Pump up the volume: Increased listings and trading are priorities for the years ahead

Regionalism is a feature not only of Francophone West Africa’s monetary regime and banking sector, but also of its financial markets. The bond market is dominated by sovereign issues from Côte d’Ivoire and Senegal, the two largest economies in the region. The equity market has two capitalisations – Sonatel and Ecobank Transnational Incorporated – while most of the companies listed from Côte d’Ivoire. Although traded volume and market capitalisation have been on the rise in recent years and financial performance has been impressive, the regional financial markets remain a marginal source of funding, except for governments. Unlike some of Africa’s larger, more dynamic exchanges, the Bourse Régionale des Valeurs Mobilières (BRVM) has been stagnant in recent years, with few new equity listings. The markets are limited to trading of shares and bonds, although moves are afoot to open up the exchange to smaller businesses, and to the development of derivative products and commodities.

HISTORY: The West African Economic and Monetary Union (Union Économique et Monétaire Ouest-Africaine, UEMOA) itself dates from a treaty signed in 1973. The regional Central Bank of West African States (Banque Centrale des États de l’Afrique de l’Ouest, BCEAO) and World Bank subsequently conducted studies into the regional financial markets and identified the desirability of achieving critical mass at a regional level.

It was not until 1993 that the region’s Council of Ministers decided to create a regional financial market and mandated the BCEAO to run it. In December 1996 responsibility for running the markets was transferred to two private sector entities, the BRVM and its sister organisation, the Dépositaire Central/Banque de Règlement (DC/BR), the securities depository which manages the payments system for transactions, dividends, interest and repayments on maturity. The following November, the Council of Ministers created a regional regulatory authority, the Regional Council for Public Sav- ings and Capital Markets (Le Conseil Régional de l’Epargne Publique et des Marchés Financiers, CREPMF), before the markets began operating in September 1998. The new regional market replaced the Abidjan exchange that had been in existence since 1974, and its former members made up the bulk of the new BRVM. Previously, the Abidjan market had not been subject to codified laws and regulations, so the BRVM represented a big step up in terms of transparency. At first, the new market used a centralised trading system with T+5 settlement and three days of trading a week. The market migrated to the current decentralised electronic trading system in 1999, and to daily trading in 2001. Since 2007, this system follows a T+3 settlement process, marking better efficiency.

RECENT DEVELOPMENTS: Total assets under management (AUM) on the books of the DC/BR stood at approximately CFA5.02trn (€7.53bn) at the end of 2012, up some 27% in 12 months, driven by a combination of increases in capital and share prices; 80.3% of AUM consisted of listed equities, 16.6% of listed bonds and 3.1% of non-listed bonds, with 0.01% in non-listed equities. In the year to end-2012, the DC/BR processed 91 corporate actions, amounting to CFA275bn (€413m). This consisted of CFA124.3bn (€186m) in repayments on listed bonds, CFA76.6bn (€115m) in dividend payments, CFA54.3bn (€81.5m) in interest payments on listed bonds, CFA15.5bn (€23m) in repayments on non-listed bonds and CFA3.8bn (€5.7m) in interest payments on non-listed bonds.

There were no new equity initial public offerings (IPOs) during the course of 2012, while there were two mergers: NEI CI and CEDA CI merged in a deal worth about €1.1m, while SARI CI and CFAO CI merged in a deal worth around €26.7m. There were new bond issues from Côte d’Ivoire, Benin and Burkina Faso, as well as regional entities such as the West African Development Bank (Banque Ouest Africaine de Développe- ment, BOAD). The BRVM announced in late 2012 that trading would be extended to a six-hour continuous trading day, a significant increase from the previous hours of 8.30am to 10.45am and the fixing mechanism. ORGANISATION:Headquartered in Abidjan, the BRVM has branch offices in each of the seven other member states: Mali, Senegal, Niger, Benin, Togo, Burkina Faso and Guinea Bissau. Commercial intermediaries active on the markets include brokerage companies, unit trust management companies, wealth management companies, business providers and securities sales people. The DC/BR selected Ecobank, a pan-regional bank headquartered in Togo, as a partner in the administration of cross-border payment settlements. Ecobank therefore acts to assure all cross-border transactions, both payments and the delivery of title.

