The Egyptian economy looks set to witness a rush of corporate bond issues. Niveen Wahish examines how ready the market is to receive them During the past two weeks, two major companies began procedures to issue bonds and two more announced their intention to make a similar move. Orascom Telecom (OT) was the first to make the announcement when it signed an underwriting agreement with the National Bank of Egypt, Banque Misr and the Bank of Alexandria to underwrite its upcoming bond issue. It intends to issue two tranches of bonds, the first amounting to LE700 million and the second $150 million. The announcement by Telecom Egypt (TE) came on the heels of OT's. TE also signed an underwriting agreement with Banque du Caire, Bank of Alexandria, the Arab African International Bank and Citibank to issue bonds worth LE2 billion, in what has been described as Egypt's biggest corporate bond issue. The offering will be split into two equal tranches, fixed and floating with a maturity of five to seven years. The bond proceeds will be used to replace more expensive debts and to finance new investment, company officials announced. In the meantime, a third company, Amoun Pharmaceuticals, is also set to issue bonds but on a much smaller scale. Last week its extraordinary general assembly agreed to issue bonds worth LE150 million to finance its production. A further LE175 million in bonds is expected to be issued by the Industrial Development Bank to finance expansion of its services. Bonds are means for companies to borrow from the market at a cost that is cheaper than borrowing from banks. As Enayat El-Naggar, financial consultant, explained, "Banks are lending at an interest rate which averages 15 per cent, while by borrowing from the market, these companies will be paying an average 12.5 per cent interest rate." Furthermore, bonds represent medium to long-term financing as opposed to the shorter term bank loans. The maturity of the bonds is expected to range between five to seven years. In addition, as Mahmoud Abdel-Latif, chairman of Bank of Alexandria, said during the TE signing ceremony, borrowing from the market distributes risk and does not limit it only to the banking sector. "Any market uses different tools for various needs; what is wrong is to use one tool," he said. But there is something in bond issuing for the investor as well. OT, for example, has said that its pound-denominated bonds will bear a variable interest rate of 2.5 per cent above the Central Bank of Egypt lending and discount rate. The dollar-denominated bonds will also bear a variable interest rate of 2.25 per cent above the interbank rate in London. Mohamed Hegazi, sales trader with EFG-Hermes Fixed Income, believes these are very attractive rates and will earn their owners a yield that is higher than what they would expect to get from making a bank deposit. The dollar bonds are particularly luring and he expects them to be "grabbed". But will the Egyptian market be able to absorb all these bond issues? Hegazi expects "competition to be high, but they will be covered". Besides the fact that the companies on offer are strong entities, there is a lot of liquidity in the market that is looking for investment, he explained. According to CBE figures, liquidity grew by LE16.7 billion during the first quarter of fiscal year 2003-2004 to amount to a total of LE401 billion. Furthermore, the Egyptian bond market is untapped. According to El-Naggar, while bond trading usually represents up to 70 per cent of stock market trading, that is not the case in Egypt where it averages around 10 per cent. But the increase in the size of the bond market does not mean a more active bond market. Currently the value of listed bonds in the Egyptian market is LE20 billion with LE14 billion in government bonds and bills and LE6 billion in corporate bonds. To activate the bond market, El- Naggar said, investors have to be confident that they can liquidate their bonds should they need to, which is not the case right now. In fact, as Walid Gamaleddin, part-time business instructor at the American University in Cairo, believes, whoever buys these bonds will be someone who has excess liquidity and can afford to keep them until they mature. What is needed to activate the market is to get the primary dealer system working. That system has been introduced earlier this summer, but is not fully operational yet. Until now, primary dealers are only allowed to trade in government issues, not corporate issues. They act as wholesalers who make sure that the bonds are repurchased by other investors in the secondary market. Another essential element to the success of the bond market is a decrease in interest rates. Hegazi pointed out that two years ago, when interest rates were low, bonds were doing very well. In that year LE14 billion of trading took place, as opposed to LE8 billion the year before. When interest rates are low investors are attracted to buy bonds because they offer a yield that is higher than bank deposits and government bills and bonds. "Otherwise investors will prefer the former since they are less risky," he said. Meanwhile, if bank interest rates are high, that means that bonds have to be issued at even higher rates to make them appealing to investors. In that case, companies could be reluctant to issue bonds because the cost of acquiring credit would be high. However, the current direction of interest rates may not favour the bond market. There is a trend to hike interest rates, particularly on medium to long-term bank deposits, which will push the interest rate for the whole market up. That, as Gamaleddin, pointed out, must be avoided. For starters, he explained that there is no point in maintaining a high interest rate on the pound to create demand because the value of the pound has stabilised against the dollar, leaving almost no place for the black market. The other reason interest rates are high is government short-term borrowing to cover its budget deficit by issuing treasury bills. That, he said, must end and the government should revert to long-term borrowing by issuing bonds to cover its budget deficit. As to who will buy these bonds, El-Naggar expects mostly institutions. Ninety-five per cent of bond trading in Egypt is by banks and institutions. "It has taken individuals years to understand stock; they have yet to learn about bonds," said El-Naggar. She added that they tend to confuse bonds with stock believing that they will fluctuate in price, whereas bonds are a fixed income paper.
