Algeria exploring capital financing options

Algeria’s capital markets offer considerable potential in light of the size of the country’s economy but have historically been fairly shallow. Few corporate stocks and bonds have traded on the market since it opened in 1998, and the last initial public offering (IPO) was in 2013. Trading has been comparatively light in recent years as investors await the listing of several state-owned companies to increase capitalisation and breathe life back in the markets.

Regulators are working alongside market officials to encourage listing and trading, but cheap loans from the banking sector have complicated efforts to attract new participation in the markets. However, the recent fall in oil revenues and resulting liquidity squeeze may offer new opportunities to develop Algeria’s capital markets and increase their role in financing the national economy.

Market Overview 

Algeria’s capital markets include three exchanges: a corporate stock and bond exchange launched in 1998, a Treasury bill exchange established in 2008, and a small and medium-sized enterprise (SME) exchange launched in 2012. All three are managed by the Société de Gestion de la Bourse des Valeurs (SGBV), a joint company owned by Algeria’s six public banks and the private bank BNP Paribas. These seven shareholders are authorised as brokers on the exchange.

Private bank Société Générale and local financial advisory firm Tell Markets were granted provisional brokerage licenses in April 2014 and April 2015, respectively, while awaiting deposit of their investment stakes in SGBV. Individuals and companies must engage a registered broker in order to invest in the markets, or they may choose to invest indirectly through a single registered mutual fund provider.

Indicators 

The range of securities available on Algeria’s exchanges are limited, as are their trading volumes. Just four corporate stocks and one corporate bond are currently listed on the main exchange, the Treasury bill exchange lists 28 bonds, and no company has yet listed on the SME exchange, which remains empty. Trading hours are open twice weekly, on Monday and Wednesday mornings. Market capitalisation is low, particularly when considered in light of the economy’s size. Capitalisation of the corporate stocks reached AD16bn (€147.2m) by Q4 2015, up from a 2014 closing figure of AD14.8bn (€136.2m). While the principal exchange’s total value has grown steadily over the past three years, it is still well below its peak of AD21.5bn (€197.8m) reached in 2000. The 2014 capitalisation represented just 0.12% of Algeria’s non-hydrocarbon GDP, highlighting the degree to which Algeria’s capital markets remain underdeveloped. By comparison, capitalisation of exchanges in neighbouring Morocco and Tunisia represent 62.7% and 21.7% of their respective total GDPs in 2014.

Algeria’s capital exchange markets are overseen by an independent state regulator, the Commission de Surveillance des Opérations de Bourse (COSOB). COSOB is charged with issuing market regulations, accrediting all market actors and approving all new securities, as well as monitoring compliance with the regulatory and legal frameworks. It also oversees the work of the central depository, Algérie Clearing. Given the limited maturity of the markets, COSOB is being encouraged by the government to expand beyond its traditionally narrow technical role and work to stimulate the capital markets by actively working to attract new investors and companies.

Those efforts may be given some additional momentum, in light of the country’s macroeconomic dynamics. Yazid Benmouhoub, SGBV’s general director, told OBG, “We have long believed that capital markets can play a greater role in economic growth.” Years of easy liquidity in the financial sector had a crowding out effect that discouraged business from seeking funds in the capital markets. “But the change in economic circumstances offers a propitious moment for the capital markets, which will be more competitive and present a more attractive alternative to financing from banks,” he added.

Equity Exchange

Algeria’s principal stock exchange currently includes four listed companies. State pharmaceuticals manufacturer Saidal listed a 20% stake in 1999. EGH El Aurassi, a partly state-owned hotel operator, floated 20% of its equity in 2000 after a successful IPO the previous year. Local insurer Alliance Assurances listed 31% of its capital valuation in 2011, becoming the first private company to join the exchange. The market’s latest IPO saw food and beverage producer NCA Rouiba float 25% of its equity in mid-2013. That stake was partially owned by regional private equity firm Africinvest, and some saw its sale as a potential model that other equity firms could follow to deliver these investments to the stock exchange, though to date none have followed suit. One other state enterprise, cereals producer Eriad Setif, floated stock in 1999 but later delisted in 2006.

In 2014, the main stock exchange saw slightly fewer than 300 transactions, representing a volume of nearly 102,000 shares worth AD149m (€1.4m). The first three quarters of 2015 saw 234 transactions. With the exception of one anomalous trade, in which the CEO of Alliance Assurances transferred his shares in the firm to his personal holding company, 2015 trading volumes and values through Q3 were muted, at 103,000 shares worth AD51m (€469,200).

A basic index of the market’s four stocks showed 10.6% annual growth in 2014 and 13.8% growth through Q3 2015. Saidal led the market in 2014 with a 24% gain, with Aurassi also performing well at 13% growth, which served to balance out the losses for the other two stocks. The first three quarters of 2015 have seen gains by all four properties, with Saidal and Aurassi still leading the market.

