Zambia seen paying 8% – plus yield on new dollar bond

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However, investors say its days of achieving sub-6 per cent yields are past and that it may have to pay more than 8 per cent.

Zambia’s was one of the first in a wave of African dollar bonds to launch in recent years, and one of the best received, but it has underperformed other sub-Saharan African Eurobonds in recent months.

(READ MORE: Eurobond issuance on hot pursuit in Africa)

That reflects the impact of US stimulus withdrawal, which has pushed up yields across emerging markets, and a tumble in the price of copper as the economic outlook darkens for giant resources importer China.

Zambia’s kwacha currency has also hit record lows.

A roadshow for the new bond reaches its final leg in London on Thursday and Friday, according to Thomson Reuters news service IFR.

The yield for a new 10-year dollar bond should be at least 8 per cent, said Stuart Culverhouse, chief economist at frontier markets broker Exotix.

“It’s more expensive than Zambia paid two years ago – maybe they should go a bit higher than 8 per cent, given uncertainties about the global outlook and copper prices.”

Copper has dropped 20 per cent in price to 6,700 US dollars a tonne, from 8,400 US dollars in September 2012. 

(WATCH VIDEO: Investors expect increase in Eurobond issuance)

Zambia’s debut 750 million US dollars 10-year bond was oversubscribed by a spectacular 15 times when issued 18 months ago at the height of investor excitement about frontier market debt.

It benefited from investor demand for higher-yielding debt as the Federal Reserve’s quantitative easing programme – which it has now started to wind down – depressed US yields.

The yield on Zambia’s existing bond has risen by more than 200 basis points to 7.8 per cent, according to Tradeweb, and has underperformed similar debt.

New bonds usually command a premium to encourage switching from existing debt.

“I would presume they would want to do a 10-year, a good starting point would be 8.25-8.50 per cent,” said Richard Segal, analyst at Jefferies.

But a juicy yield will still bring demand for the B/B-plus rated credit, said Angus Halkett, emerging debt fund manager at Stone Harbor.

“Zambia has widened quite a lot, you could argue it was too tight to begin with. There has to be a price at which people will come in and buy.”