REGULATION: The BRVM is regulated by the CREPMF, which authorises all financial transactions on the primary market and regulates both the secondary market and the financial intermediaries, similar to the US Securities and Exchange Commission. The regulatory environment governing the regional financial markets has improved progressively over the course of the past decade as the CREPMF and other stakeholders have worked to put regulations on a par with international norms. One notable example was the introduction of special-purpose vehicles (SPVs) for securitising mortgages, i.e. mortgage-backed securities. While market players were slow to adopt such innovations at first, there are expectations that these can help develop the financial markets in the future. Another example was the creation of two regional ratings agencies. The Ivoirian-based Bloomfield Investment and the Senegal-based West Africa Rating Agency were set up in early 2012 to cover nascent domestic and regional bond markets denominated in local currencies. They rate governments, businesses and SPVs, providing a niche service to a market segment heretofore underserved by market leaders like Standard & Poor’s or Moody’s.

PRIMARY MARKET: The BRVM is divided into two compartments, one for bonds and one for shares. By the end of 2012 the CREPMF had authorised more than 240 transactions on the two primary markets since their inception, accounting for a total of CFA3.03trn (€4.54bn). Of this, CFA1.51trn (€2.27bn), or nearly 50%, consisted of government bonds; CFA888bn (€1.33bn), or 29.3%, other public and private sector bonds; and CFA619bn (€928m), or 20.4%, publicly offered equities. At the end of 2012 there were 37 quoted companies in the equity compartment of the BRVM, but there had only been 11 IPOs since 1998.

Given that 36 quoted stocks had been carried over from the old Abidjan exchange, it is clear that new IPOs and de-listings or mergers have broadly cancelled each other out. One problem is that businesses in Côte d’Ivoire and across the region tend to be small, rendering the criteria for a stock market listing particularly onerous. Of the 37 listed stocks, all but six are Ivoirian. In part, the lack of immediate post-launch development of the BRVM can be explained by the fact that it is dominated by Côte d’Ivoire, which experienced sustained political turmoil from 1999 onwards.

Another impediment was the inability or unwillingness of governments in the region to deliver on their planned privatisation programmes, which had been expected to see up to 40 new firms come to the stock market during its first five years of operation. The financial and industrial sectors dominate the listings while two stocks, Senegalese telecoms company Sonatel and Ecobank, together represent nearly 50% of total market capitalisation. These two, along with Bank of Africa and L’Onatel (a telecoms firm from Burkina Faso), are the most notable new listings since 1998.

SECONDARY MARKET: There are two equity indices: the composite index (BRVM C), which tracks all quoted shares on the market, and the BRVM 10, which tracks the 10 most liquid. When launched in 1998, total market capitalisation was CFA1.02trn (€1.53bn) and remained relatively unchanged until 2004. Strong performance in the middle years of the last decade lifted total market capitalisation to CFA3.73trn (€5.59bn) in 2007 on the eve of the global financial crisis. It resumed its upward march in 2009, experienced a small contraction in 2011 due to the Ivoirian political crisis, breached CFA4trn (€6bn) for the first time in December 2012, and stood at CFA5.03trn (€7.54bn) in late July 2013. Local players expect that if the high-growth trajectory can be maintained, it is reasonable to expect market capitalisation to reach CFA9trn (€13.5bn) by 2015, when prospective IPOs are taken into consideration.

