Zambia Eurobond first develops new client protection structure

Author: Gemma Varriale | Published: 26 Sep 2012
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Zambia has become the latest Sub-Saharan sovereign to tap the international capital markets, issuing its inaugural sovereign bond.

The benchmark offering incorporated a new structure designed to protect client money from rogue investors.

The sovereign’s debut was for $750 million 10-year Eurobonds. Issued under English law, the proceeds are expected to be used to fund infrastructure investment.

Stuart Matty, partner and global head of White & Case’s capital markets practice said the deal incorporated innovative mechanisms to mitigate the risk of potential future attachment of interest payments by third parties. Such mechanisms removed the paying function of the fiscal agent as intermediary from the transaction.

The need to consider such a payment structure arose out of a recent case involving a Gabonese Republic creditor. In that instance, the creditor attempted to place a freezing order on an interest payment being paid by Gabon to its paying agent for on-payment to the clearing systems in order to claim those funds as their own.

Under the new mechanism, Zambia could pay part of the funds directly to the clearing systems in Europe. It could therefore avoid the risk of the funds being attached between the clearing system and the issuing country by a future creditor of the country.

The paying agent in the US held the funds on trust for bondholders so the country would have no proprietary interest in them once they had been transferred to the US agent.

A high growth market

Zambia’s inaugural issue was the first public bond to come out of sub Saharan Africa this year. 2011 saw three issuances of 144A securities offerings: for Nigeria, Namibia and Senegal. More sovereign issues are expected from Africa in the near future.

According to Matty, more companies will also likely look to access the fixed income markets in the coming months. “We’ll see banking sector issuers out of countries in sub Saharan Africa,” said the White & Case partner. “These are more likely to come from countries where the sovereign has already issued and established a benchmark.”

Matty also listed state-owned companies, and companies in the resource and telecoms sector as being among the most likely to issue.

  “The biggest challenge now, given the volatility in investor demand caused by macro-economic events, it’s only going to be the very good names or those with some state ownership that are able to access the market,” said Matty.

White & Case advised the Republic of Zambia, Clifford Chance advised the banks. Barclays and Deutsche Bank acted as the joint lead arrangers.

See also:
‘The challenges faced by African issuers’

‘Moroccan Financial Board’s Hicham Zegary Q&A’

‘Africa investment opportunities explained’

‘Kenya loan shows staggered approach to eurobond market’

‘South African high yield: the new structure that could revolutionise the market’