System overhaul: Reforms to the bourse are hoped to encourage listings

Operational since 1999, the Algerian stock exchange, Bourse d’Alger, is characterised by low levels of activity and liquidity, with just three equities and two corporate bonds currently listed, and with government bonds accounting for over 90% of trading. However, the authorities are working on a project that will significantly overhaul the framework of the exchange to boost activity. Implementation of the reforms is due to begin in 2013. Plans to establish an exchange for small and medium-sized enterprises (SMEs) are also close to being finalised. The bourse authorities hope these changes could lead to dozens of new listings.

EQUITIES: The Bourse d’Alger started out with two listed equities at its launch in 1999 – agro-industrial firm Riad-Setif and pharmaceuticals manufacturer Saidal – before being joined by a third, EGH EL Aurassi (which operates the El Aurassi hotel in Algiers), in 2000. Riad-Setif delisted via a share buyback in 2006.

After a long period of little activity, EGH El Aurassi and Saidal were joined by a third equity, insurance provider Alliance Assurances, the first private Algerian firm to list on the bourse. “We decided to go to the bourse in order to increase our capital as well as to participate in the revitalisation of the exchange,” Hassan Khelifati, the CEO of the firm, told OBG. “The experience has been a very positive one.”

The company listed in March 2011, following an initial public offering (IPO) the previous year, at an opening share price of AD830 (€7.97). It placed 30% of its capital on the bourse and raised AD1.4bn (€13.4m), with around 5800 investors taking up the shares, including 60 companies and four institutional investors. The launch nearly doubled the size of the exchange; as of late August 2012 the market capitalisation of equities on the bourse was approximately AD13.44bn (€129m), up from AD7.7bn (€73.9m) prior to the listing of Alliance Assurances in January 2012.

LOW LEVELS: Quoted by Reuters in March 2012, Mustapha Ferfera, the director-general of the bourse, put the exchange’s market capitalisation at about 0.2% of GDP. The statistic underlines the low level of development of the local capital market in comparison to other countries in the region; the figure stood at around 60% for Morocco and 21% for Tunisia in 2011.

The comparatively low level of development in Algeria relates in large part to the country’s history as a state-dominated economy, observers say. “The fundamental key drivers are here: economic growth, companies financing needs and a high level of local savings. But the high-capitalisation companies are still state-owned and the market is still waiting for an aggressive privatisation pipeline that would help the stock exchange reach its critical size,” Lies Kerrar, the CEO of Algiers-based financial advisory firm Humilis, told OBG.

Khelifati believes the small number of equities listed on the exchange is a result of the availability of less demanding alternative means of raising finance and a lack of incentives to list. “Algerian banks have excess liquidity, so it’s easier to get bank credit with good rates, which comes with fewer obligations than listing,” he told OBG. “Listing also doesn’t currently involve very much in the way of tax incentives, for example, so there is a lack of encouragement for companies.”

However, a number of firms appear set to follow in Alliance’s footsteps in the near future. In July 2012 the bourse indicated that three companies – namely agro-industry firm NCA Rouiba, a new life insurance unit of insurer Salama Assurances and leasing operator Maghreb Leasing-Algerie (MLA) – were planning to list, according to reports in the local media. Speaking to OBG in June 2012, Ferfera said he was hopeful for several listings before the end of the year.

In its annual report for 2011, the Commission for Stock Market Organisation and Supervision (Commission d’Organisation et de Surveillance des Operations de Bourse, COSOB), the market regulator, noted that in response to constraints related to the government’s right of first refusal for the purchase of stakes being sold by foreign companies under the 2009 supplementary finance law, it had put forward relevant proposals to the prime minister. These suggested that the government should renounce its right of refusal in the event that foreign companies sell interests in local businesses to local investors via the stock exchange and that financial institutions should be allowed to float some of their capital, subject to restrictions such as limits on the stake any one investor can hold and pending the approval of the Bank of Algeria.

CORPORATE BONDS: The bond market lacks liquidity as investors tend to hold onto bonds due to their status as a safe investment and their attractive interest rates compared to bank deposits. The development of the market is also constrained by the fact that the government subsidises many types of bank loans, in effect bringing down interest rates and rendering bonds a comparatively more expensive way to raise financing.

The first Algerian corporate bond to be listed was an AD12.1bn (€116.2m) debt issue by Algerian state oil and gas firm Sonatrach, which was issued in 1998. This was followed by a six-year, AD14bn (€134.4m) bond by Air Algerie in 2004. Since 2006 five more corporate bonds have been listed, namely a five-year, AD21.5bn (€206.4m) bond by Algérie Télécom in 2006; another six-year, AD14.1bn (€135.4m) issue by Air Algerie listed in 2007; two six-year bonds issued by electricity and gas utility Sonelgaz that were listed in 2005 and 2008 and worth AD16bn (€153.6m) and AD30bn (€288m), respectively; and finally an AD2.36bn (€22.7m) bond issued by real estate firm Daewoo Algérie Hotellerie Loisirs et Immobilier (Dahli), which owns the Algiers Hilton and the Algeria Business Centre, listed in 2009.

