Basel Bond Sale Backfires as Investors Balk: South Africa Credit
FirstRand Ltd. (FSR)’s plan to sell South Africa’s first dollar bonds that meet new global capital rules backfired as investors balked even with yields above those of developing market financial-services companies.
South Africa’s second-largest bank delayed a sale last week of 10-year $300 million to $500 million of debt priced to yield 5.875 percent. That compares with a rate of 4.56 percent on $1 billion of 10-year dollar bonds sold this month by Johannesburg-based fuelmaker Sasol Ltd. (SOL) and was 117 basis points above JPMorgan Chase & Co.’s CEMBI Financial Sector Blended Yield Index on Nov. 21.
The sale was pulled after FirstRand marketed the notes to U.K. and Asian investors in what it said would have been the first Basel III-compliant securities by an emerging-market bank. The rules allow debt sold by lenders to be converted to equity or written off by regulators to avoid bankruptcy. The worst labor unrest since the fall of apartheid and two sovereign downgrades amid deteriorating budget and current-account deficits also weighed on the planned sale, FirstRand said.
“It’s untested and untried,” Bruce Stewart, head of debt origination at Nedbank Group Ltd. (NED)’s investment-banking unit, said by phone on Nov. 20. “There’s still not a lot of precedence in the international markets given that the Basel III regulations are still a work in progress.”
The sale was canceled on Nov. 16, a day after the debt of Gold Fields Ltd. was downgraded to junk by Standard & Poor’s amid concerns of more social and political tension in Africa’s largest economy. It also came amid a bigger-than-expected increase in U.S. unemployment claims, strikes in Europe over austerity and rising tension in the Middle East between Israel and the Hamas-ruled Gaza strip.
“They were brave to try an inaugural Basel III issue offshore,” Stewart said. “I don’t believe the timing was ideal.”
FirstRand’s credit rating was cut one level by S&P on Oct. 16 after the ratings company lowered its sovereign assessment of South Africa. The Johannesburg-based lender’s reduction to BBB-from BBB matched that Sasol, the world’s largest producer of motor fuel from coal. Moody’s Investors Service cut the nation’s debt on Sept. 27.
“It would’ve backfired if we went through with it,” Andries du Toit, FirstRand’s treasurer, said by phone from Johannesburg yesterday. Demand exceeded supply 1.2 times, short of the lender’s target for being at least three-times oversubscribed to ensure there was an active secondary market, he said.
“We are very happy with the fact that our relationships are intact and we can go back when market conditions improve,” he said. “We don’t want our first issue to be less than optimal. All the investors we spoke to said we were right to postpone. We never expected it to be a slam dunk.”
The company tested selling the debt locally and decided against it after pricing and appetite didn’t meet expectations, Du Toit said. It also needs funding for its London and Indian operations, he said.
A Basel III-compliant tier-2 instrument should pay between 50 basis points and 100 basis points over traditional tier 2 securities, Du Toit said.
The yield on South Africa’s 6.75 percent rand bonds due March 2021 jumped 24 basis points, or 0.24 percentage point, to 6.68 percent at 2:52 p.m. in Johannesburg from a record low of 6.44 percent on Sept. 26, a day before the Moody’s downgrade. The extra yield investors demand to hold the debt rather than U.S. Treasuries rose 23 basis points over the period to 500 basis points.
Investec Asset Management, which manages more than $95 billion, would invest in bank debt that meets Basel III requirements, Simon Howie, who heads South African and frontier-market credit, said by phone from Cape Town on Nov. 21.
“We’re moving into a new regime in terms of regulation, where there is potentially huge value in providing part of the capital for banks,” Howie said. “The initial reception to that bond was incredibly strong.”
FirstRand doesn’t need more tier 2 capital, which includes some reserves and subordinated debt and excludes equity, until 2014, FirstRand’s Du Toit said. “We are preparing the market, local and offshore, for these instruments,” he said.
The cost of protecting South African dollar-denominated sovereign debt against non-payment for five years using credit default swaps rose one basis point to 165 yesterday. That compares with 166 a week ago when FirstRand pulled the sale, the highest level since Oct. 9.
Yields on FirstRand’s 4.375 percent dollar-debt due June 2016 have jumped 10 basis points to 3.14 percent since Nov. 15, its highest since Sept. 18.
“Whether it’s once oversubscribed or three times oversubscribed you are still placing it,” Erik Nel, a fund manager at Atlantic Asset Management Ltd. in Cape Town, said yesterday. “There’s no upside in coming to market and then pulling it at the last minute, irrespective of how pure the intention.”
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