Market moves: The prospect of more private equity-driven IPOs is cause for optimism

While still at an early phase of development, with few listed securities, Algeria’s capital markets are set to see a host of new listings. The exchange’s second initial public offering (IPO) of a private company took place in June 2013 (the first was in 2011), with several other firms expected to follow suit. The government is also working on a plan to partially privatise a number of state-owned companies via the bourse, which would give it a dramatic boost in terms of capitalisation, and market authorities are currently implementing a programme to modernise the stock exchange, which will include the overhaul of its trading and IT platforms.

BEGINNINGS: The bourse is operated by the Société de Gestion de la Bourse des Valeurs (SGBV), which was established in 1998. The SGBV’s shareholders are the country’s licensed stock brokers, namely private French bank BNP Paribas and the six public banks. It currently maintains trading hours twice a week, on Monday and Wednesday mornings.

Following the creation of the exchange, the authorities drew up plans that envisaged the listing of around 20 state-owned companies. The plans were ultimately scrapped; however, new plans for part-privatisations via the bourse are currently being formulated. Two firms – pharmaceuticals manufacturer Saidal and agribusiness firm Riad Setif – listed in 1999, followed by a third, the company responsible for operating Algiers’ El Aurassi hotel, in 2000. All three are majority state-owned. The next equity listing did not come about until 2011, with the IPO of privately owned Algerian insurance firm Alliance Assurances. In June 2013 agro-industry company NCA Rouiba became the latest listing. As regards debt, public oil and gas firm Sonatrach and national flag carrier Air Algérie issued bonds in 1998 and 2004, respectively. Between 2006 and 2008 state-owned firms including Air Algérie, Algérie Télécom and electricity supplier Sonelgaz issued a further five, leading to trading on the bourse becoming dominated by corporate bonds. However, there have been no further bond listings, and all but one of the debt issues have matured.

CAPITALISATION & TRADING: Stock market capitalisation at the end of 2012 stood at around AD13bn (€123.5m). This represents a fraction of 1% of GDP, underlining the low level of development of the country’s capital markets, including by regional standards; the capitalisation of the Tunisian and Moroccan markets are equal to around 20% and 60% of their countries’ respective GDPs. The 2012 annual report of the market regulator, the Commission for the Organisation and Oversight of the Stock Market (Commission d’ Organisation et de Surveillance des Operations de Bourse, COSOB) suggested that given the size of the country’s economy, around 150 companies with a combined capitalisation $40bn should be listed.

The value of trading on the bourse (excluding Treasuries, which are listed on a separate exchange from equities and corporate bonds) reached a peak in 2008 of AD1.22bn (€11.6m), but fell every year after that until 2011, when the figure stood at AD321.2m (€3.1m). Trading levels increased in 2012, to AD673.2m (€6.4m); however, so far 2013 has been a quiet year, with transactions as of mid-August standing at just AD73.8m (€701,000). The fall in trading in comparison to recent years is partly explained by the fact that two bonds – an Algérie Télécom bond and the Sonelgaz/11 issue – both matured in 2011. The lone remaining bond listed on the exchange, the Sonelgaz/14 bond, accounted for the bulk of all trades in 2012, at AD548.6m (€5.2m), or around 83% of all transactions, compared to just AD20.6m (€195,700), or around 20.6% of total trades, as of mid-August 2013. The reduced levels of transactions in the issue in 2013 may be accounted for by various realities such as the fact that the bond is due to mature on June 1, 2014.

NEED FOR DEVELOPMENT: Speaking to OBG, COSOB’s president, Abdelhakim Berrah, argued that the development of the financial markets is crucial to tackling some entrenched problems. “The priority in developing the market is not the provision of finance – many firms have a great deal of liquidity already,” he said. “Rather, the initial aim is to use the bourse to improve transparency, modernise companies and the economy, and prepare for the future.” With this in mind, the authorities have put ambitious targets for the bourse in place; COSOB’s 2012 annual report put forward a medium-term target of listing 38 firms with a combined capitalisation of $10bn over five to eight years, while Berrah said the authorities are aiming for a market capitalisation of 5% of GDP within five years.

NEW LISTING: In an encouraging sign, agro-industrial firm NCA Rouiba became the second privately owned firm to hold an IPO in March 2013, selling 2,122,988 shares that represented 25% of its capital. Over 1900 investors bought shares in the firm, 1865 of which were individual investors. The shares were officially listed on the bourse on June 3, 2013. The company and BNP Paribas, which managed the IPO, have signed a six-month “liquidity contract” – extendable to 12 months – in order to ensure that the security remains liquid. As of mid-August 2013, the company had accounted for just over half of all transactions in the country’s equity and corporate bond market in the year to date.

