Syndicated loans, which rose in value in sub-Saharan Africa from $11.3bn in 2010 to $27.7bn in 2013, are fuelling the growth of local corporations.
“Nigerian firms are leading the push into the syndicated loan sector, borrowing more than $13bn in 2013, four times the level in 2012.
All the evidence points to a huge increase in the syndicated loan sector
“There has been a big increase in the syndicated loan market since 2010 and this is driven by a number of factors,” explains Steven Loubser, a portfolio manager in the Africa credit team of Investec.
“The number one factor is that there has been an improvement in African opportunity […] more growth and business activity in Africa. It’s all part of the improving African macroeconomic story. Another factor is that there is a higher risk appetite and search for yield among several market participants, particularly among the international banks,” says Loubser.
Syndicated loans are provided by a group of lenders, rather than a single financial institution, in order to spread the risk of default.
A lead bank, known as an arranger, offers a large proportion of the loan and plays an administrative role.
Among the principal drivers of the surge in loans in Nigeria is Dangote Group.
The conglomerate alone took a $3.3bn loan from a combination of local and international banks in order to fund the construction of an oil refinery, which is estimated to cost some $9bn.
Dangote, which has grown into Nigeria’s biggest company, has announced plans to borrow an additional $2.2bn.
Meanwhile, in February, Nigeria’s Oando took a loan worth $800m to finance the acquisition of oil blocks owned by Conoco-Phillips.
This loan was made up of $350m provided by local banks and $450m syndicated to international lenders, including Standard Bank, BNP Paribas and Standard Chartered.
The syndicated loan industry in Africa is led by Standard Bank and Standard Chartered Bank, which together controlled almost 13% of the market in 2013.
Other banks, such as Zenith, FirstRand and Ecobank, have smaller stakes.
Citibank, which was consistently in the top three lead arrangers in Africa between 2010 and 2012, lost a considerable amount of market share in 2013.
However, Jim Cowles, chief executive officer for Europe, the Middle East and Africa, said in February that Citibank has a “new strategic plan for sub-Saharan Africa”, with East Africa, Nigeria and South Africa targeted as the primary markets for growth.
Citibank – the third- largest lender in the United States – is planning to boost investment in the continent, which is now also witnessing an increase in the num- ber of mergers and acquisitions.
Cash flush banks
“One of the key drivers in the syndicated loan market is the South African banking sector,” explains Investec’s Loubser.
“Big South African banks such as Standard Bank, Rand Merchant Bank and Nedbank are cash flush. They have a great deal of liquidity, which is giving them an advantage.”
There has not only been an increase in the value of loans offered but also a rapid surge in the number of loans.
In 2010, the sub-Saharan market recorded 28 syndicated loan issues, with this increasing to 39 in 2011, 56 in 2012 and 60 in 2013, according to data from Bloomberg.
“All the evidence points to a huge increase in the syndicated loan sector,” adds financial analyst Aly-Khan Satchu.
“There is no shortage of projects in Africa that need financing, and the healthy profits to be had mean there is no shortage of banks offering these loans.”
Europeans want in
Indeed, Standard Chartered is not the only European bank to be drawn by the strong returns available from syndicated loans in Africa.
French bank BNP Pari- bas is playing an important role in the sector, says Satchu, adding that he expects to see British firm Barclays boost its presence in the coming years.
In addition to the large number of syndicated loans offered in Nigeria, companies from other African countries are interested in the market, says Ronak Gadhia, an Africa analyst at investment bank Exotix.
“In the more developed African economies, such as Kenya, you are increasingly seeing more of these type of deals coming through. Predominantly, it is the international banks who are taking the lead because local banks have limited capacity to offer these kind of loans and because it is probably cheaper to borrow from the international market,” Gadhia says.
“The other countries getting involved in this funding arrangement are the more sophisticated and faster-growing economies such as Ghana and Botswana. Although, it is only a question of time before others follow,” he concludes.
However, despite the surging annual figures, there are early signs that the increase may have peaked.
Reuters data for the first quarter of 2014 showed a slump of 41% in syndicated lending across Europe, the Middle East and Africa compared to the same period in 2013, with loans totalling just $140.2bn. ● Charlie Hamilton
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