First Strut Default Jolts High-Yield Market: South Africa Credit

The liquidation of First Strut (Pty) Ltd. following the murder of its chairman in June has cut sales of high-yielding debt in South Africa as investors shun the risk of more corporate bond defaults.

First Strut, a building company also traded as First Tech, applied for provisional liquidation on July 16 after Chairman Jeff Wiggill was found dead with bullet wounds next to his Bentley in Soweto, southwest of Johannesburg. In 2011 the company sold 925 million rand ($90 million) of floating-rate notes due September 2016 at 550 basis points above the three-month Johannesburg interbank agreed rate, which was 5.13 percent on Aug. 30. High-yield emerging-market bonds have fallen 575 basis points in 2013, according to Bloomberg indexes.

“High-yield transactions that were on the table and far advanced or in the pipeline have disappeared,” Eyal Shevel, head of corporate ratings at Johannesburg-based Global Credit Rating Co., said in a phone interview on Aug. 22. “For a market that was very robust in the first half, First Strut has caused sentiment to turn negative.”

South African companies sold $15.1 billion of bonds in 2012, the most on record. Corporate issues this year are at the slowest pace since 2010 at $7.54 billion, data compiled by Bloomberg shows. Only two high-yield notes, which are bonds rated below investment grade, have been sold, compared with five in 2012. High-yield issuance increased 35 percent this year through August to $329 billion globally, compared with the year-earlier period, according to data compiled by Bloomberg.

Unsustainable Losses

Wiggill’s death left a web of transactions that had to be unraveled by court-appointed managers, who concluded that the company’s opaque overhead structure amid a weak economic climate had left First Strut with unsustainable losses. Liquidation procedures are ongoing.

Apart from the First Strut fallout, Africa’s biggest economy is beset with rising inflation, the world’s worst-performing major currency against the dollar, rising borrowing costs and a labor strikes. Emerging-market assets have been under pressure since the U.S. Federal Reserve said in May it may start reducing its bond-purchase program.

“It’s important not to taint the good standing of many of our corporates with the debacle of First Strut,” Heather Jackson, chief executive officer of Cape Town-based Atlantic Specialised Finance, said in an e-mailed response to questions on Aug. 23.

Non-rated Debt

Yields on South African benchmark government debt due December 2026 fell four basis points, or 0.04 percentage point, to 8.43 percent by 3:48 p.m. in Johannesburg after rising to the highest since January 2012 on Aug. 22. The rand has weakened 17 percent against the dollar this year, the worst performer of 16 major currencies tracked by Bloomberg. It strengthened 0.6 percent to 10.2217 per dollar.

Last year, Idwala Industrial Holdings Ltd. a Johannesburg-based producer of lime and calcium carbonate, was the biggest issuer of non-investment grade credit in South Africa with almost 1.5 billion rand in debt, according to research compiled by Johannesburg’s Nedbank Group Ltd. There have been no sales of non-investment grade debt since June, according to research by Rand Merchant Bank, which is also based in the South African city.

“It’s highly leveraged and unlisted,” Shevel said. Idwala, owned by private equity companies including Ethos Private Equity Ltd. and a unit of Old Mutual Plc, had debt that was four times greater than its annual earnings by the end of December, according to a report by Global Credit Rating.

Privately Placed

Idwala has “four or five bondholders” and the notes don’t trade, Peter Buchner, the company’s head of treasury, said by phone on Aug. 22. The debt was privately placed and the company won’t be issuing more bonds this year, he said. Buchner didn’t immediately return a message left at his office on Aug. 30.

First Strut owed about 2.5 billion rand to creditors including South Africa’s five largest banks and six of the country’s fund managers. Global Credit Ratings gave First Strut’s bonds an investment-grade BBB rating, higher than the company’s non-investment level. Calls made to the numbers for First Strut’s office, published on its website before it was taken offline, didn’t connect on Aug. 30.

“Within the listed investment grade universe, there had never been a corporate bond default,” Jackson of Atlantic Specialised Finance said in a note to clients. “The First Tech default on senior secured bonds has now tarnished this.”

Before the company collapsed it didn’t show it was compliant with South Africa’s corporate governance code, King III, according to Jackson. The chairman, Wiggill, was an executive and said to be solely responsible for the group’s financial affairs, while First Strut’s auditor was a little-known U.K.-based company, she said.

“Alarm bells should have rung,” she said. “It’s an important lesson to us all, no question, but defaults should still be expected to be rare events.”

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