EQUITY RETURNS: The average market return in local currency terms was 8.6% in 2011, while 27 of the 37 listed companies paid dividends in that year. The BRVM 10 and BRVM C stood at 101.03 and 100.56, respectively, in September 1998, soon after their launch. They trended lower until 2002, before growing slowly at first, then gathering pace. The markets peaked in 2007 at 224.85 and 199.45, respectively, before enduring two years of losses on the back of the global financial crisis. The BRVM 10 and BRVM C fell by 36% and 33%, respectively, from peak to trough during this period. From their cycle low point in 2009, they recovered in 2010 before suffering losses of 13.4% and 12.7%, respectively, in 2011 as a result of the post-electoral crisis in Côte d’Ivoire. The BRVM 10 and BRVM C have since rallied to 231.88 and 208.53, respectively, in late July 2013.

All sectors advanced during 2012: agriculture by 8%, financials by 11%, industry by 22%, public services by 25%, transport by 46%, distribution by 66% and other sectors by 75%. Some sub-sectors performed even more strongly, with infrastructure gaining 140% and construction (in which SETAO is the only quoted stock) up 75%. The top five performing stocks in 2012 all doubled in value or better: CFAO CI (distribution) +179%, CIE CI (public services) +153%, SODE CI (public services) +133%, FILTISAC (industry) +126%, VIVO Energy CI (distribution) +111%. Meanwhile, the worst-performing four stocks were Nestlé CI (industry) -8%, NEI-CEDA CI (industry) -14%, SMB CI (industry) -16%, and Uniwax CI (industry) -25%. Overall, the market rose 20% in 2012. Further strong performance is likely in 2013 as companies publish their annual reports, the first year of results to reflect the impact of the political crisis of 2011. All sectors are set to advance, although the 2012 outperformance of the two firms in the infrastructure subsector may limit their potential for more gains in 2013.

RISING VOLUME: Since the market’s inception, secondary market transactions for bonds and equities have totalled more than CFA1trn (€1.5bn). From a relatively low level of CFA10.6bn (€15.9m) per annum in 1998, traded volumes increased to over CFA50bn (€75m) in 1999 before declining gradually until 2003. Volumes traded began to grow strongly in 2004 and surged to an all-time high of CFA231bn (€347m) in 2008 before falling back due to the global financial crisis and Côte d’Ivoire’s 2011 political crisis. Strong volume growth resumed in 2012, reaching CFA145.8bn (€218.7m) for the year. Over the past four years, average daily traded volume has grown three-fold, from CFA100m (€150,000) to CFA300m (€450,000), up from CFA246m (€369,000) in 2011. The five most traded stocks in terms of volume in 2012 were Ecobank (financials, 34.6m), Sonatel (public services, 891,011), VIVO Energy CI (distribution, 864,721), Palm CI (agriculture, 218,139), SAPH CI (agriculture, 175,190). The five most traded in terms of transaction values were Sonatel (€64.2m), Vivo Energy (€17.9m), SAPH CI (€11.25m), Palm CI (€6.15m) and SOGB CI (€4.95m).

BONDS: The bond market has proved more dynamic than that of equities. Since 1999 it has grown from CFA83bn (€125m) by a factor of 10 in terms of total bonds outstanding, to stand at CFA838bn (€1.26bn) at the end of February 2013, registering an increase of 19% in 2012 alone. There are two segments to the market, with 80% consisting of publicly quoted bonds and the remaining 20% private placements. Bonds account for approximately 14% of trading volume. The bond market is dominated by sovereign issues, with corporates accounting for only 10% of the total. Governments from the region, as well as regional entities such as the BOAD and multilaterals like the International Finance Corporation, have courted the bond market far more assiduously, valuing its virtues of long-term financing. By contrast, corporates often perceive as onerous the reporting and transparency requirements necessary to access the bond market, even for those firms already listed on the equity market.

There are currently 36 listed bonds in issue on the BRVM, of which six are Ivoirian sovereign issues (accounting for 47% of the total par value of outstanding bonds), two are Senegal sovereign issues and three are sovereign issues from other regional governments.