The IPO, which had a subscription rate of 106.4%, was undertaken to allow Africinvest, a private equity fund run by the Africinvest Group’s Algeria team, to sell two-thirds of its stake in the firm that it acquired in 2005. It earned around four times what it initially paid in the sale. Riadh Dekhli, manager of Africinvest Group’s Algeria team, told OBG that the firm intends to gradually sell its remaining stake in NCA Rouiba and to be fully divested by the end of the first half of 2014. “The sale has helped to give the bourse momentum and we want to maintain this dynamic by gradually adding more shares onto the exchange,” he said.

EQUITY PROSPECTS: More firms appear set to follow NCA Rouiba in the near future, with local industry players telling OBG that private companies are showing an increased willingness to go public; around five or six firms are currently thought to be considering taking the plunge, including several other private equity-backed firms. According to local media reports, among the specific firms currently reported to be looking at listing on the exchange are pharmaceuticals manufacturer Biopharm and insurer Salama Assurances.

“I think Algeria can reach 10 listed companies by the end of 2014,” Adel Si-Bouekaz, chairman and CEO of Algerian investment bank Nomad Capital, told OBG. “Companies can finance capital expenditures more cheaply than traditional banks, but some also realise that transparency and good corporate governance have an added value too,” he said.

To encourage more listings, Yazid Benmouhoub, CEO of SGBV, said that he is working on a roadmap for bringing more private firms to the bourse, and that he intends to seek out meetings with as many private companies as possible to persuade them of the benefits of listing.

PRIVATE EQUITY: Exit strategies have traditionally been one of the most problematic aspects of private equity investments in North Africa, but the recent listing of NCA Rouiba demonstrates the viability of such a move in the Algerian market, and may spur increased involvement from other private equity funds. Following the successful exit of Africinvest from NCA Rouiba via the bourse, other stake sales by private equity firms appear set to play a significant role in the development of the exchange. “The transaction showed other funds that there is a possible exit via the bourse, which is an important element for the development of capital investment in Algeria. The amounts involved were not very large, but it’s symbolically important,” said Lies Kerrar, president and managing director at local corporate finance advisory firm Humilis. The sale is a particularly reassuring signal for international investors, among whom there is concern about getting money out of Algeria.

The development of the segment faces some challenges, but investors say the situation is improving. “The foreign investment process, including private equity transactions, is relatively long in Algeria; for example, all investments have to pass through the National Council on Investments, which represents a safeguard for the foreign investor more than a barrier, even though it slows down the process somewhat,” said Dekhli. “The transfer of funds also takes relatively more time than in other countries in the region. However, in our case the process is becoming shorter as we gain expertise in the procedures,” he said, adding that Africinvest is thinking of listing one portfolio company per year.

REFORM & MODERNISATION: To support the development of the country’s capital markets, COSOB and the UN Development Programme are working on a project to modernise the bourse. The plans focus on five key areas, namely the structure and functioning of the market; market professions and services (including brokerage services); the judicial and regulatory framework; information systems; and image and training ( including the identification of a partner to train market analysts). The first phase of the project consisted of a study that was completed in November 2012, after which the project moved on to the implementation phase.

With regard to modernising the bourse’s information and IT platform, speaking in mid-June 2013 Benmouhoub told OBG that the SGBV was in the midst of negotiations with a foreign firm for the acquisition of a new trading system. “Negotiations are well advanced,” he said. “The new system will be in line with international standards and will be used by both the bourse and the regulator. The old system has worked well but needs to be upgraded given the new actors coming to the market. Furthermore, the new system will be able to provide real-time pricing and allow for remote trading, without requiring brokers to physically come to the exchange.”

In addition to the reform plan, the authorities have taken various steps to encourage the stock exchange’s development and are considering others. For example, companies that list benefit from several incentives, including a range of tax exemptions such as on share dividends (as of June 2013 the exemption was about to expire, but Benmouhoub told OBG it was likely to be renewed in the next finance law). COSOB has also proposed to the government that the Treasury should pay the costs of companies’ listings. In addition, the authorities are working on the creation of an organisation that brings all the major players in the financial markets together, modelled on France’s Europlace, which has been working with COSOB to develop the project.

SME EXCHANGE: In a 2012 reform the bourse was restructured through the creation of three separate exchanges for Treasury bonds, large firms, and an alternative exchange for small and medium-sized enterprises (SMEs). Alternative exchanges are increasingly popular in North Africa, given the prominent role SMEs play and the general difficulties they have in accessing bank financing. Firms on the SME exchange benefit from relaxed rules, such as reduced shareholder and minimum listed capital requirements, to incentivise and facilitate their listing. Currently, no companies have signed up to the exchange; however in mid-May 2013 Avenir Decoration, which rents out advertising space, announced its intention to hold an IPO ahead of its planned listing, which would make it the first firm to be listed on the SME exchange. Berrah said that he believed the listing is likely to take place in first-quarter 2014. According to Benmouhoub, there is much interest among other SMEs in listing. “Most SMEs in Algeria are limited liability companies, but only joint-stock companies can list on the bourse. However, we are hearing about firms changing their status, which is a sign that they are thinking about listing,” he told OBG.

