Presenting the 2014 budget last year, Finance minister Patrick Chinamasa indicated that government would complement budgetary resources for the Public Sector Investment Programme (PSIP) by issuing infrastructure bonds through its relevant agencies in order to finance targeted Zim-Asset priority projects.
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This article explores some of the issues slated for 2014 and assesses their prospects in a challenging capital markets ecosystem.
IDBZ/Zimbabwe Power Company & TelOne — $72 million.
During the first half of 2014, the Infrastructure Development Bank of Zimbabwe (IDBZ) intends to issue bonds to raise $72 million for the Zimbabwe Power Company and TelOne.
The bonds will have a tenure of between three and five years, while the interest rate will depend on market conditions at the time of issuance. The IDBZ says the bond will be open to both local and foreign investors and will have prescribed asset status in order to make it more attractive to insurance companies, pension funds and other relevant institutions.
Of the $72 million, $40 million will constitute government’s contribution towards the construction of Kariba South Power Station, while $32 million is ear-marked for TelOne’s fibre optic project.
GoZ Diaspora Bond — $8 million
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The Government of Zimbabwe (GoZ) has signalled plans to tap Zimbabweans in the Diaspora by issuing bonds whose proceeds will fund the construction of hydroelectric power plants.
“I am considering floating a Diaspora Bond and using that money for hydro power projects. We will start with a $8 million bond,” Chinamasa said in November 2013, neither disclosing the bond’s applicable interest rate, its tenure nor the specific time frame for its issuance.
He later reaffirmed this intention in his 2014 national budget speech.
“Given market indications of appetite for investment in such instruments by our Diaspora, this group will also be targeted in the bond issuance programme,” he said.
Air Zimbabwe Aero Bond — $50 million
As 2013 drew to a close, speculation swirled around that Air Zimbabwe intended to come to the market to raise $50 million through the issuance of a local aero bond in order to fund its working capital requirements and pay off its crippling debt obligations.
Citing “well-placed sources familiar with the developments” at the wholly-government owned company, official media sources said Air Zimbabwe had since applied to the Finance Ministry for prescribed asset status in order to confer the bond a more attractive investment status for insurance companies, pension funds and other relevant institutions and also to enhance the tradability of the bonds.
Mining Bond
In October 2013, Government said it was determining how to structure the sale of the country’s first international bond and was seeking advisors to help it raise money for a mining development fund, according to Mines and Mining Development minister Walter Chidhakwa.
“We haven’t worked out how much we are going to raise and who is actually going to work in putting together the bond,” Chidhakwa said while touring Mimosa Platinum Mine in Zvishavane.
Underwhelming Support
If these and other unspecified bond issues materialise, the bond market looks set to be relatively active leading to a revival of sorts, given the liquidity conditions seen in the local markets in recent times.
In his 2014 budget speech, Chinamasa outlined a raft of features such as tax exemption, prescribed asset status, liquid asset status and Government guarantees among others meant to improve the attractiveness of the bonds as well as their tradability.
However, despite these sweeteners, government agencies are unlikely to find it easy to garner the required level of support for these prospective bonds issues, especially from foreign investors given the country’s debt situation and its sovereign risk profile coupled with an anemic liquidity profile.
It is, therefore, likely that most of the debt issues will be targeted at specific takers given the general apathy with which previous public bond issues have been met.
In October 2012, the IDBZ floated a $30 million bond for the Zimbabwe Electricity Transmission and Distribution Company, offering a 10% fixed interest rate. It attracted only 53 applications valued at $17,8 million, for a subscription performance rate of 59%- 41 %.
At about the same time, the Reserve Bank of Zimbabwe attempted to rekindle the capital markets through a series of Treasury Bill auctions which however failed spectacularly.
Targeted bond issues so far
Previous examples of targeted issuances include the Zimbabwe Stock Exchange’s five-year bond under which it raised $1,5 million to fund implementation of the Automated Trading System (ATS) project.
Structured by Ernst & Young, the bond was issued at a coupon rate of 8% and all of the funding was raised from the $6,2 million Investor Protection Levy which is administered by the Securities and Exchange Commission of Zimbabwe (SECZ).
In late 2013, the government reportedly raised $42,5 million by selling debt of up to one year’s duration to selected investors after public Treasury Bill sales by the central bank had — to all intends and purposes — failed.
The duration of the debt sold was 180 days to one year with yields of 7% to 10%.
About $20 million of the notes were reportedly bought by an insurance company through private placement with the rest coming from four undisclosed banks in transactions that were not made public.
