Archive for the 'Bonds' Category
March 30th, 2011 by Tom Minney
Flows into South African bonds turned positive in the last few days, although money is still being moved out of equities. In the 10 days to 29 March net non-resident purchasing of bonds, including repo, structured trades and other transactions, has totalled R9.3 billion ($1.4 bn) inflow, while non-resident investors in equities have taken out R1.6 bn. For much of 2011 (year to date) investors had followed the global trend of less appetite for emerging markets and there have been outflows from South African bonds and equities. Between 1 Jan and 29 March, net non-resident flows into bonds were outflows of R11.2bn, according to Citi, citing data from the JSE securities exchange. Foreign outflows from equities were another R1.5bn, totalling R12.7 bn. This compared with the record inflows of 2010, being a total inflow of R52.0 bn into all bonds and R37.4bn into equities, totalling R89.4bn.
March 22nd, 2011 by Tom Minney
Leading investors and institutions are to discuss transactions and trends in Africa’s capital markets during the Africa investor 2011 Analysts’ and Fund Managers’ Forum to be held in London this week. The one-day meeting will be held in association with Thomson Reuters, at their headquarters in London on 24 March. Africa investor (www.africainvestor.com) is a leading international investment research and communications group.
Investments into African debt during 2010 rose 7-fold compared to 2009, according to research by Ai, and capital markets in Nigeria, Kenya, Ghana, Zambia and Zimbabwe are reaching new levels of activity. Ai says its meeting is the European roadshow platform for African companies to meet current and prospective investors, analysts and the financial media.
Hubert Danso, Vice Chairman and Managing Director of Ai, said in a press release: “The Africa investor Analysts’ and Fund Managers’ Forum represents a unique business development opportunity for domestic and international investors with an interest to participate in the African growth story.
“We have an exceptional line-up of the leading institutions investing and influencing major capital market transactions on the continent, all of whom will be sharing their insights, predictions and strategies for successful investing on the continent.”
Institutions that have confirmed include Citigroup, HSBC, Goldman Sachs, Fitch Ratings, Deutsche Börse AG, Société Générale, Renaissance Capital, CDC Group, Silk Invest, Towers Watson, The Coca-Cola Company, the Africa Finance Corporation, Scipion Capital, The Stock Exchange of Mauritius, Bourse de Casablanca, along with many others. Partners of the Forum include Reuters, Insparo Asset Management, Preqin, the African Securities Exchanges Association and the Africa Venture Capital Association.
The annual Analysts’ and Fund Managers’ Forum is a unique, high-level networking venue for analysts, fund managers, pension funds, sovereign wealth funds, investor relations officers and the financial media to engage in valuable and stimulating discussions, together with CEOs from Africa’s leading listed companies and stock exchanges. The Ai Financial Reporting Awards will take place during the evening of the Forum.
Ai says the Forum and Awards are acknowledged as being “must-attend events for all those in the capital markets industry”. For further information please check the conference website or email to Emma Sayers (ESayers@africainvestor.com)
March 17th, 2011 by Tom Minney
South Africa’s securities exchange the JSE Limited (www.jse.co.za) increased Group revenues by 9% to R1,255 million ($178 mn) from R1,156 mn in 2009. The exchange described it in a press release as “a fair year in challenging conditions in 2010” and said it focused on operational projects and responding to changes in the global exchange industry. Results were driven by strong performances from the cash equity market, information products sales and commodity derivatives.
CEO Russell Loubser has also announced that he will stand down as CEO at the end of 2011, having taken the post in 1997. His place will be taken by Nicky Newton-King, who has been deputy CEO for eight years.
Commenting on the 2010 results, Loubser in the release: “The past 15 years have been a time of extraordinary development for the JSE. The diversity of revenue streams in the business reflects the fundamental nature of its transformational journey. The JSE’s ability to remain competitive in our fast- changing industry has been maintained through continued growth in product range and trade volumes, as well as tight management of costs while still maintaining world-class standards.”
JSE operating costs before net finance income rose by 8% to R879 mn (2009: R810 mn) resulting in a net profit after tax of R378 mn (2009: R366 mn). Much of the cost increase can be attributed to costs related to the JSE’s large IT projects, which required increased staff numbers. The JSE has no borrowings and R1,046 mn in cash reserves (2009: R921 mn).