Nine corporate bonds (including several non-listed, private placements) with a combined value of AD73.66bn (€35.1m) matured in 2011, including the last of Air Algerie’s two issues and Algérie Télécom’s bond. Six bonds, all non-listed, with a combined value of AD14.02bn (€134.6m) will reach maturity in 2012.

As a result of listed bonds reaching maturity, there are just two corporate bonds currently listed on the Algerian stock exchange, namely Sonelgaz’s six-year, AD30bn (€388m) bond with a progressive interest rate, which is due to mature in 2014 and is known as Sonelgaz/14. The other is the Dahli bond, which is due to mature in January 2016.

GOVERNMENT BONDS: In 2008 the government decided to list state treasuries on the stock exchange. “The listing of government bonds on the bourse gave a major boost to the debt market and constituted a strong signal for private firms on the importance of the exchange for the authorities,” Ferfera told OBG.

As of late August 2012 there were 25 government bonds listed on the bourse, of which 10 have maturities of 10 years (with coupons ranging from between 3.5% and 5.75%), eight have maturities of 15 years (3.75-5%), and seven have maturities of seven years ( 3-4%). At the end of 2011 the total value of government bonds listed on the stock exchange stood at some AD273bn (€2.62bn), more or less evenly split between seven-, 10- and 15-year bonds.

TRANSACTIONS: The total volume of transactions on the bourse stood at AD3.83bn (€36.8m) in 2011. This was down from AD4.98bn (€47.8m) the previous year and AD6bn (€57.6m) in 2010. Government debt accounts for the bulk of transactions; the value of trading in government bonds in 2011 stood at AD3.51bn (€33.7m), a decrease from AD4.31bn (€41.4m) the year before. This compared to AD321m (€3.08m) for other securities, down 52% from AD670m (€6.4m) in 2010, meaning that government debt accounted for more than 91% of transactions by value.

Of non-government instruments, Alliance Assurances was the most heavily traded in 2011, with AD116.4m (€1.12m) worth of transactions, or 50.25% of the total. Alliance was followed by the Sonelgaz/14 bond, which accounted for 22.75% of the value of trading for the year, or AD73.05m (€701,300).

Transaction levels on the exchange have been erratic since it was launched. In its first year of operations the bourse saw AD108.8m (€1.04m) of trading activity, which rose to AD720m (€6.9m) the following year before slumping in 2003-05, hitting a low of AD4.2m (€40,320) at the end of the period. Transactions subsequently recovered and reached AD1.22bn (€11.7m) in 2008 before falling back again in the following years.

However, activity appears to be rising in 2012. By late August the value of corporate bond and equity trading on the stock exchange had already strongly surpassed that for all of 2011, standing at AD655.5m (€6.29m), more than double the previous year’s value. The most heavily traded instrument for the year to date in terms of value was the Sonelgaz /14 bond, which accounted for nearly 82% of total trading, on AD537.28m (€5.16m) worth of transactions.

STRUCTURE & REGULATION: The company that operates the stock exchange, Société de Géstion de la Bourse des Valeurs Mobilières (SGBV) is jointly owned by the country’s six public banks, each with a share of 16.67%, and has a staff of around 20 people.

The central security depository, known as Algeria Clearing, was established in 2003, allowing for the dematerialisation of securities. The depository is jointly owned by the six public banks as well as two companies listed on the bourse, EGH El Aurassi and Saidal. It uses software installed by France’s central securities depository, Euroclear France.

The exchange is overseen by COSOB, which was created by legislative decree in May 1993. The commission is made up of a president and six members who serve for four-year terms and are nominated by various ministries and other institutions, supported by administrative staff. COSOB is currently leading a reform process that will significantly overhaul the regulatory framework and other aspects of the stock exchange to boost market activity (see analysis) and has also proposed some regulatory changes as part of plans to launch an exchange dedicated to SMEs. Other regulatory changes under consideration include plans to allow the issuing of Islamic bonds, or sukuks. “We submitted proposals for establishing the legal framework that would allow sukuk issuance,” Kerrar told OBG, saying he expects the necessary reforms to be introduced soon to meet the market demand for such products.

SME EXCHANGE: SME development has been a major area of focus for the government as part of its plans to diversify the economy away from a reliance on hydrocarbons, and allowing SMEs to obtain funding via the stock exchange would do much to support the segment.

