Issue 136 • 11 April, 2008

Angola eyes new entry point on borrowing curve

Sonangol is expected to tap the structured finance market for new borrowing soon, and it will find a warm welcome from banks who see its oil-fuelled growth as sufficient to outweigh any concerns advocacy groups might have about Angola’s governance record, writes Kevin Godier.

Rumours of an intended new approach to the market by Sociedade Nacional de Combustiveis de Angola (Sonangol) for fresh funding have underlined Angola’s oil-fuelled climb up the financial ladder. The United Nations Economic Commission for Africa recently reported that GDP grew by 21% in 2007, some 12% ahead of its next African peer. Sonangol’s putative foray to tap new funds will surprise few observers in a structured finance community that has now provided 50 or so international borrowing facilities to the Angolan parastatal. “Sonangol is trying to grow, and will probably always have a need of liquidity – so it will be no shock if they come to the market again this year,” said a continental European financier, who refused to be drawn further on details of upcoming loans.

A London-based financier told African Energy that Standard Chartered Bank had been hoping to put a new syndicated loan in place for Sonangol by end-Q1 08. “The question seems to be whether it will fly in the current market at around the 1% mark,” he said. “The sub-prime fallout has led to pressures on liquidity, pricing and structures, and Angola is no exception – but there will always be a market for good deals, at the right price.”

Angola is one of the few oil producing countries to offer a steadily upward curve in output, which has generated a cushion of some $40bn in hard currency reserves and offers a variety of offtake options were Sonangol to opt for another secured financing. Yet, if Sonangol proves reluctant to refinance credits at higher margins than those at which it has most recently borrowed, “China could step into the breach again,” suggested Ian Barnes, special risks division director in insurance broker Heath Lambert’s London office. “China Eximbank and other Chinese banks extended a multi-billion dollar, oil-backed tranche to Angola two years ago, and remain very active in Africa on all sides.”

Looking further ahead, Sonangol has already disclosed plans to list, by 2010, on the New York Stock Exchange. The NYSE’s requirement for comprehensive financial transparency is certain to force greater financial disclosure by a company that traditionally operates in deep secrecy. Sonangol’s lack of transparency has facilitated its role as an independent, quasi-sovereign entity, but upset Bretton Woods institutions and others bent on making Luanda open its financing ledgers.

Infrastructure finance

As Sonangol considers its options, which include buying more stakes in local and Portuguese companies (including banks), Angola has untold non-hydrocarbons financial needs, stretching into tens of billions of reconstruction dollars for new bridges, ports, roads, hospitals and power facilities – and for which a new infrastructure financing template will need to be established.

“When you have an emerging market such as Angola, Nigeria or Zambia that receives 90% or more of its export receipts from just one main commodity, drawing investment and lending into the infrastructure sector represents the next step up the financial ladder, and can take time to structure,” said one banker canvassed by African Energy.

Some financing models have been laid down for state-owned telecoms, diamond mining and aircraft companies, but the volumes involved have rarely been substantial. One of the more innovative steps was taken several years ago by Deutsche Bank, which extended several hundred million dollars in maximum five-year credits for the Ministry of Finance (MoF), under a framework agreement originally signed in 2003. The deals were extended on strictly commercial terms in support of equipment purchases for social and reconstruction projects, and involved risk-sharing between Deutsche Bank and private investors.

Market bottlenecks

Bankers believe the private risk insurance (PRI) market will almost certainly be required to back any major new borrowing structures. Rates for Angola in the global PRI market have fallen significantly during the past two years in tandem with oil price increases. “Sonangol credits are taking up much of the [market’s] capacity – and multi-year [contract frustration] CF cover on Sonangol is priced at about 0.9% per annum, or around 70% of the lending spread,” Barnes said.

PRI market cover for MoF-guaranteed reconstruction projects is offered at “around 50% more than Sonangol credits”. Meanwhile, some “quite chunky confiscation-type cover could be required down the road for several mining projects, especially on the diamond side,” Heath Lambert’s Barnes observed.