Farewell Russell
The JSE Board has been relatively unchanged for the past decade but CEO Russell Loubser has decided to stand down as CEO with effect from 31 December 2011. JSE non-executive chairman Humphrey Borkum said: “Russell joined the JSE as CEO in 1997 and has been responsible for significant and highly successful innovations. This is not the time to praise or thank Russell for his enormous contribution as he still has 9 months left before leaving the JSE. The time for farewells will come later. I am delighted to announce that the Board has appointed Nicky Newton-King as CEO with effect from 1 January 2012. This appointment is well deserved and will ensure an orderly transition.”
2010 Overview
• Growing trading volumes pushed up equities trading revenue again, up 5% year-on-year to R325 mn in 2010 (2009: R310 mn). The number of daily equity trades increased 13% year-on-year (2010: 94,656). The JSE implemented a new equities billing model to incentivise increased trading in March 2010.
• The interest rate market also increased revenue, partly because of including 12 months of revenue, compared to only 6 months before since it was June 2009 when the JSE acquired the Bond Exchange South Africa (BESA). Like-for-like, revenue fell 10% to R35 mn (2009: R38 mn). Bond market volumes in 2010 were driven partly by foreigners entering the SA bond market, with net purchases valued at R58.6 billion (2009: net positive R24 bn). Interest rate derivatives volumes continued to grow off a low base. The JSE continues to discuss the model and ways forward with all market participants.
• In the equity derivatives market, the number of futures contracts traded rose in value and number, but revenue fell slightly owing to a changed product mix. Trade in international derivatives – that is, derivatives on companies listed on a stock market offshore – grew particularly strongly. The team continues to bring new products to the market. To encourage a move to a central order book and to stimulate greater activity on the equity derivatives market, the JSE introduced the maker-taker billing model in July 2010.
• The commodities derivatives market performed well in 2010 with a 12% rise in commodity derivative contracts to 2.1 mn. This is largely owing to a rise in volumes traded in its oldest product set – agricultural product derivatives – but also aided by the expansion of trade into new hard commodities products thanks to a licensing agreement with the CME Group.
• Revenue from the issuer services division which does listings including equities, bonds and other instruments, rose to R86 mn (2009: R79 mn), mainly owing to the inclusion of 12 months of revenue from the interest rate market. The number of new company listings on the JSE rose to 14 in 2010 (2009:10) including one on AltX and one on the Africa Board. Loubser comments: “Listings remained subdued, an experience shared with most other members of the World Federation of Exchanges. Notably, 2010 saw the listing of Wilderness Safaris – the second Africa Board listing.”
• Trade in currency derivatives for 2010 was slightly down on 2009 levels. In 2010, the JSE added contracts on the Swiss franc and Chinese yuan.
• The Information Products Sales division focused on new markets and grew revenue by 7% to R117 mn (2009: R109 mn). The team also expanded its product range and adjusted some fees to give more retail clients access to data.
Strategic initiatives
The global financial services industry is changing fast and the JSE, haveing already changed enormously, has to keep moving. Big technology projects are central to the JSE’s focus for 2011. Other strategic initiatives include:
• Building consensus on the growth of the spot and derivatives interest rate markets;
• Growing the client and product range in all market segments, concentrating particularly on how to bring over-the-counter (OTC) trade on-market and on how to encourage more foreign activity on the JSE derivatives exchange;
• Unlocking the opportunities for investors on the African continent by attracting listings on the JSE’s Africa Board as well as creating indices on African stocks that allow investors to track the performance of top issuers across the continent.
Prospects
Revenue projections are not possible in the stock exchange industry, since they depend on trading volumes, which are driven by market conditions. Loubser says: “In a globally competitive environment, markets with strong regulation, solid infrastructure and thriving institutions will be better positioned to attract sustainable capital flows. The recognition by the World Economic Forum (WEF) Global Competiveness Report 2010-2011 that South Africa’s securities exchange regulation is the best in the world reflects our transformation from a single product equity exchange to a well regulated fully horizontally and vertically integrated exchange.”
Board changes
Non-executive directors Gloria Serobe and Wendy Luhabe have indicated that they will not make themselves available for re-election at our AGM in April 2011. Chairman Borkum says: “After having served 10 and 8 years on the Board respectively they have both made significant contributions to the JSE’s affairs and I thank them most sincerely”, says Borkum.
Jonathan Berman resigned during the course of the year due to his other business commitments. He joined the Board as an alternate director following the BESA merger.