The performance of the exchange does not always reflect the performance of the listed firms, which has prompted some of the market participants to raise concerns. While NCA Rouiba posted record sales and 14% year-on-year revenue growth in 2014, and further growth in the first half of 2015, this year has seen its stock reach its lowest share price since entering the exchange two years earlier. Speaking to local media, Slim Othmani, chairman of NCA Rouiba blamed this paradox on brokers, “who do nothing to promote NCA Rouiba stock due to an absence of motivation”, and stated in September 2015 that his firm was considering delisting. Alliance Assurances CEO Hassen Khelifati expressed similar frustrations with the secondary market this year, but said his company is not seeking to leave the exchange.

Public-Sector Floatation’s

Given both the large number and size of state-owned companies in Algeria, many have looked to the public sector to stimulate Algeria’s stock market, particularly through flotation of state enterprises on the exchange.

In 2013, the Conseil des Participations de l’Etat, which manages state holdings, announced its intention to privatise minority stakes in eight firms: insurer Compagnie Algérienne d’Assurance et de Ré assurance (CAAR); bank Crédit Populaire d’Algérie (CPA); quarry operator Cosider Carrières; water and sanitation firm Entreprise Nationale des Aménagements Hydrauliques; three cement plants owned by Groupe Industriel des Ciments d’Algérie; and mobile operator Mobilis (Algérie Télécom Mobile).

It is projected that the entry of these state-owned companies, whenever they eventually do list, will help to build a critical mass in terms of market capitalisation, attracting new investors and energising trading for existing stocks. The privatisation of these companies will also constitute a ripple effect of fundamental importance, by demonstrating to private companies and investors alike the government’s dedication to developing the capital markets.

Some analysts are confident that greater demand for capital in the public sector may help solidify this political will. Lies Kerrar, CEO of advisory firm Humilis Corporate Finance, told OBG, “In 2013 they announced plans for these offers primarily to encourage the stock exchange by bringing some dynamism to the market, not because it was strictly necessary. But now the state is really looking to raise funds and also to improve governance of public companies.”

Meanwhile, In 2014 and 2015, press reports indicated that IPOs for some or all of these companies were imminent, but they have yet to materialise. The offers are still being prepared, and it is widely accepted that company valuation and other required procedures can be time consuming. Public bank CPA, which unsuccessfully attempted public offers in 2002 and 2007, now has authorisation to proceed through a streamlined approval process. In October, Iman Houda Feraoun, minister of post and information and communication technologies, confirmed that Mobilis’s IPO – expected to amount to 20% of its value – was moving forward, but that officials were studying the need to first spin it off from parent company Algérie Télécom to avoid allowing outside investors a stake in a “strategic” firm. Reports indicate that offers for 20% in Cosider Carrières and 35% in Société des Ciments de Ain El Kébira are being prepared, and CAAR officials confirm to OBG that they are in the final stages of preparing a request to the COSOB regulators for the final approval to launch its IPO.

Private Sector Floatation’s

Market officials anticipate that a series of IPOs from state enterprises would solidify the private sector’s interest in the capital markets. Chedly Zaoun, president of Maghreb Leasing Algérie, told OBG that “Algeria’s development depends on a diversification of its economy. It is important that institutions and individuals begin to explore new channels and opportunities for investment,” including IPOs.

COSOB president Abdelhakim Berrah confirms that at least a dozen private companies are currently working to meet the requirements for listing, which include structuring as a joint stock company, a minimum number of initial investors, accompaniment by one of the registered brokers, payment of listing fees, public notifications, and the preparation of a series of financial statements, audit reports and other application documents. Private companies seeking to list on the main exchange must have a total capital valuation of at least AD500m (€4.6m), and must float at least 20% of their equity. Following validation of the application package, under current rules COSOB issues a “visa” authorising the issue of the security. However, a rating system for companies, which could offer greater transparency for potential investors and increase incentives for improved corporate governance, is in the works. Berrah confirmed that Algerian insurance and export guarantee firm CAGEX, which was contracted in 2014, is developing the rating mechanism. “This system will alleviate the need for asset guarantees, which are a burden on companies, making it easier to issue securities,” Berrah said.

Courting SMES

Since the opening of the SME board in 2012, many privately held small and medium-sized firms have preferred to continue to seek relatively cheap, and sometimes subsidised, financing from Algeria’s highly liquid banks, rather than complete the requirements of a public offering. Requirements for entering the dedicated SME exchange are substantially lower than for the main equity exchange, with no minimum capital valuation needed, a lower initial shareholder threshold and only a 10% equity issue required.

However, since its opening in 2012 the exchange has not seen any listings – although as evidenced by the performance of alternative boards elsewhere on the continent, including Morocco, Egypt, Kenya and Nigeria, SME exchanges can often take years to reach a critical mass. “Many of these businesses are family-controlled,” said Benmouhoub. “They are reluctant to give up control, and we are working to help them understand that selling a 10% or 20% stake in their company does not mean a loss of control. On the contrary, it can ensure the sustainability of their company in the future, even if the founder is no longer in charge, and it can have major financial advantages, as compared to financing through the banks.”

