Pollak, managing director for depositary receipt services at Citigroup, said by phone from New York on Nov. 20.

Foreign investors in the notes need to balance potential returns against swings in the kwacha when converted back into international currency, Stuart Culverhouse, chief economist at Exotix Partners LLP, said by phone from London today. The kwacha has weakened 3.3 percent over the past month, falling to 5.56 per dollar on Nov. 19, the lowest close since May 2009.

“The kwacha has come under quite a bit of pressure over the past couple of weeks so obviously investors would have to weigh that up,” said Culverhouse. “If you assume a relatively stable exchange rate, then that does look attractive.”

Fitch Ratings last month lowered Zambia one step to B, five levels below investment grade and Standard & Poor’s downgraded its outlook to negative, retaining its B+ rating.

Yields on the nation’s $750 million of Eurobonds have climbed 224 basis points, or 2.24 percentage points, to 7.4 percent since being issued in September 2012, compared with an average 150 basis-point increase for dollar-denominated sovereign African debt, JPMorgan Chase & Co. indexes show.

Bank of New York Mellon Corp. in September established American Depositary Receipt programs for three companies in Africa’s biggest copper producer. These were the first to be established in southern Africa other than South Africa.

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