African Bank Casts Shadow Over South Africa’s Bond Market

The collapse of African Bank Investments Ltd. is casting a shadow over South Africa’s corporate bond market, driving up borrowing costs and prompting companies to cancel debt sales.

Issuance was 4.6 billion rand ($415 million) in August, about a third of the monthly average in the first half of the year, and climbed to about 50 percent in September, Alexi Contogiannis, a primary-market debt executive at Standard Bank Group Ltd., told reporters in Cape Town on Nov. 13. “A number” of clients have pulled sales since African Bank failed on Aug. 10, said Prasanna Nana, head of debt capital markets at Barclays Africa Group Ltd., without identifying any.

Three months after South Africa’s central bank stepped in to rescue the lender, imposing losses on bond investors and wiping out shareholders, participants at Africa’s biggest bond-market forum last week fretted about lackluster investor appetite and dwindling issuance. The yield premium of the nation’s corporate bonds over government securities widened 36 basis points to 206 in the period, the most in at least two years, according to Johannesburg Stock Exchange indexes.

“African Bank was a catalyst to create what we are now in, which is essentially a corporate bond drought,” Bruce Stewart, head of debt origination at Nedbank Group Ltd., said during a panel discussion at the annual Africa Capital Markets conference. “Some irreparable damage is being done and I don’t think we’ll see spreads back to where they were six, seven months ago.”

‘Behind Forecasts’

Corporate debt issuance climbed 14 percent to 88.6 billion rand in the first three quarters, 37.9 billion rand short of Standard Bank’s full-year projection of 126.5 billion rand, Contogiannis said. By comparison, local-currency corporate issuance in Turkey doubled in the first 10 months of the year to 43.2 billion lira ($19.3 billion), according to data compiled by Bloomberg.

“We are behind our forecasts,” Contogiannis said. “The extent of the miss will depend on how hesitant issuers are to access the market, given the shift in investor sentiment and pricing. The lingering impact of this will still be felt for some time.”

Second Default

Yields on government rand bonds due December 2026 dropped one basis point, or 0.01 percentage point, to 7.86 percent by 5:05 p.m. in Johannesburg.

African Bank bondholders suffered a 10 percent loss when the central bank stepped in to rescue the Johannesburg-based lender after investors withdrew funding amid rising losses and bad loans. Toyota South Africa Pty Ltd. and Bayerische Motoren Werke AG’s South African unit were among companies that withdrew bond sales in the wake of the collapse, and Moody’s Investors Service cut the credit ratings of the nation’s four biggest lenders.

The default, the second in South Africa’s 1 trillion rand corporate bond market, exposed the lack of secondary-market liquidity that prevented holders from selling the debt when warning signals appeared, and raised concerns the central bank won’t necessarily bail out a failed lender.

“It reminded investors that investing in interest-bearing instruments isn’t a risk-free investment,” Philip Myburgh, chief executive officer of Stanlib Credit Partners, a unit of Johannesburg-based Stanlib, which oversees the equivalent of $50 billion. “Defaults do happen. Abil has clearly made investors more reluctant to invest,” he said, referring to African Bank.

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