CELTEL Burkina, Port Autonome de Dakar and Shelter Afrique are the only truly private corporates with bonds in issue at present. Côte d’Ivoire’s bonds maturing in 2016, 2013 and 2017 were three of the top five most-traded bonds on the market in 2012, Togo Telecom (2nd) and CAA Benin (5th) being the others. Issues with a maturity of four to five years are the most common, accounting for around 70% of total bond market capitalisation, bonds with a maturity of 6-7 years accounting for an additional 30%.

All bond issues must be approved by the CREPMF, a process which can take up to six months. This lengthy period is more attuned to the needs of governments than to corporates, which often require a much more rapid response for operational reasons. In addition, corporate bond issues need to be accompanied by a third-party guarantee, provided by an organisation such as the Fonds de Garanties, although new regulations on ratings agencies allow for certain rated corporates to emit without guarantees. The acquisition of such guarantees takes time and costs money, and must be completed before approval is sought from the CREPMF.

One potential upside, however, is that those firms capable of securing a good credit rating may also be able to purchase a lower cost guarantee. Until accessing the bond market is made easier, corporates will continue to rely on banks or internal resources for financing, or listing elsewhere. Where corporates wish to raise debt in smaller transactions than are typical on the listed market, they can opt for the private placement market, where a maximum limit of CFA10bn (€15m) is imposed on all placements. The documentation requirements are also less onerous. This market is also regulated by the CREPMF and administered by the DC/BR, but it is open only to around 100 pre-approved investors. As with its listed counterpart, volume in the secondary market for private placements is very limited, with buy-and-hold investors tending to predominate. The make-up of issuers tends to be similar to that on the listed market, and includes corporates such as Orange, CI Telecom and Nestlé. The choice between the listed and private placement markets is therefore driven largely by transaction size.

Sovereigns represent the bulk of regional bond issues. Typically, governments can borrow at rates of 6-7.5%. Given that regional inflation has been relatively low and stable around 2-3%, not least because the currency is pegged to the euro, these rates suggest either a significant risk premium on the basis that the country has defaulted on its sovereign debt repayments several times in the last 15 years or so, or substantial market inefficiencies. Some regional bodies, such as the BOAD, can raise debt at rates at the lower end of – or even lower than – this range. The rates do not vary significantly over time or across countries as the counter-party risks are considered to be similar across the region, while investors are typically of the buy-and-hold rather than the speculative variety. Even during the global financial crisis, average rates for sovereigns did not rise much above 7%. The secondary market for bonds is not highly developed, while traded volumes are low, even for sovereign issues, not least due to market players’ proclivity for buy-and-hold investment strategies.

DEBT RELIEF: The government is highly dependent on donor, bilateral and multilateral financing. By mid-2012 Côte d’Ivoire had benefitted from €3.4bn in debt relief under the IMF’s Highly Indebted Poor Country initiative (€2.4bn) and its Multilateral Debt Relief Initiative (€1bn), in addition to debt relief worth €2.6bn in net present value terms from the Paris Club of bilateral debtors. The country has undergone a series of debt restructurings since the 1980s, including participation in a Brady bond programme in the 1990s. It has twice since defaulted on these internationally traded Brady bonds, most recently in early 2011. Although it resumed interest payments in 2012 and had begun to clear its arrears, the country is still without an internationally recognised credit rating and is absent from international sovereign bond markets.

Côte d’Ivoire does, however, rely heavily on the regional debt markets for its financing needs, and has done since 2000. This allows it to raise debt at reasonable rates, over long terms and in its own currency, without the need for a credit rating, and despite being in arrears to international creditors. For instance, the government borrowed at 6.25% over a five-year term in mid-2012. Given the high liquidity in the regional banking system, demand for new bond issues is robust and this five-year issue was oversubscribed by 156%. The same was true for the Ivoirian state’s issue of a CFA120bn (€180m), three-year bond in mid-2013.

