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Beating 26% Joblessness Spurs IDC Bond Sale: South Africa Credit

South Africa's President Zuma
Jacob Zuma, president of South Africa, has made his top priority reducing a 25.5 percent unemployment rate. Photographer: Scott Eells/Bloomberg

The Industrial Development Corp., a state-owned South African lender, plans to sell bonds to private investors for the first time in 30 years, raising as much as 12 billion rand ($1.38 billion) for projects to cut unemployment.

The company has raised 3 billion rand in funding by issuing five-year notes directly to the government’s Unemployment Insurance Fund that pays annual interest of 5 percent. That compares with a yield on the government’s 8.25 percent securities due September 2017 of 5.91 percent.

President Jacob Zuma has made his top priority reducing a 25.5 percent unemployment rate, the highest of 61 countries monitored by Bloomberg. The IDC, as it’s known, is loosening its purse strings to boost investments in projects with the greatest potential to create jobs by building up a 100 billion-rand lending pool over the next five years, according to Finance Director Gert Gouws. That will raise its level of debt to about 40 percent of equity through 2017 from 15 percent.

“The IDC has not been fulfilling its developmental mandate because it has been too conservative and averse to lend,” Jason Lightfoot, who helps manage the equivalent of $12.6 billion of fixed-income funds at Cape Town-based Futuregrowth Asset Management, said by phone Dec. 7. The decision to boost funding is long overdue and should be accelerated to a debt-to-equity ratio of 60 percent, he said.

Project Opportunities

The IDC may raise between 10 billion rand and 12 billion rand through bond sales to private investors within five years, with the first issuance planned in the fourth quarter of next year, Gouws said in an e-mailed response to questions Dec. 4.

“The IDC is proactively identifying and funding new project opportunities,” he said. “The IDC’s funding requirements will continue to dictate the pace of our borrowings.”

The company provided a record 13.5 billion rand in financing to 293 projects in the year through March 2012, a 55 percent increase on the previous financial year. It estimates the investments helped create or sustain about 45,900 local jobs.

The lender hasn’t previously needed to raise much debt because it generated sufficient cash and profit to fund most of its lending. The company helps entrepreneurs who cannot access bank finance because they lack adequate security and provides funding for projects that meet government’s development goals.

Private Placements

The IDC agreed to sell 5 billion rand of 14-year bonds to fund renewable-energy projects to the state-owned Public Investment Corp., or PIC, with the first 500 million rand allocated on Nov. 7. The funds, which will be drawn down as needed over 24 months, will help the IDC finance 7.6 billion rand of renewable energy projects. The Pretoria-based PIC oversees pension funds of government employees with about 1.3 trillion rand in assets.

The IDC may make further private-bond placements with the PIC, while accessing another 1 billion rand from the Unemployment Insurance Fund in 2013, Gouws said. It also plans to secure more funding from banks and development finance institutions, such as the European Investment Bank, African Development Bank and China Development Bank.

Yields on the government’s five-year notes have dropped this year by 148 basis points, or 1.48 percentage points, to 5.91 percent as of 10:50 a.m. in Johannesburg. The premium investors demand to hold the debt rather than similar-maturity U.S. Treasuries narrowed four basis points to 531 from 651 at the beginning of the year.

‘Market Funding’

Total debt will probably climb to more than 30 billion rand by 2017 from 13 billion rand, Gouws said. About 5 billion rand worth of debt will be raised next year over and above funds obtained from the PIC and UIF, he said.

“The market would love to have the opportunity to have a look at the IDC and potentially invest in their bonds,” Simon Howie, who heads South African and frontier-market credit at Investec Asset Management, which manages the equivalent of $89 billion, said by phone from Cape Town on Dec. 7. “It was disappointing for everyone to see a bond arranged for the IDC and placed entirely with the PIC. It should be accessing market funding.”

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