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In many respects, corporate bonds issued by large South African companies and government gilts compete in the bond market. There are compelling reasons for buying both and much will depend on the investor. But the biggest attraction of corporate bonds is the higher rates they offer. That’s to compensate for the perceived higher risk.
In theory, the risk is higher. “For example, I don’t think it’s always understood a bond issued by a large bank does carry risk,” says Andrew Canter, head of fixed interest at Futuregrowth Asset Management. “You have to watch inflation very closely.”
However, some critics might argue there’s as much chance of government defaulting on interest payments as a large corporation. Indeed, that’s been the case in parts of Europe, where some countries have deferred payments on bonds as they deal with the debt crises.
But in normal times there probably is a higher chance of a company not meeting its bond repayments – and for that investors receive a higher yield. For example, the rate on the 207 – the10-year government bond –is around 8.7%. Bidvest, a large, multi-national group, pays more than 11%.
The measure of risk for any bond – but particularly corporate bonds, because events in the corporate world tend to happen faster and are more unpredictable – is duration.
As time increases from the date the bond was issued so does the potential risk. Interest and inflation rates, the two big movers of bond yields, aren’t difficult to predict over the short term. But further out both become more unpredictable. For that reason longer term bonds tend to offer higher rates or yields.
“Bonds and bond funds have been out of vogue because of the risks associated with sitting in a bond fund for a long time: duration is the measure of risk,” says Murray Anderson, MD of Atlantic Asset Management.
Corporate bonds get graded according to the perceived quality of the issuer. If it’s a large corporation, such as one of SA’s Big Four banks or multinationals, like Bidvest, Steinhoff and SABMiller, the grading will be high. Smaller, less well-known companies will attract a lower grading. But it’s really no more than a method of rating the bonds.
The actual quality of a small company can be just as high as a large corporation. However, the quality grading system is used by large institutions, such as emerging market fund managers, to made investment decisions.
For the companies issuing bonds it’s an effective way to raise capital. Bank debt is more expensive and rights issues dilute earnings and the shareholding structure. A corporate bond is often the favoured method of raising capital, especially if a particular amount is needed for a specific project.
The corporate bond market was started by what was then SA Breweries about 15 years ago. Ever since there’s been a growing number of corporate bonds issued: most of SA’s major companies have a corporate bond in the market.
But there have been times when corporate bonds become effectively squeezed out of the market. For example, that happened in the early 2000s, when government was issuing a lot of debt and not many companies were issuing bonds. But while government still has a number of bonds in the market and is the largest issuer, corporates are catching up. More bonds in the market provide a better choice for investors.
It’s also an alternative to investing in a company’s shares, which will be influenced in different ways by the macroeconomic environment. While bond yields can be volatile at times investors who ride the bond to maturity know what they’re in for. No so with share prices.
- Finweek
In theory, the risk is higher. “For example, I don’t think it’s always understood a bond issued by a large bank does carry risk,” says Andrew Canter, head of fixed interest at Futuregrowth Asset Management. “You have to watch inflation very closely.”
However, some critics might argue there’s as much chance of government defaulting on interest payments as a large corporation. Indeed, that’s been the case in parts of Europe, where some countries have deferred payments on bonds as they deal with the debt crises.
But in normal times there probably is a higher chance of a company not meeting its bond repayments – and for that investors receive a higher yield. For example, the rate on the 207 – the10-year government bond –is around 8.7%. Bidvest, a large, multi-national group, pays more than 11%.
The measure of risk for any bond – but particularly corporate bonds, because events in the corporate world tend to happen faster and are more unpredictable – is duration.
As time increases from the date the bond was issued so does the potential risk. Interest and inflation rates, the two big movers of bond yields, aren’t difficult to predict over the short term. But further out both become more unpredictable. For that reason longer term bonds tend to offer higher rates or yields.
“Bonds and bond funds have been out of vogue because of the risks associated with sitting in a bond fund for a long time: duration is the measure of risk,” says Murray Anderson, MD of Atlantic Asset Management.
Corporate bonds get graded according to the perceived quality of the issuer. If it’s a large corporation, such as one of SA’s Big Four banks or multinationals, like Bidvest, Steinhoff and SABMiller, the grading will be high. Smaller, less well-known companies will attract a lower grading. But it’s really no more than a method of rating the bonds.
The actual quality of a small company can be just as high as a large corporation. However, the quality grading system is used by large institutions, such as emerging market fund managers, to made investment decisions.
For the companies issuing bonds it’s an effective way to raise capital. Bank debt is more expensive and rights issues dilute earnings and the shareholding structure. A corporate bond is often the favoured method of raising capital, especially if a particular amount is needed for a specific project.
The corporate bond market was started by what was then SA Breweries about 15 years ago. Ever since there’s been a growing number of corporate bonds issued: most of SA’s major companies have a corporate bond in the market.
But there have been times when corporate bonds become effectively squeezed out of the market. For example, that happened in the early 2000s, when government was issuing a lot of debt and not many companies were issuing bonds. But while government still has a number of bonds in the market and is the largest issuer, corporates are catching up. More bonds in the market provide a better choice for investors.
It’s also an alternative to investing in a company’s shares, which will be influenced in different ways by the macroeconomic environment. While bond yields can be volatile at times investors who ride the bond to maturity know what they’re in for. No so with share prices.
- Finweek
