5 - 11 July 2001
Issue No.541
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Al-Ahram Weekly Online 5 - 11 July 2001 Issue No.541 |
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Egyptian eurobond in the limelight
Egypt's eurobond launch drew attention away from yet another slow week for the market, writes Niveen Wahish
Egypt's long-awaited sovereign eurobonds have finally hit international markets. Last Friday $1.5 billion-worth of bonds were snatched up by investors. Until last week the government's line was that it only intended to offer $500 million in 10-year bonds. The deal was lead-managed by Merrill Lynch and Morgan Stanley.
Source: EFG-Hermes
A third of the bonds mature in 2006 at 275 basis points over the US Treasury bond benchmark, which adds up to returns of around 7.6 per cent. The remaining two thirds mature in 2011 at 335 basis points over the benchmark, which represents returns of approximately 8.7 per cent. The eurobond issue will be used, according to the government, to finance dollar-return projects and economic growth.
The Egyptian government was relieved to see the demand on its eurobond. It had feared that purchases would fall short of the offering especially in light of recent announcements by Standard & Poor's (S&P) of the US and the UK-based Fitch rating agencies.
S&P in recent weeks reduced its rating for both long- and short-term local debt from A- to B+ and from A-1 to A-2 respectively. The downgrade was mainly attributed to the increase in the net local domestic debt to 54 per cent of Gross Domestic Product (GDP) in 2000/ 2001, contrary to the targeted 49 per cent of GDP in 1997/98.
S&P said it would maintain the long-term foreign currency rating at BBB- with a negative outlook. However, it warned that the ratings would be lowered within one year if "the government misses its fiscal deficit target, the current exchange regime loses credibility and the pace of structural reform remains slow."
S&P's report also expressed serious concern about control over capital expenditures, the sustainability of the exchange rate regime and the pace of structural reforms.
In mid-2000 the agency had revised its outlook from stable to negative.
On a similar note, the UK-based ratings agency Fitch assigned a long-term foreign currency rating of BBB- to Egypt's eurobond issue, as its outlook for the long-term ratings is stable.
The BBB- foreign currency rating by both agencies did not deter investors. Amr Mohamed, a banker, said that investors were happy to buy because the terms of the deal minimised risk.
And although the success of the eurobond will not have an immediate effect on trading at the Egyptian stock exchange, Mohamed is hoping that it will increase foreign investor confidence in the Egyptian market. Last week foreigners sold LE256.2 million-worth of shares to their buying of LE203 million- worth of stocks.
Foreign transactions were a reflection of the general trend in the market. Trading continued to be slow and share prices fell close to the lowest levels of the year. The CMA index closed at 602.64 points, down from 606.81 points the week before.
In total, LE541 million-worth of shares in 160 companies were traded. The share value of 52 companies rose, while it fell for 66 and remained stable for 42. Bonds were heavily traded last week, accounting for LE403.6 million of total transactions.
With share prices so low, some analysts are predicting that a market rebound is just around the corner.
Analysts believe that investors will begin to acquire low-price big cap stocks like the Egyptian Company for Mobile Services (Mobinil), which closed at LE58.08 last week, a 23 per cent drop from LE75.37 six months ago. Orascom Telecom (OT) shares, which lost 54.6 per cent of their value during that same period to close at LE23.55 last week, might also become an attractive buy.
However, one analyst who preferred to remain anonymous believes that even a buying flurry, triggered by bargain prices, will result only in a temporary rebound before the market falls back again. "Nothing could revive the market short of a change of government," the anonymous analyst said, explaining that the current government has lost its credibility. "They announced time and again that shares of Telecom Egypt and electricity companies will be put up for public subscription, but nothing ever happened." Moreover, he pointed out that as long as the dollar continues to be unavailable, foreign investors will desist from becoming involved in the market.
Sherine Moussa, a chartered financial analyst at Commercial International Investment Company (CIIC), also believes that macro- economic reform is necessary to revitalise the market. She pointed out that hopes were pinned on Egypt's inclusion in Morgan Stanley's Emerging Markets Free Index as a measure that would lead to a boom in foreign investor transactions. Needless to say, foreign interest has not grown since May when Egypt was added to the index.
In Moussa's opinion, what the Egyptian bourse needs to revive are stocks that are as attractive to investors as the eurobonds.
In the cement sector, Suez Cement shares closed at LE35.9, down LE0.7. Although the company's shares had been in the limelight, reaching LE38.25 during the week following the announcement that it had accepted in principle a bid from Ciments Français to buy a 25 per cent stake for 51 pounds per share, the value dropped back to its opening level as enthusiasm faded. Investors who had hoped to sell their stocks to Ciments Français as part of the stake sale were not informed about the timing of the deal, causing some to become impatient and sell their stock.
In the banking sector, Egyptian American Bank (EAB) shares rose by LE1.05 to end the week at LE57.81. This is due to speculation over an expected takeover of the bank.
The bank's major shareholders announced in May that they were offering up to 100 percent of their shareholdings for sale. Standard Chartered and Citibank, part of Citigroup, were rumoured to be the likely bidders.
Until dates are set for the conclusion of these deals, demand for these shares will continue to be news-driven, suggested Moussa.
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