Gabon Revises Guidance Upward as Eurobonds Seen as Expensive

Gabon increased the yield guidance on Eurobonds it plans to sell as part of an exchange of $1 billion of existing debt after initial rates were criticized by Standard Bank Group Ltd. and Jefferies Group Inc. as too low.

Rates on the central African oil producer’s securities will be about 6.5 percent, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. The minimum yield level was first set at 6.125 percent, according to a Dec. 2 statement sent by Citigroup Inc., Deutsche Bank AG and Standard Chartered Plc, the arrangers for the sale.

Gabon, which first sold Eurobonds in 2007 with a coupon of 8.2 percent, is replacing debt due 2017 through a combined exchange and tender offer. The new notes will mature in 2024, according to the person. There should be good demand at the revised guidance, said Richard Segal, the London-based head of international credit strategy at Jefferies Group.

“I considered the original guidance fair to slightly expensive, so the new figure seems a little more realistic,” he said in an e-mailed reply to questions today.

Yields on Gabon’s existing securities have risen 30 basis points, or 0.3 percentage point, this year to 3.78 percent. That compares with an average increase of 155 basis points for dollar-denominated sovereign African debt, JPMorgan Chase & Co. indexes show, as the Federal Reserve considers paring stimulus that spurred demand for riskier emerging-market assets.

‘More Adequate’

“The latest yield guidance looks more adequate than what the market expected,” Samir Gadio, a London-based emerging markets strategist at Standard Bank, Africa’s biggest bank, said by e-mail today. “At 6.5 percent the bonds will be more appropriately priced given the country’s fundamentals relative to other sub-Saharan African oil producers.”

Gabon is considered a middle-income nation with per capita income of more than $11,000 even as a third of its citizens live in poverty and 20 percent of working-age people don’t have jobs, according to the International Monetary Fund.

The country in September lowered its 2013 growth forecast to 6.1 percent from an earlier projection of 7.1 percent and compared with a rate of 5.3 percent last year. Expansion, which has been buoyed by rising public investment, is forecast at 6.8 percent in 2014, according to the IMF. Tullow Oil Plc and Total SA are among companies operating in Gabon.

‘Scream’ Value

Gabon’s yield guidance compares with 6 percent for similarly rated Nigerian dollar bonds due 2023. Both sovereigns are rated three levels below investment grade at BB- by Standard & Poor’s and Fitch Ratings. Gabon’s guidance “offers some value, but as you might expect it doesn’t scream huge value,” said Stuart Culverhouse, chief economist at investment bank Exotix Ltd. in London.

Yield guidance above the country’s 2017 notes suggests Gabon’s authorities know the existing bonds are expensive and “they’re essentially saying their country risk spread should be wider,” Culverhouse said in e-mailed comments today.

An investor roadshow ends today and pricing is expected tomorrow, according to the person.

Before it's here, it's on the Bloomberg Terminal.