Lastly, in terms of accepted practice, it has been decided to shrink the number of executive directors on our Board. Borkum says: “Leanne Parsons and John Burke, who are senior and highly respected executives of the JSE, will both stand down as executive directors at our AGM in April.” They will continue to contribute to the Board as alternate directors.
March 7th, 2011 by Tom Minney
The Egyptian Exchange (www.egyptse.com) has failed to meet another self-imposed deadline to reopen yesterday (6 March), and investors are increasingly unhappy. In a statement on 3 March the stock exchange said the delay was linked to the resignation of Prime Minister Ahmed Shafik. Costs of debt are soaring and prices for a foreign-listed exchange-traded fund (ETF) and global depository receipts (GDRs) are falling.
In the statement, the bourse says: “Resuming of trading will be decided following the discussions with Egypt’s new Prime Minister.” New regulations by the Egyptian Financial Supervisory Authority to govern trading, aimed to halt trading if there is too much volatility, are published on the EGX website. There are also requirements of disclosure of who owns the shares and many pages of blocks on share trading by named individuals.
According to interviews by Bloomberg news the EGX market could fall by up to 10% when it does reopen.
The Ministry of Finance sold LE 3 billion ($509 million) of bonds on 6 March, LE 1.5 bn less than planned, as yields on 266-day notes climbed 31 basis points from the last auction to 12.47%, reports Bloomberg.
The Market Vectors Egypt Index ETF, traded in the US, firstrose19% between 27 January and 14 February, 3 days after former President Hosni Mubarak resigned, and then fell 9%, including 6.2% in 2 weeks while the MSCI Emerging Markets Index rose 1.5%. Last week, Commercial International Bank Egypt GDRs, traded in London, sank 15% to the lowest level since July and GDRs in Orascom Telecom Holding first climbed12% but since sunk to 5.2% below their level on 27 January when the EGX shut down during political unrest.
Barclays Capital said in a report on 18 January that foreign investors hold about $13 bn in Egyptian shares and account for almost 25% of trading.
Jeff Chowdhry, the London-based head of emerging-market equities at F&C, which oversees about $163 billion worldwide, is reported on Bloomberg as saying that Egypt risks becoming “a pariah of an investment destination. If they value foreign investment in their stock market, they should get that market open immediately and take off any restrictions in terms of having too cumbersome administrative requirements.”
Slim Feriani, London-based CEO of Advance Emerging Capital Ltd, which manages $750 mn in frontier and developing nation stocks warns the EGX30 may drop another 10% when it eventually reopens after falling 16% in the week before it closed.
Bloomberg also quotes Frank Nielsen, MSCI executive director for equity and applied research, saying on 1 March that MSCI Inc. may begin investor talks on whether to remove Egypt from the MSCI Emerging Markets Index if the market is closed for 40 days or more. Argentina was dropped from the index in 2009 and reclassified as a frontier market.
Prime Minister-designate Essam Sharaf may announce his new cabinet by the end of the week. Finance Minister Samir Radwan said economic growth will slow to about 4% in the fiscal year to end June, down from an earlier 6% forecast.
Bloomberg cites Fadi Al Said, a Dubai-based senior investment manager at ING Investment Management which oversees about $ 518 billion worldwide: “I’m really disappointed on the way it’s been handled. I hope that the market will open up soon and let’s get over with this cleanout, because this will create massive opportunities.”
March 3rd, 2011 by Tom Minney
Fitch Ratings agency (www.fitchratings.com) has given Zambia a “B+” rating on long-term foreign and local currency, with a stable outlook. Fitch has also assigned a Short-term rating of ‘B’ and a Country Ceiling of ‘BB-’. This could pave the way for a $500 million Eurobond, according to Standard Bank, but the country has plenty of local deposits seeking homes as local interest rates are attractive and the currency that looks strong against the US dollar.
Veronica Kalema, Director in Fitch’s Sovereign Group, says in a statement: “The ratings reflect the marked improvement in Zambia’s economic performance since 2003 driven by improved macroeconomic stability, economic liberalisation, rising private investment and production in the mining sector, and more recently, a strong agricultural performance.
“The rating is also supported by Zambia’s resilience to the global financial crisis, with growth accelerating in 2009 and 2010, and comfortable external and public debt ratios, which deteriorated only slightly in 2009 before recovering in 2010. After spiking in 2008 and 2009, inflation fell to high single digits in 2010 and the currency has been stronger and more stable since H2 2009.”
