Introduced in June 2024, the iBoxx LSF USD African Sovereigns tracks the performance of USD-denominated bonds issued by African sovereign entities, specifically those located in countries that qualify for the Liquidity & Sustainability Facility (LSF) repo facility. This co-branded index is designed to support the LSF’s goal of enhancing the liquidity and sustainability of African sovereign Eurobonds by utilizing the fixed income expertise of S&P Dow Jones Indices.
1. What surprised you when you first looked at the current spread-rating relationship for African issuers? (LSF)
Looking at the data, one of the first things that appears is the diversified performance of the iBoxx LSF USD African Sovereigns. They have ratings ranging from BB to CCC.
But the most interesting and telling piece is the yield differential within identical rating categories. While Namibia and Angola are both rated B, the spreads go from 200 bps to over 700 bps. As an example, for a USD 1 billion bond issuance, every 100 bps in lower spreads equates to USD 10 million saved. Looking at Nigeria and Egypt, for instance, Egypt would pay approximately 35 bps more for a bond issuance.
Even among lower-rated sovereigns such as Gabon and Mozambique (both rated as speculative), there are notable spread variations, ranging from 800 to over 1,000 bps.
Lastly, it is worth noting the positioning of certain countries. For example, based on its performance, Benin could potentially have a higher rating and appear in a different category, while Namibia and Morocco appear underrated compared to the U.S. emerging market broad sovereign category.
Finally, of interest is the duration risk that we see in Exhibit 2. While there is a general sense that African countries suffer from shorter maturity schedules on their bond offerings, the chart shows that African Sovereigns performed better or on par with their benchmark indices. This could mean that their challenge isn’t inherently about duration but about rollover and liquidity. The typical U.S. emerging market BB sovereign bond benefits from greater access to repurchase agreements and capital market infrastructure tools that facilitate maturity extensions than the corresponding bond in an iBoxx LSF USD Sovereigns index. The market is not mature enough and needs more tools to develop further.
2. How reflective are spreads of the credit ratings assigned to African sovereigns? (S&P DJI)
Sovereign credit ratings are meant to assess a country’s creditworthiness and help inform market participants’ risk perceptions and expectations of returns. There has been a historical inverse relationship between credit ratings and annual benchmark spreads; lower credit ratings have corresponded to higher spreads, indicating greater perceived risk. The iBoxx LSF USD African Sovereigns’ spreads have aligned closely with those of the iBoxx USD Emerging Markets Broad Sovereigns B index, though spreads of individual African sovereigns can vary significantly.
