“South Africa’s established and efficient debt capital market is a key competitive advantage for South African firms” writes Barry Martin, joint head of debt capital markets at Rand Merchant Bank [link], in a recent article in South Africa’s Independent online. He says that companies have raised R6.1 billion ($612 million) in the first quarter of 2013 on the corporate bond market, about as much as was raised in the second half of 2012. “The unprecedented boom in the corporate bond market is expected to continue with about R35bn in corporate issuances forecast for this year, compared with R27bn last year, which also experienced high levels of activity.
“While the low interest-rate environment makes the debt markets attractive for issuers, the high yields that can be earned, particularly from the higher risk, low investment grade companies, are attracting institutional investors.
Martin writes that increasing cost of bank loans in line with Basel III banking regulatory standards means that more companies are choosing African corporate bonds of funding future growth and refinancing existing debt, “helped by almost perfect market conditions”. He says key conditions for bonds to attract institutional investors such as pension funds, life companies and other investment vehicles include that the bonds are listed on a securities exchange (the JSE in South Africa) and they are often credit-rated.
But recently smaller corporate issuers have come to the bond market, including a second–tier level of first-time corporate entrants to the market, “often low investment-grade rated or unrated companies”. Martin says this could already be seen in 2012, with a 20% fall in proportion of new debt that had the top AAA rating compared to 2011. However, single A-rated debt paper made up 27% of last year’s total issuances and the rand value “nearly doubled”. The share of BBB-rated notes (lower investment-grade) more than doubled to 8.1% of the total, up from 3.6% in 2011.
In 2013, first-time market entrants include job-placement company Adcorp (R400m raised), information technology IT company Pinnacle Technology Holdings (R315m raised) and property group Hospitality (R270m raised in 3 issuances) have entered the market for the first time. Issuances are far smaller than those of the giant groups who use the JSE to raise billions. “These companies are using the corporate bond market as a means of diversifying their funding requirements from banks”.
There is no short-term sign of the interest rate environment changing in South Africa and smaller companies are taking advantage of low rates and attractive credit margins, which combine to cut the cost of their debt. “Institutional appetite for these bonds (is) at high levels because of the attraction of good yields or additional returns they provide when compared with better-rated bonds.”
Since the global financial crisis, many South African companies held back on fixed investment and built up cash reserves to absorb further shocks better. Martin says recently “a slight shift has taken place towards the investment in growth, such as expansion of plants and development of properties, which is important to further grow South Africa’s economy.”
He sees the trend continuing: “With interest rates likely to remain at current levels for some time, the impetus in corporate bond issuances is likely to continue providing a platform for more corporates, municipalities and state-owned enterprises to look to the debt capital markets to provide the essential longer-term funding to finance more projects and long-term investments within South Africa and on the African continent.”