Most comments offered to African Energy laid heavy stress on the frantic activity across Luanda, where cranes dominate the skyline, and on the red tape and graft that appear to permeate business dealings. “Flights are packed, and hotel rooms are very difficult to come by, even at $350-500 a night,” said Texel Finance’s Africa guru Ian Henderson. “Huge levels of consumables are being imported, but getting goods in is a logistical nightmare due to congestion at the port, which can trigger delays of as long as six to eight weeks.”

The bottlenecks extend to financial markets, in which “western investors of any ilk are generally frowned upon by officials at the central bank and Ministry of Finance, for both cultural and generational reasons,” said an investment banker who recently visited the former Portuguese colony. “Sonangol, the telecoms company and the domestic banks are absolutely flushed with money,” he added. “The plan is to soak this up through government bond issues” – such as a five-year, $1bn issue in late 2007, which was mainly absorbed by local investors, and a forthcoming seven-year, $1.5bn issue planned for mid-2008. According to this banker, “they don’t want foreign investment to interfere in this process, and have not been able to go to the Eurobond market yet – which is what most investment banks are advising – as Luanda has not divulged enough information to get a sovereign credit rating.”

Similarly, the long-standing plan to launch the Angolan stock exchange and derivatives market – Bolsa de Valores de Luanda – was described by one observer as “window dressing” to please the IMF and World Bank. Apart from government bonds and some old Sonangol debt paper, the sole investible Angolan asset is property, demand for which has created a recent bubble. “Some people are going in directly and buying real estate in Luanda, or buying land in the agriculture sector,” the banker added.

Trade finance flows increase

The greater foreign interest includes trade, which is flowing in from Latin America, China and the Far East, and increasing from the traditional South African supply market. Trade financiers are faced with confirming letters of credit (l/cs) that can be sizeable, and which emanate from a local banking sector still seen as under-capitalised, as was the case with Nigeria before the recent market consolidations.

In African Energy’s soundings of trade finance specialists, BES Angola was pinpointed as one of four banks seen as acceptable risks for l/c confirmation by Malta-based FIMBank, which specialises in African risks. The others cited were state-owned Banco de Poupança e Crédito (BPC), Banco Africano de Investimentos (BAI) – in which Sonangol has invested – and Banco Fomento Angola. “Generally spreads in Angola have come down – this trend has, however, slowed down due to the liquidity issue in the market,” said FIMBank president Margrith Lutschg-Emmenegger.

At South Africa’s Nedbank, general manager for customised trade solutions Steve Meintjes reported “receiving more enquiries and business, because there is lots of trade going on between SA and Angola – and there will definitely be growth in this business in the next couple of years.” Nedbank in SA deals only with private sector banks; dealings with state entities go through Nedbank London. “We have lifted our Angolan market restrictions substantially, although we are still quite wary,” Meintjes said. The bank has financed consumer goods, foodstuffs, and infrastructure equipment.

Another trade financier said the process of obtaining decent-sized confirmation lines can be aided by Portuguese shareholdings in issuing banks, stressing that state-owned banks suffer from insufficient financial transparency. “Private banks tend to be better managed,” he added, noting that Absa Bank had invested in Banco Comercial Angolano, Banco Regional do Keve has a Russian shareholding and Standard Bank has set up a Luanda office.

“The pricing versus liquidity equation is the big challenge”, the banker commented. “Due to the big foreign interest in the oil industry, Angolan banks get a false sense for the pricing – and should see that people who lend to Sonangol at 1% are dealing with a vastly different credit risk. One could go as far as saying that at the rates currently achieved, they are doing so for relationship purposes or for the purposes of market exposure achieved.”

Syndicating l/cs for $25m or more can open up tensions over this mismatch, the financier said. “The Angolan issuing banks can want pricing of 2% or below, whereas the international bank market may see 3% as a fairer price, based on the risk perceptions of Angola’s non-oil sector. The secondary market is not quite as liquid, so you will need an idea of who in the market will look at the risks. There is a growing interest from Chinese banks, and some, but not all of the South African banks are taking more risk. Also, the head offices of Portuguese banks can give bigger, cheaper-priced lines for their Angolan subsidiaries.”

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