High appetite by subscribers signals bright future for new initiative on local stock market
The manner in which the Note programme issued by the African Development Bank (AfDB) has been received on the Uganda Securities Exchange has surprised and encouraged stakeholders in Uganda’s securities market. Following the granting of clearance by the Capital Markets Authority (CMA) - the regulators of the industry- AfDB opened books on its Shs 125 billion Medium-Term Note (MTN) programme. The first tranche of the programme - a 10-year Shs 12.5 billion bond was over-subscribed by 50% - receiving Shs 18 billion. The institutions that showed most appetite for the bond included the National Social Security Fund (NSSF), Standard Chartered Bank, Stanbic Bank, and Pine East Africa among others.
The bank, which expects to issue the next tranche before year end, was confident that the new initiative would register even more success in future in the Ugandan market. A second tranche of the triple-A-rated bond, likely to be the same size as the first bond, is expected before the end of the year. The World Bank’s International Finance Corporation (IFC), which is also set to issue another $2.6 million domestic bond programme before year end, would also be encouraged by the success of the AfDB’s Note. Proceeds of the bond sale are to be used to provide local currency loans to AfDB clients who have been struggling to secure long-term shilling loans. Speaking at the official launch at the USE on August 2, Patrick Khaemba, the AfDB resident representative, said the first tranche was a “testament to the potential that exists in the Uganda domestic market for financing development initiatives through long term bond issuances.”
Part of the funds raised will be used to fund the bank’s projects in Uganda including infrastructure and others, but the bank already holds sufficient foreign currency in liquidity, which it uses to finance foreign currency loans. Under the local currency initiative, the bank issues bonds in African domestic currencies when there is a transaction to be funded by the bank in that currency and the bank is able to raise the local currency efficiently at competitive terms.
“In Uganda the bank has established a programme that will enable swift issuance when the need arises,” Khaemba said. “We will continue to tap into this programme as and when our Uganda shilling funding requirements arise.” Finance Minister Maria Kiwanuka, who was the chief guest at the launch of the Note, said such initiatives were important in deepening and broadening the financial sector. The government too, she added, is looking at avenues to raise funds from the public to finance infrastructure development, so the performance of the Note would be a key indicator of how successful such initiatives would be in future. “We shall observe the performance of this Note Issue with a lot of interest to ensure that when we decide to raise funds on the markets we can do it smoothly,” she said. The bond issuance is part of a wider initiative of the bank in which it strives to fund part of its lending activities with African currencies to the extent that underlying loans by the bank are better suited for this funding. He said that resources raised in domestic African currencies will supplement hard currency funding that the ADB group will continue to provide.
But the Ugandan note is said to be “a landmark bond” in that unlike previous African currencies linked bonds issued by the Bank, all coupon and principal re-payments would be made in shillings and there would be no currency swap attached to the transaction. The coupon for the AfDB bond is to be re-priced at two year intervals will be pegged at 85 percent of the yield on Uganda’s two-year government bond benchmark. However, the future tranches may have different reference rates. But some analysts have questioned the pricing of the bonds due to the prevailing high interest rate regime on the market. Foreign interest in Ugandan debt grew late last year as soaring inflation pushed Treasury bill and bond yields to record highs, but interest has since waned as yields have shown a slow down. Year-on-year inflation fell for the fifth straight month to 14.3 % in July from 18% in June, thanks to a drop in food prices, which prompted the Central Bank to slash its rate to 17%. But generally, experts are excited about such the Note initiatives, saying besides the direct benefit of raising funds to finance the bank’s lending operations, it also encourage domestic resource mobilization to finance development initiatives in the country and thereby reduce the over reliance on commercial banks and foreign funding that can be subject to volatility. Also, such bonds encourage the development of capital markets since all the players in the sector including regulators, investors, advisors, and traders acquire more practical experience with respect to different categories of issuers, particularly in a market where issuance occur less frequently. Also risks involved in foreign currency conversions are eliminated and such bonds allow domestic investors to diversify their bond portfolios to include a new asset class thereby reducing the overall risk of their investments. Joseph Kitamirike, the USE chief executive officer, pledged support to other institutions that would follow suit.
“We call upon other institutions to do the same and we will give them all the necessary support,” he told journalists on the sidelines of the event.