Raising the interest rate: Broadening the appeal of listing is a top priority going forward

Of Africa’s 29 stock exchanges, the Central African Stock Exchange (Bourse Régionale des Valeurs Mobilières d'Afrique Centrale, BVMAC) is one of only two regional bourses. Headquartered in Libreville, it serves the Central African Republic, Cameroon, Chad, Congo, Equatorial Guinea and Gabon.

Despite its geographic breadth, the BVMAC is a small institution compared with the continent’s giants in Johannesburg, Casablanca, Cairo and Lagos. Founded in 2003, it officially began trading in 2007, when the state of Gabon issued a regional bond. The exchange has since listed five additional public bonds and three private placements. Although the BVMAC is equipped to trade equities, it has yet to list any stocks.

RECENT ACTIVITY: The BVMAC had a relatively slow 2011, the sole public offering being a regional bond issued by Chad in July. The CFA100bn (€150m) note was a resounding success, however. Following an intense publicity campaign headed by Chad’s Ministry of Finance, the bond was oversubscribed. The instrument carries an interest rate of 6% and will reach maturity in 2016. Chad will use the proceeds of the bond to fund infrastructure development in the country. Diversified holding company KOMO issued a five-year private placement of €15m with an annual interest rate of 5.25%. Unlike 2010, however, no private companies issued public offerings on the exchange. In October 2010 PetroGabon issued a €10.5m seven-year note with a coupon of 6%, the second major public listing by a private company after Prix Import’s €600,000 note in 2009, which attained a 7% rate. Also in 2010 the Central African Development Bank (Banque de Développement des États de l’Afrique Centrale, BDEAC) issued a seven-year, 5.5% note of €51m. Some 65% of the market consists of sovereign debt. Regional organisations – BDEAC and the International Finance Corporation, the private sector arm of the World Bank – make up 11% of market. The remaining 24% consists of private corporations.

SECONDARY TRADING: The BVMAC is a small, developing exchange, so it sees limited secondary trading activity. Liquidity is restricted by a number of factors. First, most investors have so far preferred to hold their securities, rather than engaging in active secondary trading. Second, the size and number of listings is small, limiting investor choice. Third, the BVMAC has yet to offer equities, which are often more actively traded than bonds. “As the exchange grows and adds equities, we should see a corollary rise in secondary trading and liquidity,” Marcel Ondele, the head of internal audit at the Central African Financial Market Supervisory Commission (Commission de Surveillance du Marché Financier de l’Afrique Centrale, COSUMAF), told OBG.

Fourth, lack of liquidity can also be attributed to the types of investors that have decided to invest in the BVMAC. The vast majority are institutions, which generally have longer time horizons than individuals and are consequently more willing to hold securities until maturity. Around 60% of total debt on the BVMAC is held by banks, with a further 10.5% held by insurance companies. Corporations hold 22.5%, with individuals representing only 2.5% of total debt.

Fifth, the average interest rate offered by debt instruments on the BVMAC is 5.7%, much higher than most comparable investment opportunities in the region, although lower than the yields on many West African sovereign bonds, which pay out at up to twice that rate. Bank deposits, one of the few other interest-bearing investment options in Gabon, do not routinely pay more than 4%. Despite these constraints, year-on-year trading volume rose in 2011, with 37,000 units traded in six transactions. Only two transactions, totalling 1870 units, were executed in 2010. Market liquidity has yet to regain the peak it reached in 2008, when 10 transactions totalling 572,075 units took place.

STRUCTURE: The BVMAC is a private company owned by institutions across the region. It is fully independent from the Gabonese government and the institutions of the Central African Economic and Monetary Community (Communauté Économique et Monétaire de l’Afrique Centrale, CEMAC). The idea of creating a regional exchange stemmed from a push to encourage alternate forms of long-term financing in the wake of the CEMAC banking crisis in the early 1990s. It was not until almost a decade later, however, that trading began. Technically, the BVMAC is a state-of-the-art, fully automated exchange. The V900 system is similar to the technology used on a variety of exchanges around the world, including NYSE Euronext.