In total, the Ivoirian government is targeting debt issues of around €1.21bn in 2013, almost double the level raised in 2012 and one-third higher than the 2012 target. Of this, roughly €483m is accounted for by Treasury bills with maturities of up to two years, and about €727m by bonds of varying maturity.

At present, the maximum maturity on Ivoirian sovereign bonds quoted on the BRVM is seven years. Other than Côte d’Ivoire, Senegal is the largest sovereign participant in the debt market. Its last major bond issue was in late 2012. Senegal, Benin, Togo and Burkina Faso have all issued bonds with maturities up to 10 years.

PRIVATE EQUITY: Recognising the economic opportunities in Côte d’Ivoire as the political situation stabilises, private equity firms have become more active of late. Having started off with a €3.8m fund in the late 1990s, CAURIS Management is the most well established local player. Based in Abidjan and Lomé, Togo, CAURIS now has €81m under management and investments in high-growth-potential small and medium-sized enterprises (SMEs) in West Africa. Afric Invest and Phoenix Capital Management are newer arrivals on the scene, but private equity in Côte d’Ivoire is still in its infancy. DERIVATIVES, COMMODITIES AND F/X: Currently, the market is relatively unsophisticated in terms of the complexity of traded products, namely plain-vanilla stocks and bonds. It is envisaged that derivative and commodity markets will be added, but this is not expected before 2015 at the earliest. To get to this stage, several challenges need to be overcome. It is important, for instance, to first concentrate on boosting liquidity in the markets for the underlying financial instruments – that is, the existing stock and bond markets – before a derivative market can be realistically contemplated. The introduction of convertible bonds could mark the BRVM’s first foray into derivative products, but even this is seen as very much a medium-term project. While countries in the region, and Côte d’Ivoire in particular, are important commodity producers, all relevant commodity trading currently takes place in London or other leading financial centres. Inspired by the success seen in Dubai, for instance, the BRVM hopes in the future to set up a commodity exchange in Abidjan, although this would not be a physical delivery exchange, given the inherent logistical challenges involved. There are no plans to introduce a foreign exchange trading platform as this lies within the remit of the BCEAO. In the case of both commodity and derivative trading, a new regulatory framework would also be needed, requiring agreement and implementation at the regional level.

In late 2012 the FTSE Group and the African Securities Exchanges Association announced the launch of the joint FTSE ASEA Pan Africa Index, comprising equities listed in some 19 countries across the continent, including Côte d’Ivoire. It is an independently calculated, rules-based index. The index has no more than 30 listings per country, while a country’s maximum weight is 20% of total market capitalisation. As well as acting as a benchmark for equity performance on the continent, it is envisaged that it will eventually become an investible index as associated products evolve.

MARKET PLAYERS: There are 21 brokerage houses operating across the region, 10 of which are based in Côte d’Ivoire, four in Benin, two in Senegal, two in Burkina Faso and one each in Mali, Togo and Niger.

The largest Ivoirian brokers, Hudson and BICI Bourse, dominate with a combined market share of approximately 80%. Brokers are represented by their professional organisation, the APSGI, which has a mandate to develop the brokerage industry and promote a stock market culture throughout the region. It also acts as a consultative and lobbying forum that works with the authorities towards its objectives. The APSGI has expressed an interest in expanding its footprint beyond its current stronghold in Francophone West Africa. To secure a brokerage licence from the authorities, a broker must by law join the APSGI. There are also six to seven mutual funds (Sociétés de Gestion d’OPCVM, SGOs) operating across the region, as well as individuals who participate in order to facilitate business by partnering with either a brokerage or a mutual fund for executing transactions.

An effort to integrate the BRVM with other regional capital markets – Nigeria, Ghana and Sierra Leone – has gathered steam since mid-2012. The relevant exchanges and authorities set up a council to oversee the project in January 2013, with a view to harmonising rules and regulations by early 2014 and facilitating pan-regional trading by 2015. While there are challenges in adhering to this timeline, there now appears to be political buy-in to the idea at the highest levels. It is hoped that merging West African capital markets can help develop the financial sector and spur economic growth across the region (see analysis).

