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The Allan Gray Africa ex-SA Bond Fund currently has 58.7% weighting to US dollar-denominated assets at 9.4% average yield. About 70% of this exposure is to corporate issuers and the remaining 30% is to governments. The higher allocation to corporate issuers partly reflects our ability to leverage our extensive equity research capability to find attractive opportunities in debt markets. During Q1 2017, the Fund invested in a US dollar-denominated secured loan issued by Seplat, a Nigerian oil and gas company. We have followed the company as equity investors for over five years, and have been impressed by the track record of the management team. Seplat is now a key gas supplier to a local market where demand far out-strips available supply. The company is on-track to increase capacity for gas supply by 75% in 2017. Unfortunately, Seplat’s oil production has been impacted by the security challenges in Nigeria. Seplat previously exported crude oil via the Trans Forcados pipeline, which has suffered several militant attacks and has been shut down since February 2016. The company has established alternative export routes via barging and a new pipeline expected to be completed in the second half of 2017. Under normal circumstances, Seplat can generate about $230m free cash flow before interest and tax; compared to $516m net debt as at December 2016. The Fund acquired a $15m portion of Seplat’s secured term loan facility maturing in 2021 and a coupon at Libor + 8.75% per year. We acquired the loan in the secondary market at a discount to par and, in our assessment, this investment offers an attractive double-digit yield with minimal risk of capital loss. The Fund’s exposure to government US dollar debt is skewed to Zambia and Ghana, but we have trimmed our Zambia holdings as the macro outlook gradually improves. We have increased our local currency exposure in both Zambia and Ghana, where we believe investors are getting a better risk-reward payoff. The Fund retains a 3.7% US dollar cash buffer.
Regional Performance
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Fund Performance (USD returns)
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