Fitch notes real GDP growth has averaged 6.3% since 2006 and accelerated to 7.1% in 2010. Copper production reached a record high of 820,000 metric tonnes (MT) in 2010, ahead of targets, and the Government expects it to reach 1m MT in 2012. Standard Bank, in a research note today (3 March) notes that the price of copper is up from $2,800/tonne in Dec 08 and passed $10,000/tonne during Feb 11. Zambia also grew more maize than it could consume locally last year and exported some. The harvest is looking even better this year.
“Predictably, the country’s trade balance has improved to record a large surplus during 2010, roughly 20% of GDP,” writes Standard Bank analyst Phumelele Mbiyo. Fitch also gives B+ ratings to Angola, Ghana, Kenya. Nigeria and Gabon (BB-) are more highly rated, Mozambique and Rwanda (B) are lower.
The Government is planning extensive infrastructure investment, chiefly on energy and roads. in 2008 it has postponed plans for a $1 billion bond due to the global financial crisis. In 2010 it has raised funds separately to extend the Kariba North Bank power station and build the Kafue Gorge Lower power plant. This would cut the size of any potential Eurobond.
February 14th, 2011 by Tom Minney
Africa’s newest stock exchange is the Rwanda Stock Exchange (RSE), launched on 31 Jan to start trading the shares of brewer Brasseries et Limonaderies du Rwanda BRALIRWA (www.bralirwa.com). The exchange replaces the Rwanda-Over-The-Counter (OTC) market which has operated since 31 Jan 2008.
Prime Minister Bernard Makuza launched the RSE and said it is a key development milestone, according to news reports: “Building a strong financial system is a key element of Vision 2020; the Government will continue to facilitate the development of the capital market.” Finance Minister John Rwangombwa said Government had sustained a stable macroeconomic environment over the years and laid the appropriate environment to attract both domestic and international investments.
The RSE was formed as a dormant company after a March 2007 decree that established the Capital Markets Advisory Council (www.cmac.org.rw) to set up and regulate the transitional process towards a full stock exchange. CMAC had run the ROTC and would now be transformed into a Capital Markets Authority to act as regulator. The legal framework aims to comply with standards of the International Organization of Securities Commissions (IOSCO).
BRALIRWA IPO
Bloomberg agency reported that BRALIRWA shares surged 62% when trading began on the RSE on 31 Jan. It quoted Robert Mathu, Executive Director of CMAC, saying the stock first traded at 220 Rwandan francs ($1.67).
The Rwandan Government aimed to raise RwFr 22.1 billion (US$37.3 million) from selling its 30% stake in BRALIRWA. Of this 128.6 mn shares, or 25% of the company, were sold in the public offer at RwFr 136 francs (22.9 US cents) per share. The Government said this was a discount to the valuation of RwFr 170 each share, in order to encourage buyers.
Government was to sell the remaining 5% of its shareholding to Heineken Group, which earlier bought 70% of the brewer from the Government. BRALIRWA sells beers such as Amstel, Guinness, Mutzig and local brand Primus and has an estimated 95% market share and also bottles Coca Cola products. Net annual revenues are reported at around $93 mn.
The offer reportedly attracted $80 mn in bids. MBEA Brokerage Services Rwanda was lead transaction advisor. The IPO campaign included investor education, TV and radio ads and Rwanda’s first research reports.
Co-transaction advisor Renaissance Capital sold 60% of the international tranche offering to international and local investors across several continents. There were share orders from Africa, Europe and the United States and the international portion was oversubscribed more than 5 times.
The shares ended the week on 11 Feb at RwFR 189, according to the market report from CMAC.
Future share offers
Bloomberg reports that the Government is discussing the sale this year of its 10% stake in MTN Rwanda, 55% owned by South Africa’s MTN Group Ltd. Minister Rwangombwa said another shareholder with a 35% stake will probably also offer its shares in public offer.
State-owned Banque de Kigali, Rwanda’s biggest lender by assets, will sell shares in May 2011 and cement-manufacturer Ciments du Rwanda Ltd., Rwanda Commercial Bank (BCR) and insurance company SONARWA are among other companies partly owned by the State who may sell stock through the RSE.