SME MARKET: The BVRM was never envisaged as a vehicle for smaller firms to raise equity, and its rules and procedures are prohibitive for all but the largest businesses. There have even been instances in the past when smaller firms from the region have secured listings in Paris (such as Simat, Petro Ivoire and Money Express) rather than on the Abidjan exchange. This is expected to change in 2013 with the launch of an SME-dedicated compartment on the BRVM, a project on which the exchange has been working for a number of years. Such SME markets are not uncommon on the continent, and can be found in Egypt, South Africa and Nigeria, among others. They are a promising development, both in terms of financial market development and in terms of easing the chronic challenges smaller businesses face in accessing credit, although frequently the performance and listings tend to be underwhelming. To facilitate listings, businesses in this compartment will be faced with less onerous membership criteria in terms of financial reporting. For example, firms will not have to have been in existence for three years, will not have to be profit-making, and will not have to have a minimum of CFA500m (€750,000) in capital as is currently the case for BRVM equity listings.

Rather than a free float of 20% being required, SMEs will only have to cede a minimum of 5% of their capital to other investors to qualify for a listing. This should help overcome the cultural aversion of many entrepreneurs in the region to ceding any ownership of their firms. It is also envisaged that a mentoring programme will be introduced to help prospective SMEs meet the criteria for an IPO or to raise debt on the bond market. It is hoped that this new market can attract around five IPOs per year from across the region, or 15-20 by 2015, a reasonable target given that Nigeria has roughly 12 on its alternative exchange.

PERSPECTIVES: The BRVM is engaged in a number of projects to strengthen the profile and activity of the financial markets. It is taking a number of actions to improve liquidity, such as encouraging quoted companies to split their shares – as Sonatel did in November 2012 with a 10-for-1 split – to make them easier for retail investors to trade. Such splits are historically rare on the BRVM. The bourse is trying to increase the number of listed companies and market players, and is eagerly anticipating the possible privatisation of state companies, particularly banks, through the exchange. As such, the BRVM initiated in December 2012 a series of seminars at its headquarters with the relevant privatisation committees. Côte d’Ivoire Telecom is also seen as a potential IPO candidate. The creation of SGOs is also being actively encouraged. To deepen the market, the BRVM is working to improve listing rules, moving to more continuous trading, revising its market indices and introducing the SME alternative market.

The BRVM is also engaged in communications campaigns to enhance its visibility locally, regionally and internationally. The BRVM sees a role for itself in educating savers and investors to support the development of a stock market culture in the region. It employs information campaigns using diverse media, including SMS, to reach as many prospective retail investors as possible. It also supports the development of investment clubs and has for a number of years run the Junior Bourse Challenge, a stock market simulation game for students throughout the eight UEMOA countries.

OUTLOOK: While increased listings, liquidity and trading volumes are seen as the top priority, qualitative improvements are also viewed as key, notably further integration with regional and international markets. Investing in the BRVM is still largely a domestic affair. While foreign investors first appeared in 2005, they are still small in number.

Integration into global markets and an increase in the number of international investors will be important stepping stones in the market’s development, and the exchange is engaged in efforts to raise awareness outside the region. The BRVM aspires to be the fifth-biggest African stock exchange within three years, and hopes to enter the top five by 2020.

From a considerably low base, penetration of banking services is expected to increase notably in Côte d’Ivoire and across the region over the short to medium term, with mobile banking very likely to play an important role in this development. “Financial markets play a pivotal role in regional economies such as Côte d’Ivoire because they provide an alternative to financing from banks, particularly where the banking sector remains limited in terms of both scope and accessibility,” Pascal Djéréké, managing director of BNI Finances and president of APSGI, told OBG. This represents a significant opportunity for banks and brokerages, and thus for liquidity in the financial markets, to benefit from cross-selling as more and more banking clients become retail investors with share portfolios of their own.