Malawi to hold largest ever bond auction Dec 23

Malawi will hold its biggest ever bond sale on Friday as the government aims to raise 30 billion kwacha to restructure its domestic debt and develop a benchmark yield curve, a central bank official said on Thursday.

The auction of 2-, 3-, 4- and 5-year notes will be open to domestic and offshore investors but foreigners may be deterred by Malawi’s severe dollar shortages, which led the southern African country to devalue its currency by 10 percent in August.

After Friday’s sale, auctions will be held monthly until the bonds are fully subscribed, Henry Mathanga, director of financial markets at the Reserve Bank of Malawi, told Reuters.

“That’s the biggest amount government has tried to raise in a single auction,” Mathanga said. “We are aware that it’s not possible to raise all that at one auction so we have made arrangements for reopening…We will be asking the investors to come in and buy the paper until it’s fully subscribed.”

The 2- and 3-year notes will offer coupons of 8 percent and 8.5 percent respectively, while coupon rates on the 4- and 5-year notes are 9.5 percent and 10 percent.

Mathanga said the new notes would enable the government to extend the maturity profile of its debt but its overall domestic debt stock was not expected to increase as a result.

“The purpose of this is to build a benchmark yield curve,” Mathanga said. “A portion of the domestic debt will be converted to medium or long term. Government has no intention of increasing its domestic debt from the current level.”

Malawi, a land-locked country of 15 million whose main export is tobacco, holds weekly Treasury bill auctions and recently introduced a 1-year note. It has four government bonds outstanding, including a 5-year instrument and three with a tenor of 3 years.

The central bank also issues bonds for monetary policy purposes. Its sale of a 5 billion kwacha 3-year bond in June was oversubscribed, with the bond yielding 15 percent.

Stephen Bailey-Smith, head of Africa research at Standard Bank, said Friday’s auction could attract domestic investors who need longer-dated instruments but foreigners were likely to stay away given Malawi’s foreign exchange problems.

The FX shortages have led to a wide gap between the official exchange rate, at 165 kwacha to the dollar, and the black market rate which is between 240 and 250 kwacha.

“Against such large currency risk, foreign investors would probably need a higher interest rate than the authorities would be willing to offer,” said Bailey-Smith. “The only real demand is likely to come from locals.”

Foreign donors, on whom Malawi relies for about 40 percent of its budget, suspended aid to the country this year over human rights concerns, intensifying the FX shortages.

Malawi is not rated by Fitch, Moody’s or Standard & Poor’s but Mathanga said it plans to obtain a rating by the end of 2012.

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