The BVMAC is regulated by COSUMAF. Based in Libreville, COSUMAF plays three main roles: monitoring information provided to investors; supervising handling of investment funds; and ensuring efficient operation of the regional market. COSUMAF also issues licences to brokers across the region and regulates the fees they can charge for transactions. There are four brokers registered with COSUMAF. BGFIB ourse in Gabon is the leader in the region in terms of total fundraising. Majority-owned by BGFI Holding Corporation, it has raised over €210m since it was founded in 2006. EDC and BMCE Capital both serve the Cameroonian market, while Africa Bourse Congo serves the Republic of Congo. SFA Gabon, Gabon’s second broker, shut its doors in 2011, its portfolio bought by BGFIB ourse. COSUMAF expects to grant two new brokerage licences in 2012.

REGIONAL COMPETITION: Despite its regional scope, the BVMAC is not the only exchange in the CEMAC region. The Douala Stock Exchange (DSX) has been in operation since 2001 in the economic capital of Cameroon, Douala. The DSX trades both stocks and bonds. It currently has three stocks and two bonds listed, and total market capitalisation of over €450m.

The existence of two exchanges in the region presents a challenge for the development of a vibrant capital markets sector. “The CEMAC is too small a region for two exchanges. Without consolidation, the two markets will continue to suffer from liquidity problems,” said Ondele. The division has turned into a rivalry of sorts. When Cameroon decided in 2010 to issue a €300m bond, it did so without COSUMAF authorisation. While bonds issued for purely domestic consumption do not require COSUMAF authorisation, Cameroon was forced to open up the issue to the region as it was not fully subscribed at home, an action which technically requires the authorisation of the regional authority.

Despite the division, there remains political will to find a solution. “The decision has already been made by the heads of state to consolidate the exchanges, and this would send an encouraging signal to potential investors,” said Alexandre Gandou, the president of COSUMAF.

Following the CEMAC meeting in the Central African Republic, the African Development Bank (AfDB) was commissioned to undertake a study on unification options. The study, which was finished in 2011, presented three options: a complete merger; the creation of two specialised exchanges for debt and equities located in different places; or the separation of the regulatory and trading aspects of the exchange system.

“The study looked at Canada, where regional exchanges in Toronto, Montreal and Vancouver were merged, with certain aspects given to each city,” Pascal Yembiline, the principal country economist at the AfDB, told OBG. The decision remains a political one. At the CEMAC meeting in Congo in December 2011, the participants again called for a union of the two exchanges, but failed to pick one of the options presented in the AfDB report, and a final decision about the future of the two exchanges is still to be made.

STRONG DEMAND: Despite the lack of liquidity, demand remains strong for debt issued on the BVMAC. While the first issue by Gabon in 2007 was marked by hesitation – the state only raised €128m of a desired €150m – more recent public and private offerings have been oversubscribed. “It is clear there is a strong demand for debt instruments in Gabon and throughout the region. All of our recent bonds have been fully subscribed on issue,” said Ondele. Considering that companies in the region often cite lack of credit as a key constraint to their growth, it is an anomaly that more are not looking to make use of capital markets. “Companies are not yet fully comfortable with the markets. We need both the political will to convince multinationals and state-owned companies to list and more education to increase the comfort level and understanding of smaller companies with the market,” Ondele told OBG.

There is strong international demand for CEMAC debt, too. Gabon’s debt issue on the BVMAC in 2007 was part of a larger initiative to reduce Gabon’s overall debt, which included the issue of a $1bn dollar-denominated Eurobond (see analysis). The proceeds from both the CFA-denominated and dollar-denominated bonds were used to pay down Gabon’s foreign debt as part of a plan developed by the Paris Club, a forum to help restructure the debt of developing economies. Unlike Gabon’s local issue, the Eurobond – which was initially rated BB- with a coupon of 8.2% – was oversubscribed. It has fared well over the past two years and in June 2012 was trading above par, with a yield of 4.3%. At a time when the debt of developed economies around the world is being downgraded, ratings agency Fitch recently held its rating of Gabon at BB- and upgraded its outlook to positive.