Contract to Kenya’s central depository
Rwanda contracted Kenya’s Central Depository and Settlement Corporation (www.cdsckenya.com) for a year. The company said it will train staff of the central Bank National Du Rwanda (BNR). The bank aims to procure and install a system to run a central depository for the equity market using its own staff by the end of the contract. CDSC has handled the BRALIRWA IPO and many of the biggest share offerings in East Africa, including Safaricom.
Kenyan depositories and share registrars are competing to offer their services more widely in the region.
Market structure
CMAC’s Mr Mathu told East African Business Week that the law establishing Capital Markets and the law regulating the market were to be published before end of January.
Previously the Government owned majority shares in the dormant RSE, but now it has reportedly reduced this to “at least 20%”. The private sector, including stockbrokers, holds the majority. Mr Mathu said: “We would like to see a stock exchange that is going to be pro-business, active and capable of providing a very efficient service to the investors both domestic and international.” Stockbrokers have welcomed their inclusion in the ownership of the stock exchange saying it will hold them responsible for protecting the bourse.
According to statistics from CMAC, bonds worth RwFr 26 bn have been issued and listed for trading on the ROTC, including 7 treasury bonds (RwFr 25 bn) and one Commercial Bank of Rwanda (BCR) corporate bond of RwFr 1bn. Bonds traded on the secondary market have so far generated a turnover of RwFr 654.4 mn. Two Kenyan companies, Kenya Commercial Bank (KCB) and Nation Media Group (NMG), are cross-listed.
February 1st, 2011 by Tom Minney
Cote d’Ivoire has formally reneged on $2.3 billion of Eurobonds, becoming the first nation to default since Jamaica in January 2010. The default comes after the strife-torn West African nation could not pay $29 million of interest which had become due on 31 December, and after a 30-day grace period had expired. However, the market appears to have faith the crisis will eventually end.
The problem stems from a stand-off following an election which all international and African observers say was won by Alassane Ouattara. However, the previous president Laurent Gbagbo has refused to step down and got an internal ruling to disallow hundreds of thousands of votes, meanwhile using the military to blockage Ouattara in a hotel where he is protected by 700 UN peacekeepers.
African states had earlier threatened force to remove Gbagbo, but more recently seem to be settling onto the usual compromise of a shared administration as demonstrated in Zimbabwe and Kenya. This is what Gbagbo seems to have been gambling on from the start, according to his early statements. Meanwhile Cote d’Ivoire hangs on the brink of renewed civil war, hundreds have died and thousands have fled into neighbouring countries.
According to a report on Bloomberg, Alcide Djedje, foreign affairs “minister” in Gbagbo’s administration, said in Addis Ababa, at the African Union summit: “We will be making the payment. We do have the money of course. We have been paying civil servants. I don’t have a date yet but we will definitely pay.”
Bloomberg cites an email from Thierry Desjardins, the Paris-based chairman of the London Club group of commercial bank creditors and vice-president of sovereign debt restructuring at BNP Paribas SA, which said they had not received the debt and this was an “event of default”. The trustee for the bond is Robert Rywkin, the New-York based trustee at Law Debenture Trust Co., and Bloomberg says he said his firm would send out a notice of an event of default “not more than a couple of days later,” once it has assessed the situation.
Surprising price bounce
Meanwhile the bonds price bounced back up. They were 36.25 cents for each $1 of nominal value in trading on Monday (31 January) but up to 40 cents by 4pm today (Tue 1 Feb), according to bid prices quoted on Bloomberg. This may be because the bonds will now trade including any interest that has been accumulated which the buyer can claim, according to Stephen Monks of London stockbroker Exotix Ltd. Bloomberg quotes Aviva Werner, general counsel at the New York Emerging Markets Traders Association said the bonds should, unless otherwise agreed, trade “flat”, which means the buyer doesn’t pay for accrued interest separately from the purchase price of the bonds: “It takes into account they might pay in the next week, month, year, so it’s an all-in price; the buyer is due to all past interest.”
Central bank closed
The region’s central bank, also known by its French acronym BCEAO, said it shut its offices on 27 January in the Cote d’Ivoire’s commercial capital, Abidjan. The Finacne Ministers of the West African Economic and Monetary Union had ordered it not to give Gbagbo access to national funds.
If the situation eases and a new government have access, then Cote d’Ivoire, which exports a third of the world’s cocoa, has sufficient reserves there to pay the interest. Most investors believe there will be funds to repay the bond.