In June 2012 a working group headed by COSOB was established to prepare a report on the matter, which provided recommendations for measures to be taken by various stakeholders to facilitate the initiative. Proposals included calling on the Ministry of Finance to establish a fund to cover some costs of listing for SMEs. The coverage would be based on a variety of potential benchmarks, including up to 5% of the capital to be raised or 70% of the total listing costs. SMEs listing would potentially be awarded corporate tax breaks, and it has been suggested that the Bank of Algeria revise the conditions for foreign investment in shares. “Listing offers companies financing alternatives that may be better tailored to their constraints in terms of financial autonomy,” Sahbi Othmani, the CEO of NCARouiba, told OBG. “It also offers the possibility of greater liquidity to shareholders, who have an objective evaluation of their assets in the company.”

RESTRUCTURING THE BOURSE: As part of the reforms, COSOB has also proposed the restructuring of the bourse into three separate markets – one for large companies, another for SMEs and a third for treasury bonds. COSOB has also suggested raising the minimum paid-up capital for large companies listing on the main market to AD500m (€4.8m), from AD100m (€960,000) previously, and reducing the minimum number of shareholders required to list from 300 to 150. Companies wishing to list need to present at least three years’ worth of accounts, the last year of which needs to have been profitable, and to be willing to list at least 20% of their capital, according to Ferfera.

The SME exchange would benefit from looser requirements, including a minimum listing requirement of 10% of capital rather than 20% and a minimum of 50 shareholders (or three institutional investor shareholders) instead of 150. There are no requirements regarding minimum capital or profit.

In a new innovation, SMEs wishing to list will be required to designate a sponsor, which will be responsible for advising the company and ensuring it fulfils its requirements as regards financial transparency and the timely release of information. The sponsor can be a bank or other financial institution, a broker, or a provider of financial advice and analysis. SMEs wishing to list will also be required to have at least two years of certified financial accounts, though this will be waived in the case of firms being created via an IPO.

Under the reforms, COSOB also proposed changing the requirements for bond listings – whether corporate, public enterprise or government bonds – by raising the minimum issue from AD100m (€960,000) to AD500m (€4.8m) and removing a previous requirement that listed bonds have at least 100 subscribers.

MUTUAL FUNDS: The Algerian mutual fund market is currently limited to just one fund, known as Celim. The fund, which has been licensed since 1998, is fully owned by two local banks (Banque National d’Algérie and Banque de Développement Locale) and an insurance firm (Société Algerienne d’Assurance) and is not currently open to the public. However, here too the authorities have devised several planned regulatory changes aimed at boosting the market.

One of the main proposed reforms would see a rise in the maximum permitted administration charges levied by mutual funds from 2% of the funds under management to 5%; COSOB’s 2011 annual report notes that respecting the ceiling appears to have proven difficult for Celim. The planned reforms would also allow fund operators to delegate management of the funds to external companies specialised in the field, allowing them to reduce costs; currently, fund operators are obliged to manage funds themselves. COSOB has also proposed abolishing the current cap of 60% on the share of mutual funds allowed to be invested in government securities, which would enable the creation of funds invested wholly in government bonds. The proposals were lodged with the Ministry of Finance in 2011 and are awaiting approval.

FOREIGN INVESTMENT: In March 2012 Reuters published a story suggesting that foreign investors will be allowed to buy shares in listed companies on the Bourse d’Alger for the first time, noting that “a new law for the exchange…had been approved by the government.” However, speaking to OBG, Ferfera said the situation regarding foreigners investing on the exchange did not concern a new law, but rather a long-standing Bank of Algeria regulation that has yet to be published.

“Two central bank regulations allowing foreigners to transfer funds generated by stock dividends or selling shares have been in existence since 2000 and are on the central bank website,” Ferfera told OBG. “However the regulations have not been published in the Official Gazette yet and are therefore not in effect.” Foreigners thus currently remain unable to transfer earnings from the bourse abroad, effectively blocking foreign investment. However, Ferfera said he is optimistic that the regulations may soon be published, which would effectively allow foreigners to invest in the bourse.

COSOB has also called for reforms in relation to investment from abroad, which could help address some of the bourse’s key challenges. However, others question the extent of the need for foreign investment in the local market. “It would be good for foreign investment to happen as it would bring more good governance and more analysis to the market,” said Kerrar. “However, in terms of bringing in greater volumes of investment, it would not be that important as there are already a lot of domestic savings.”

OUTLOOK: Observers say the development of the local financial market is likely to proceed slowly, but that it will make progress. “Things are not going as fast as one might like; it takes time to build a vision and the administration is not used to market mechanisms,” said Kerrar. “But both the need and the potential are there.”

In what remains a heavily state-dominated economy, the willingness of the government to carry out privatisations via the bourse will also be important. If planned reforms go ahead, the market could see a notable expansion in the mutual fund and SME fields in particular. Alliance Assurances’s listing in 2011 also marked an important development, as the first listing of a private firm as well as the first equity listing in a number of years. Though other companies have not rushed to follow suit so far, at least several more listings are expected to occur in the near to medium term.