A PLAN FOR GROWTH: According to a COSUMAF study, there are three main avenues for growth on the supply side of the market. The first is to target local affiliates of multinational companies. In Gabon’s case, oil firms like Total Gabon would be a logical first step. In other emerging national or regional exchanges, local affiliates of multinationals have often been the first to list. In Ghana, for example, Tullow Oil’s local listing – the Ghana Stock Exchange’s first in two years – more than doubled the market’s capitalisation. Listing on regional exchanges also offers certain advantages. In addition to securing financing in local currency, issuing equity on regional exchanges can help meet local content requirements. A second option is to use the BVMAC to list public companies. Regional stock exchanges can be used to aid in the privatisation or partial privatisation of state-owned enterprises. When the Gabonese Electricity and Water Company was privatised in 1997, the state offered share capital to employees. The BVMAC was not used, as it was not yet in operation. A third avenue for growth is to focus on small and medium-sized enterprises (SMEs), which are often in need of affordable long-term financing.

To encourage more companies to list on regional exchanges, the CEMAC enacted a law in 2007 that offers up to a 25% reduction on corporate taxes for firms that list 10-15% of their capital on the regional exchange. Yet some feel that does not go far enough, and that the state must be more proactive in convincing companies to list. To that end, the Gabonese government is considering a law that requires all companies over a certain size to list a portion of their capital on the regional exchange. Many firms remain hesitant, however, as they are not familiar with capital markets. The advantages of debt and equity financing are often overlooked and, given the surfeit of liquidity, bank lending is often the most common source of corporate credit. Furthermore, the mandatory disclosure of financial information required by a public offering can be a challenge. This is one reason why there has been greater interest in private placements on the BVMAC, as the disclosure requirements are less stringent.

As more companies become comfortable with the BVMAC, there is likely to be greater interest in both debt and equity finance. In Gabon, long-term financing is difficult to find and the terms are often onerous. Banks that hold primarily short-term deposits are more accustomed to offering short-term loans, and are often hesitant to assume the greater risks of financing large projects without significant collateral. With relatively attractive rates and longer time horizons, debt finance could become a more popular option for firms wishing to fund expansion in the region.

COSUMAF has been working with companies and the public to increase knowledge, and provides enterprise-level workshops and training for senior management to build their familiarity with debt and equity finance. “The key to changing managers’ perceptions is to increase their comfort level with the institution, but also with the demands of the markets, such as making results public,” said Ondele. COSUMAF also provides public education to foster understanding of the markets across society. For example, it offers regular training workshops for both aspiring and practising journalists who wish to build their financial literacy so as to be able to report on capital markets.

SME FOCUS: An important area of focus for regulators is SMEs, which have difficulty finding traditional financing. As well as a directorate established to help SMEs adapt to the reporting demands of financial market, COSUMAF is looking at other ways to support such enterprises, including identifying angel investors or establishing a venture exchange. In addition, brokers are now more actively targeting individual companies. As new brokerages are established and competition increases, brokers will likely be more proactive in their approach to companies, including SMEs, so as to build their businesses, encouraging growth in the market.

OUTLOOK: Considering the relatively small size of the region’s economy and the youth of its exchange infrastructure, considerable progress has been made since the BVMAC began operations five years ago. It has averaged two transactions a year, with more expected in 2012. The success of the issues has demonstrated that the exchange is reliable and that the technology works. State support with regard to listing public companies and encouraging multinationals would greatly increase activity and visibility of the regional market.

The BVMAC’s growth is also challenged by the existence of another exchange in the region. Both the DSX and the BVMAC will continue to suffer from perception and liquidity problems if a solution is not found. In the meantime, Gabon’s international debt should bolster local capital markets. With one of the first sovereign issues in sub-Saharan Africa, the country has attracted much press. Gabon’s exposure to international capital markets will exert discipline on the fiscal management of the country. Fitch and Standard & Poor’s now release regular reports on Gabon’s economic outlook, providing a benchmark for local ratings and a measure of security for international investors. Overall, strong economic growth and growing demand for financing, combined with aggressive outreach strategies on behalf of brokers and COSUMAF, should foster the continued growth of capital markets in the region.