Egypt's first Eurobond issue was grabbed up in international markets, Sherine Abdel-Razek reports Minister of Finance Youssef Boutros Ghali could not have been happier last week. The road show he and a group of senior government officials made to promote a LE6 billion issue of Eurobonds -- a financial term that means sovereign or corporate bonds issued in international markets -- has resulted in the issue being oversubscribed 2.5 times. The road show included the UK, Germany and some states from the US. Ghali boasted that the demand for the offering was not affected by the upheavals in the international credit market, which have halted some corporate bond issues in recent weeks. "Turmoil in the market has not affected the appetite for Egypt. Our offering was 2.5 times oversubscribed," he said. "People are convinced Egypt has a serious story to tell, and that we are operating a serious programme of reform that has already proven its effectiveness," Ghali said in New York on 13 July after the subscription in the issue was closed. He also revealed that a 10-year bond is planned by the end of this year, with longer maturities to follow. The Eurobonds have a five-year maturity and are denominated in local currency and payable in dollars. This means that investors in foreign markets will pay the value of the bond in dollars, receive its yield during the five years in dollars, and on maturity in 2012 will receive the initial value in dollars. However, the value of the bonds will be exchanged in the Central Bank of Egypt and deposited in Egyptian pounds. Ghali and his team stressed that Egypt resorted to foreign markets to borrow in order to connect them to our own domestic capital markets. However, a fixed income expert in a leading local investment bank explained that the main reason behind resorting to international markets was to reduce pressure on the payment of dollars by foreigners investing on the local sovereign debt market. He explained that locally traded treasury bills and bonds were attracting a lot of foreign investors recently. "There is no problem when they enter the market as they inject dollars in the system to buy the bonds. However, the decline in interest rates in the last half of this year led to a rise in demand for the bills and bonds which bear higher interest rates, which meant that some foreigners opted to sell to make profit," he said. "Exiting was the problem as they wanted their profits transferred to dollars when they leave the market." Mohamed Assaad, head of the government's public debt management division at the Ministry of Finance, points out that those tapping new markets widen the base of investors in Egypt; it makes it easier for them to invest in Egypt while they are in their home country. Furthermore, the international markets are better cost-wise. Assaad said that at the time the bond was issued the cost of borrowing in the Egyptian bond market with the same maturity was nine per cent, which makes the cost outside even less. The bond offers a yield of 8.875 per cent. Nevertheless, being in dollars means that the government is taking the risk of paying more in coupons and when the bond expires, in the case that the exchange rate of the Egyptian pound to the dollar changes in favour of the dollar. "Any investment includes risk; however the exchange rate risk is expected to be minimal in light of the stability of exchange rates during the recent past," said Assaad. Three rating agencies -- S&P, Moody's and Fitch -- assigned a BB+ long-term senior unsecured debt rating to the bond issue. This means that Egypt is one notch below investment grade. The higher the rating, the lower the cost of borrowing, as it means that the country's creditworthiness is better. However, this did not affect the demand for the bonds. "Investors already see Egypt as investment grade -- the rating agencies will catch up soon enough," Ghali said. Foreign investment and state asset sales have boosted Egypt's economic growth, helping it to expand at seven per cent a year. A well-received local currency sovereign issue will pave the way for Egyptian corporations to issue debt in future, he added. So far less than five local companies have tapped the international bonds market. Rating agencies seem to be content with the way the local economy is moving. S&P hailed the country's progress on structural reform and improved economic and fiscal management. "Economic growth has picked up and external finances have remained robust, supported by the non-trade balance of the current account and strong capital inflows," S&P said in a report commenting on the rating. Fitch shared the same positive outlook. "The budget deficit and debt ratio will fall appreciably this year and have clearly turned a corner; banking system restructuring is nearing completion; and further reforms are planned to improve the business environment. Growing confidence in the policy framework has brought increased investment and accelerated economic growth. The issue is registered on Euroclear, the international settlements system for bond, equity and fund transactions. It is also listed on the Luxemburg Stock Exchange. Egypt is the third country after Brazil and Colombia to opt for borrowing from international markets by issuing Eurobonds.
