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Johannesburg - Don’t be fooled by buoyant first-half corporate bond issuance in South Africa.
While on the surface the value of sales announced by companies this year is near to the record set in the first six months of 2014, they include banks that are refinancing maturing securities and raising funds to meet international capital rules on liquidity. Strip those out and remove regular auctions by the state-owned power utility and port and rail operator, and offers drop 40% to the lowest level since 2012.
“This has been an abnormal year,” Bruce Stewart, head of debt origination at Old Mutual’s Nedbank Capital, the top- ranked arranger this year, said by phone from Johannesburg. “We’re nowhere near general issuance levels if you take the financial institutions and property companies out of it.”
The reluctance by companies to tap capital markets underscores the challenges President Jacob Zuma’s administration faces in reigniting investment and growth in the $366bn economy beset by power shortages, rising joblessness and faster inflation that is threatening to result in the first interest rate increase in a year.
Adding to the backdrop is the collapse in August of South Africa’s largest provider of unsecured loans, which caused losses for bondholders.
Sales plunge
Debt sales by companies excluding banks, power utility Eskom and rail operator Transnet plunged to R15bn this year, compared with R25bn in the first half of 2014, according to data compiled by Bloomberg. Global emerging market sales excluding lenders and using the same criteria rose 81% to $481bn.
South African issuance including banks and excluding regular Eskom and Transnet auctions, is down to R53bn from R56bn in the first six months of 2014, the data shows.
Reserve Bank governor Lesetja Kganyago and other monetary policy committee members have been preparing the market for an interest rate increase since the bank left the benchmark repurchase rate at 5.75% last month. Inflation faces upside risks from a weak rand and rising food and energy costs, and the pause in the rate-tightening cycle since July is likely to be temporary, the South African Reserve Bank (Sarb) said on Monday.
Some nervousness
The failure of African Bank Investment Holdings, which provided loans not backed by assets and did not take deposits, drove up borrowing costs for companies as investors became more risk-averse.
The yield premium of the nation’s corporate bonds over government securities widened to 221 points in January, the most in at least two years, before easing to 161 on Tuesday, according to JSE indices.
“There is a bit of nervousness around corporates in the market,” Jonathan Myerson, who helps manage about of $2.2bn as head of fixed income at Cadiz Asset Management, said by phone from Cape Town. “Appetite for corporates hasn’t been particularly strong in the first few months; still the legacy of African Bank.”
Until the economy improves, bond sales will probably continue to lag behind, he said.
“Near-term, I’ve got very little conviction that there’s going to be a major change in the pick-up in issuance,” Myerson said. “If the economy continues to hobble along, demand for borrowing would generally be relatively subdued.”
Slow recovery
Power shortages are hampering a recovery from the slowest growth since a 2009 recession, while unemployment jumped to 26.4% in the first quarter, the highest among 65 countries tracked by Bloomberg. Sarb is forecasting inflation, which accelerated to 4.6% in May, will exceed its 3% to 6% target band next year.
Forward-rate agreements starting in six months, used to speculate on borrowing costs, show investors expect 58 basis points of interest rate increases this year, 18 more than at the start of May.
“The general outlook for interest rates is upward, with an interest-rate increase in September a strong possibility,” Nedbank’s Stewart said. “Anyone who wants to borrow should also be considering the extent and the timing of potential increases in base domestic rates.”
