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African yields draw the crowds

Credit: REUTERS/PHILIMON BULAWAYO

African-related credits were able to dangle enticing yields in front of investors last week, with Vivo Energy and First Quantum Minerals both securing positive results.

LONDON, Sept 18 (IFR) - African-related credits were able to dangle enticing yields in front of investors last week, with Vivo Energy and First Quantum Minerals both securing positive results.

Vivo completed a journey it started in 2018 as it made its bond market debut on Thursday with a US$350m seven-year non-call three note at 5.125%.

The company (Baa3/BB+/BB+), which is a distributor and retailer of Shell and Engen-branded fuels and lubricants in Africa, began marketing the bonds at the 5.375% area.

One investor reckoned pricing looked tight, while a banker away thought that 5.5% might have been the point where some accounts would have drawn a line.

But a lead said that the pricing strategy had been based on five days of marketing.

"It's a crossover credit and a consumer business," said the lead.

"Lower rated Double B telecoms – Millicom or MTN – trade in the mid-high 4s. On relative value it looks attractive versus sector comps in Latin America like Ultrapar or Cosan. People have also been referencing higher-rated Raizen."

Some investors liked the value on offer.

"It's quite cheap considering it still has one investment-grade rating," said Olga Budovnits, a portfolio manager at Main Partners.

"The biggest issue with the company is potential hardcore lockdowns in their markets which would substantially reduce the usage of fuel in the country and interrupt revenue streams. But the company managed to go though spring lockdowns in pretty decent form. And with a lack of other infrastructure, cars and thus fuel is the lifeblood of the economy."

Vivo operates in 15 countries under the Shell brand and eight countries under the Engen name.

"There's no denial it's a complex story operating in 23 African countries. We had key questions on the road about the ability to upstream cash, although with Vivo's clean record investors got reassured on that point," said the lead.

"In the order book we had an extremely high hit ratio from the virtual roadshow meeting. Every single investor who met these guys on the road was convinced by the credit story."

The notes will take out short-term bank debt due in 2022 with longer-term bond financing. The lead said the book was there to take a larger amount, with a potential full refinancing of outstanding debt and a revolving credit facility totalling around US$400m–US$425m.

"We could have very easily allocated more than US$350m and not create new debt, but the issuer is price sensitive and decided to remain disciplined," the lead said.

Vivo pulled its debut in June 2018, being one of a number of issuers to shy away from the market during a bout of volatility.

Global mining company First Quantum Minerals was also in the market on Thursday, selling an upsized US$1.5bn seven-year non-call three at 6.875%.

The offering was increased from the initial target of US$1bn, and came comfortably inside IPTs in the low 7s.

"FQM proved that anything with a high yield gets interest at the moment," said a lead.

"We saw the 2026s at 6.5%, so if you take into account the curve extension then it's a 20bp–25bp NIP for a Triple C rated credit, it's pretty impressive."

FQM's new notes are rated CCC+ by S&P and B– by Fitch.

The amount raised means FQM, which is listed on the Toronto Stock Exchange, can both repay US$575m of its revolving credit facility and redeem its US$425m 2022s in full.

The company amended the financial covenants on its US$2.7bn term loan and revolving credit facility in April to give the company headroom during the uncertainty caused by the coronavirus.

The net-debt-to-Ebitda ratio was increased from 4.75x to 5x for the third and fourth quarters of 2020, reducing to 4.75x in the first and second quarters of 2021 and to 4.5x in the third and fourth quarters.

"It's very much a US high-yield name for historical reasons, such as the listing in Canada, and they've executed a lot of deals in US high-yield style," said the lead.

"In the last two trades, though, there has been an increase in EM dedicated funds. By and large it's been an Africa play but as operations in Panama get up and running, it will in effect become a Latam credit, or more balanced at least."

Zambia is the primary source of FQM's cashflows, but the link between the company and country should weaken as FQM's geographical diversification improves.

The diversification will be principally driven by the ramp-up of FQM's flagship US$6.7bn greenfield project Cobre Panama.

Fitch says that FQM derived over 70% of earnings from its operations in Zambia in 2019, but Panama's contribution will rise towards 60% in 2023 when Cobre Panama's full capacity is reached.

"FQM is coming to the market at an opportune time, with copper prices rallying over 45% from the March bottom, now trading at US$3.07/lb, and with Cobre Panama reaching full production in August after shutting down earlier this year on Covid-19 issues," wrote CreditSights analysts.

"We are constructive on the FQM credit story given our positive long-term view on copper fundamentals and the ramp-up of the Cobre Panama project which should allow for balance sheet deleveraging."

(Reporting by Robert Hogg)

((Robert.Hogg@thomsonreuters.com; +44 207 542 9077;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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