Felix Domaus, of Erste Sparinvest KAG in Vienna which holds the debt in its portfolio fo developing market assets, is reported by Bloomberg: “This coupon is a small payment, it shouldn’t be any trouble to Ivory Coast’s cash flow in a normal situation. Investors will give Ivory Coast the benefit of the doubt, professional Ivory Coast investors are used to the necessity of being patient with this country.” However, he warned that patience could run out: “There will be some point in time when we investors will do something, accelerate payment or whatever.”
Standard Bank Plc in London noted “After some further downside, we believe Côte d’Ivoire 32s will be the best-performing sovereign Eurobond in 2011,” in its African Markets Revealed report on 17 Jan.
Origins of the debt
In 2000, Cote d’Ivoire reneged on $3.5 billion of “Brady bonds”, which were fixed income securities created as part of a debt restructuring plan for developing countries and named after former U.S. Treasury Secretary Nicholas Brady. It issued Eurobonds last April as part of its debt restructuring at a yield of 10.181%, according to Desjardins and data compiled by Bloomberg.
Cocoa Prices
The European Cocoa Association and Federation of Cocoa Commerce Ltd. said there is a “significant slowdown” in flows from the country. World cocoa prices have hit one-year highs.
The previous sovereign debt default was in January 2010 when Jamaica defaulted on its domestic bonds, citing falling tourism and remittances because of the global recession.
January 14th, 2011 by Tom Minney
According to recent local news reports, the Nigerian Stock Exchange (www.nigerianstockexchange.com) reports that a total volume of 93.3 billion shares valued at N797.6 billion (US$5.2 bn or 3.2% of gross domestic product) were traded in 2010, with volume down 9% and value up 16% compared to 2009 when 102.8 billion shares were traded, valued at N685.72 billion (2.9% of GDP). Compared to 2008, the 2009 figures represented a 46.8% in number of shares traded (volume) and 71.4% in value.
At a press conference on 19 January, interim administrator of the NSE, Emmanuel Ikazoboh, said average daily activity was down from 414.7 mn shares worth to 377.9 mn shares, with daily value up from N2.8 billion in 2009 to N3.2 billion in 2010. The turnover ratio dropped to 12.5% from 23.3% in 2009, partly because of a decline in share prices.
Equity trading was N797.5 bn or 99.99% of the turnover value. Only 13,000 units of State Government bonds were traded, valued at N14.14 mn. Trading in Industrial bonds and preference stocks was inactive compared to N412.8 million traded in 2009. Trading in Federal Government bonds on the NSE was also inactive in 2009 and 2010, compared to turnover of 13.8 billion units valued at N15.34 trillion in 137,080 deals on an Over-the-Counter (OTC) market for Federal Government bonds (2009 figures for the OTC were 17.1 billion units valued at N10.44 billion in 78,248 deals). In equities, the banking sector was most active and accounted for N432.1 bn of trading, followed by insurance with N15.1 bn.
The NSE received 366 complaints, up from 249 in 2009, and of these 291 were against dealing members’ firms, 66 against non-dealing members while 9 were against inactive operators. Only 135 complaints were resolved and 231 are still being investigated. A total of 74 dealing firms (up from 6 in 2009) were suspended for failing to submit audited accounts for 2008, 2009 and 2010.
January 5th, 2011 by Tom Minney
This afternoon (5 Jan) the yield on the Cote d’Ivoire US dollar-denominated sovereign bonds climbed back up 60 basis points to 15.68% as of 3:49 p.m. in Abidjan, according to a report on Bloomberg, after reaching 16.19% on 4 January. The price fell 4.1% to 40.76 cents on the dollar from a close of 42.5 cents yesterday (falls in bond prices area linked to rising yields), as news came that there is no let-up in the political crisis.
Yields had fallen earlier after an African Union envoy claimed the former president Laurent Gbagbo had honoured his pledge to lift a blockade on the hotel where the country’s president-in-waiting Alessane Ouattara is protected by United Nations troops. Prices fell this afternoon as it became clear it had not been lifted.
The country, now in danger of renewed civil war, has $2.3 billion of 2.5% Eurobonds due in 2032. It missed a payment of coupon interest totalling $29 million to bondholders on 31 December. The Gbagbo regime also failed to pay public-sector employees in December and it is likely these would be paid before bondholders. The CFA-zone central bank has withdrawn signatory powers after international and regional opinion that Gbabgo had lost an election last year but he refused to relinquish power.
