Loans, green bonds, sukuks, and securitization were all the rage in the covid era
How heavy borrowing and new debt instruments sustained us during the pandemic: As the covid-19 crisis took hold, the government and the private sector were scrambling to secure funding. To keep economic activity going, the government launched a far reaching stimulus package that included a EGP 100 bn in fiscal spending and over 400 bps cuts in interest rates. Taking advantage of the cheaper debt domestically, and internationally (as a result of similar stimulus programs by the US Federal Reserve), both the government and corporations had to engage in heavy borrowing to sustain them through the crisis.
For the government, that took the form of new fiscal and development loans, while companies relied on securitized bond issuances. In keeping with our debt diversification strategy, both have had to turn to new instruments to expand their borrowing options, including sukuks and green bonds.
A little help from our friends in 2020: As in previous crises, the government turned to international development partners and lenders to secure emergency funding. By our count, Egypt signed for USD 25.6 bn in new fiscal assistance loans, development loans, eurobond, and green bond issuances in 2020.
USD 15.75 bn of these went towards fiscal stimulus and covid emergency funding. This included a USD 2.8 bn rapid financing instrument (RFI) in May from the IMF to help support its balance of payments as Egypt grappled with fallout from covid-19. The IMF followed that up a month later by approving a one-year USD 5.2 bn standby loan of which we’ve received USD 3.6 bn, to date. Egypt then closed a USD 2 bn financing package with regional and international banks to plug budget shortfalls resulting from the covid-19 crisis in late August.
The government also tapped the bond market with a USD 5 bn Eurobond issuance in May, which was 4.4x oversubscribed, having attracted bids for around USD 22 bn worth of bonds. It then tapped bond markets again in September with the region’s first ever green bond issuance, securing USD 750 mn in green bonds.
Egypt secured USD 9.8 bn in development financing from a variety of partners, including the World Bank, the European Bank for Reconstruction and Development, the African Development Bank and others, the International Cooperation Ministry said in its annual report. That funding went primarily towards meeting Egypt’s 2030 development goals and saw loans doled out for green projects, healthcare, women empowerment, and SME financing. USD 6.7 bn would go towards financing national projects, while USD 3.1 bn would go towards supporting the private sector.
Where does that leave our foreign debt position? External debt has more than doubled in the past five years reaching 30% of total debt, according to Pharos. Our foreign debt is expected to rise to USD 139.4 bn in FY2020-21, up from USD 123.5 bn in FY2019-20. That said, our external debt-to-GDP ratio remains fairly stable, hovering at around 35% for the past two years, and is expected to increase marginally to 36% by 2023, the investment bank notes (pdf).
CORPORATIONS ALSO TAPPED THE DEBT MARKET at an accelerated pace in 2020 as businesses looked to turn receivables into cold, hard cash. Bond issuances remained the mainstay of domestic debt in 2020, particularly for real estate players and non-banking financial services with receivables on hand. Our tracker suggests the market saw 12 securitized bond issuances and one unsecuritized issuance, raising some EGP 20.1 bn in 2020. By our count, this is down slightly from 18 securitized bond offerings last year worth some EGP 22 bn — a solid performance that speaks to confidence in consumers’ continued abilities to pay as well as to subscribers’ appetite for new venues to generate returns.
The most recent issuance came in last night, with Sarwa Capital issuing EGP 1.6 bn in securitized bonds backed by the portfolios of Sarwa subsidiary Contact Credit and its affiliate companies, the company said in a statement (pdf). By our count, that’s EGP 6 bn raised from the capital market by Sarwa in a challenging year as the company marks bond number 34.
Unlike last year, however, NBFS took a bigger slice of the pie, raking in EGP 8 bn in liquidity, with Corplease’s EGP 2.2 bn issue in January being both the single largest NBFS issue and the single largest private sector bond issuance. Real estate ultimately won out in large part due to NUCA’s EGP 10 bn issuance in July.
A number of big issuances are expected in 2021. In a statement (pdf) earlier this month, the FRA said that five companies were planning seven securitized bond issuances worth a combined EGP 9.3 bn in the near future, though the names of the companies were not disclosed. These will likely include a record EGP 2.5 bn offering by Corplease, expected to take place some time in 1Q2021. Meanwhile, AT Lease is looking at a EGP 1 bn offering, while property developer City Edge is looking at a EGP 600 mn offering in 2Q2021. TMG subsidiary Al Rehab Securitization also plans to issue EGP 885 mn in securitized bonds to finance the development of TMG’s real estate projects, though no clear timeline has been offered.
2020 saw the (quiet) debut of corporate sukuks and green bonds: Years in the making and after multiple legislative amendments, 2020 was supposed to be the year sukuks and green bonds take off. Covid ate into momentum, but we still close the year with the making of a market for corporate sukuk.
Out of an estimated four companies expected to issue sukuks this year, only TMG subsidiary the Arab Company for Projects and Urban Development and Sarwa Capital closed on sukuk issuance. These, however, did rake in a combined EGP 4.5 bn, falling marginally short of the EGP 5 bn in offering from the initial four companies. A third EGP 600 mn offering by education outfit CIRA is expected to close this week.
The picture is more dim with green bonds, as despite a successful sovereign green bond issuance, CIB did not move ahead with its USD 65 mn offering in collaboration with the International Finance Corporation (IFC) in 3Q2020.
The landscape for sukuks is expected to change in 2021, as the House of Representatives is expected to finally approve legislation for the issuance of sovereign sukuks in January. But even without sovereign sukuks, a total of EGP 10 bn-worth of sukuk will have hit the market by the end of 2021, Financial Regulatory Authority officials said last month.
Green bond issuances may remain heavily skewed towards the sovereign variety next year, as the government has made it clear that it plans to use green bonds as a major source of funding for key infrastructure projects. It is yet unclear whether CIB’s offering will go ahead in 2021 and the only other corporate offering we’re hearing of is Raya’s recycling unit BariQ, which is expected to take its green bonds to market in early 2021.
Also on our radar for 2020: Prospects for an active secondary market in corporate debt — and the prospect of new waves of corporate borrowing from the banking system to fund growth plans after borrowing by large corporations slowed this year on the back of the pandemic.