Bond Market

Corporate bonds are eligible for trading on the main exchange alongside corporate stocks, while Treasury bills trade on a dedicated exchange that operates five days a week. The corporate exchange has seen a half-dozen bond listings in its 17-year history, with the most active period having run from approximately 2006 through 2010. COSOB has authorised nearly four times that number of bonds, but most were held as institutional investments and never listed on the exchange. Since the bond market’s peak, most of the listed bonds have matured, leaving only one on the market today, a 2008 issue from hotel and real estate developer Dahli SPA. Dahli’s progressive-rate bond issue, which raised AD8.3bn (€76.4m), is set to mature in January 2016.

Two new bonds received COSOB approval visas in 2015 and are expected to reach the market in the coming year. After several years of wrangling with requirements of the visa application process, in March 2015 the privately owned Maghreb Leasing Algérie opened a five-year, progressive-rate bond issue worth AD2bn with backing from CPA and CNEP. In October 2015 state-owned leasing firm Société Nationale de Leasing (SNL) launched a five-year bond issue worth AD2bn (€18.4m) at a fixed rate of 3.5% with backing from public banks BNA and BDL. According to press reports, public energy firm SONELGAZ, which saw multiple bonds traded on the market between 2006 and 2014, has applied for a new issue that it intends to list in 2016.

On the T-bill market, 28 bonds were trading as of Q4 2015, representing AD428bn (€3.9bn) in total valuation. The bonds’ maturity periods were of either 7, 10 or 15 years, with interest rates ranging from 3% to 5%. While officials are keeping a close watch on contracting liquidity levels in the financial sector after the oil price decline, they have not announced a tightening of monetary policy through bond buybacks.

On the contrary, new T-bill subscriptions present an increasingly attractive means of filling state coffers; debt could even be issued to finance particular initiatives, such as large infrastructure projects. Some officials have proposed issuing Islamic bonds (see analysis), which Algeria’s Treasury has not previously done, and as Tunisia has announced it will do in 2016.

Legal Reforms

The government continues to introduce legal and regulatory changes in order to encourage development of the capital markets. The 2015 Finance Law maintained a measure introduced the previous year granting tax breaks to companies in proportion to the percentage of capital they list on the market, and another expanding tax breaks on capital gains to encourage investors.

Benmouhoub indicated that for 2016 SGBV and COSOB would work together to identify how they could create a climate that would help SMEs with listing fees. “For SMEs those fees can represent a considerable sum and thus discourage them from listing,” Benmouhoub said.

Also proposed was the awarding of advantages to publicly listed companies competing for government contracts. COSOB officials told OBG that authorities are also considering adjustments to financial disclosure requirements (which are currently semi-annual) for listed companies, as well as penalties for non-compliance with regulations. In 2013, in the hopes of improving the potential attractiveness of listing, regulators introduced a new requirement for SMEs to contract the services of one of three authorised stock market promoters: EY Algeria, Grant Thornton Algeria or RMG Consulting. Other important changes to the legal framework are expected in 2016. While the 49:51 rule is likely to remain untouched, reports suggest a very cautious loosening of restrictions on foreign investment, including of the state’s “pre-emption rights” on the sale of stakes in national companies. This and other requirements for prior government authorisations can oblige parties to wait up to several months for their transaction to be approved, significantly dampening trading activity. The IMF recommended in 2014 that Algeria lift the pre-emption requirement.

Some financial sector analysts have called for the state to scale back or substantially revise programmes that inadvertently crowd out capital markets. Targets of these critiques include state subsidies on commercial loans, as well as low-interest loans from state lender Fonds National d’Investissement, which can provide companies with financing at rates below those offered on the bond market.

Market Culture 

According to both SGBV officials and COSOB regulators, a lack of awareness on the part of companies about the benefits of listing is among their greatest challenges, as is the case in many emerging markets. As a result, COSOB has stepped outside its traditional regulatory role to join SGBV officials in promoting understanding of the stock market’s functioning and a more active investment culture. SGBV first launched a public awareness campaign in late 2013 that sees officials regularly present the advantages of participation in the markets to local businesses around Algeria. SGBV also participates in an annual finance fair in Algiers, and in October 2015 it addressed the first annual Forum of Entrepreneurs (Forum des Chefs d’Entreprise) to distribute its message further. COSOB is also encouraging expanded university-level training.

Outlook

IPOs of state-owned firms are set to rapidly expand market capitalisation and regulatory reforms that remove barriers to participation are on the horizon. Yet as past experience demonstrates, progress in developing capital markets moves slowly. Tightening liquidity in the banking sector will drive new interest in capital exchanges, particularly by stimulating the corporate bond market. As Algeria prepares to list shares of public firms, the potential for near-term growth is sizable.