Another report on Bloomberg quotes Thierry Desjardins, vice president in charge of sovereign debt restructuring at BNP Paribas SA, as saying there is a 30-day grace period to make the payment on the bond and no action can be taken by creditors until 31 Jan.
The bonds had been created in the enthusiasm for high-yielding frontier market debt, after Cote d’Ivoire defaulted in 2000 on $1.24 bn of Brady bonds and $1.03 bn of debt denominated in French francs and the yield climbed as high as 49%, according to Bloomberg data.
The news agency quotes David Damiba, London managing director for Renaissance Asset Managers (of Moscow-based Renaissance Group), who does not hold the bonds, as saying that a yield above 20% “is probably where you can start seeing some specialist buyers come in potentially to look at opportunities. 15%, considering what’s going on down there, is actually not pricing risk in my view. Should the situation move a little bit I could participate.”
December 31st, 2010 by Tom Minney
Foreign inflows into South African Government bonds denominated in Rand were R61 billion (US$9.2 bn), up from R26.5bn in 2009, according to figures from the JSE Ltd. (www.jse.co.za), which runs the country’s securities exchanges. Net international investment inflows into equities were R35.6 bn, down from a record R75.4 bn.
A report on Bloomberg news says it is the first time that inflows into bonds have been more than those into equities since 1994, when apartheid ended in South Africa. It was more than the net cumulative bond purchases of the previous 15 years.
Yields are more than double those on US Treasury bonds. Bloomberg quotes Leon Myburgh, a fixed-income strategist for sub-Saharan Africa at Citigroup’s Johannesburg office: “South African bonds offer some of the highest yields around. Slowing inflation and declining interest rates made them a very attractive investment.”
It has been a year of massive inflows into emerging markets bonds and debt denominated in local currencies, driven as investors searched for higher returns when interest rates in developed nations have been near zero. According to Bloomberg data, “the spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points (4.8%), from almost 535 (5.35%) at the start of the year”. Put simply, bond prices in secondary trading increase when interest yields fall.
Bloomberg quotes Jacques Theron, portfolio manager at Absa Asset Management Private Clients, as saying the inflows could continue in 2011. Because the benchmark South African interest rate is at 5.5% (November’s cut was the 3rd in 2010 and the 9th since December 2008) and inflation is near its 5-year low (averaging 3.5% in the 5 months including November), investors may believe that the SA Reserve Bank (central bank) could be one of the few that could cut interest rates further in 2011.
Bloomberg says the combination of low inflation and falling interest rates meant that the bonds returned on average more than 26% in US dollars in 2010, 3rd-best performer after Colombia and Indonesia based on available index data from JPMorgan Chase & Co. Equity investments in South Africa’s FTSE/JSE Africa All Share Index returned more than 29% in 2010, measured in US dollars. Stocks were boosted by takeovers, including US Wal-Mart Stores Inc. acquriing a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp. purchasing Dimension Data Plc.
Net foreign inflows into SA bonds helped the Rand (ZAR) gain 42% against the dollar, making it the best-performing emerging market currency, over the year.
Trevor Barsdorf, an analyst at Econometrix Treasury Management, is quoted as praising prudent debt management. Finance Minister Pravin Gordhan said on 27 Oct. that the country will keep its budget deficit to 5.3% of gross domestic product (GDP), down from a February estimate of 6.2%, and aims to reach 3.2% by fiscal 2014. Greece’s fiscal deficit was 15.4% of GDP and Ireland’s 14.4% in 2009.
Prospects for 2011
On the contrarian note, Bloomberg cites Manik Narain, emerging-markets strategist at UBS AG in London. “The best of the inflows into South African bonds is behind us.” Inflation has bottomed and will begin to pick up. and it is possible SA could raise interest rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, cutting the currency to an estimated R7.60=USD1.00 by the end of 2011.
However, most remain optimistic. ETM’s Barsdorf says it will strengthen to R6.00=$1 over the year and it could climb as far as R5.50=$1. That would push inflation to below the SARB’s target lower limit of 3% and the bank could cut interest rates by 50 to 100 basis points during 2011.
Werner Gey van Pittius of Investec Asset Management told Bloomberg there could be another $4 billion of foreign inflows into South African bonds in 2011 just from dedicated local-currency emerging-market debt funds: “I can’t see too many reasons not to be bullish on South African bonds. We can’t see an aggressive sell-off on the horizon, unless there’s a massive risk-aversion event.”