The development of the SME exchange faces different and greater challenges than the mainstream exchange. “The SME exchange will be harder to develop as savers will be less interested and there will be more need for institutional support,” said Berrah. Balancing the needs of the market with those of interested SMEs is crucial. “We need to be very cautious about bringing SMEs to the stock market,” said Si-Bouekaz.

“It requires a thorough validation process and due diligence to ensure that shares are of good quality; putting poor-quality paper on the market would undermine the current solid confidence in the stock market. We’ve had a lot of discussions with interested firms, but we have had to tell some that they aren’t ready yet.”

STATE-BACKED LISTINGS: In addition to such reforms, the government has also resurrected plans to sell stakes in a number of state-owned firms via the bourse, which could dramatically increase its capitalisation. In April 2013 Karim Djoudi, the minister of finance, said that the prime minister had given the authorities instructions to identify several medium-sized state-owned companies for IPOs and that stakes in the region of 20% of each firm would be listed. In May local media reported a COSOB source as stating that the government had submitted a list of around 10 firms in the financial, industrial, telecoms and water resources sectors for the commission to evaluate their eligibility to be listed on the exchange. The State Participation Council will give final approval of the list. “The process will take time,” said Si-Bouekaz. “In the public sector, bringing a firm to the bourse will take at least 12 months, but once the decision is made, there will be no going back. This will contribute to robust trading activity.”

Industry players say the listings are much-needed. “There are several listings of private firms in the pipeline, but that alone won’t bring critical mass to the bourse’s capitalisation; for that, there is a need for firms in the country’s main sectors such as oil, banking, telecoms, engineering and public works to be listed, and the state is the main player in many of those areas,” said Kerrar.

Many such enterprises could also be very attractive to investors; state-owned firms in sectors such as oil and gas, agribusiness, real estate, construction materials and chemicals are thought to be highly profitable. However, investor interest will also depend on how sales are arranged. “There is a need to structure the firms well,” Kerrar told OBG. “For example, in the case of state banks assets that are not the result of standard commercial decisions, such as loans to other state firms, need to be removed from their books. Such assets are not necessarily ‘good’ or ‘bad’, but if left on the banks’ books they would complicate the valuation process.”

BOND MARKET: As noted above, the corporate bond market, having dominated the bourse in terms of the number of listed securities until recently, is currently largely moribund, with no new listings since 2008. There have also been no private placements for several years.

One major factor behind this is that in recent years, firms – particularly government-owned ones – have had access to state-subsidised bank loans on generous terms. “Large state-run companies such as Air Algérie and Mobilis have access to bank financing at a rate of 1%, which is significantly lower than the rate they would have to pay on a bond, and the debt market is also a form of financing with which they are less familiar,” said Berrah. This in turn makes it more difficult for private firms to list debt. “As a young market Algeria can’t issue risky, high-yield bonds from smaller private firms as there aren’t enough lower-risk bonds from large companies, which are mostly state-owned, out there to balance them out and allow investors to build a diversified portfolio,” said Kerrar.

Nevertheless, some firms are continuing to look at bond issues as a means of financing. Local leasing firm MLA is reported to be planning a public debt issue, with the resulting bonds to be listed on the bourse, though in April 2013 the then-managing director of the bourse, Mustafa Ferfera, said the issue had been “temporarily adjourned” over matters relating to “guarantees” required for the transaction by COSOB. The firm has reportedly obtained guarantees from the International Finance Corporation and others.

Furthermore, Si-Bouekaz said he was confident that state firms would eventually return to the debt markets to finance large investment programmes. “Bank financing is cheaper, but firms will want a diversity of funding options, so there is still potential for bonds in Algeria,” he told OBG. The bourse is also hopeful that scrapping a requirement for a bond to have 100 subscribers before it can be listed will boost debt listings.

BROKERS: There are currently seven licensed stock market intermediaries: the six public banks and the Algerian unit of French bank BNP Paribas. Some industry players argue that these intermediaries have not been doing enough to help develop the market and need to be more dynamic in persuading companies to list. Another possible reason is the lack of private brokers. The problem is partly one of a lack of interest in the activity from institutions, as many private banks are largely focused on trade finance due to the ample profits available from writing letters of credit; banks can also recoup their investments on these within several months, whereas IPOs take longer and involve more risk.

However, in a positive sign, another private player is working to enter the brokerage market soon, in the form of local corporate finance advisory firm Humilis. “We are currently working on setting up the firm and will seek the final licence; the process should be completed in a few months,” said Kerrar, speaking in June 2013.

OUTLOOK: The speed of the bourse’s development will depend on factors such as if and how quickly the planned listing of shares in state-owned firms goes ahead, and the extent to which cheap bank financing remains available. However, there is much optimism regarding the future of the sector, due to successful recent listings and the prospect of more private equity-driven IPOs. “We are convinced that Algerian capital markets are starting to take off,” Dekhli told OBG.