Timing Is Everything as South Africa Clinches Dollar Bond Sale

  • Deal done in week of Zuma removal bid as rating cut looms
  • Raised $1.25 billion in first international sale since 2014

South Africa seized the moment for its return to the international debt market after an absence of two years, finding a window between a failed bid to remove the country’s leader and the prospect of a ratings downgrade.

The National Treasury sold a $1.25 billion 10-year bond with a coupon of 4.875 percent, 335 basis points over U.S. Treasuries, it said in a statement Friday from the capital Pretoria. The last dollar sale was a 2044 bond issued at 220 basis points above similar maturity U.S. bonds, which has since widened to 295 basis points, data compiled by Bloomberg show.

The latest deal was arranged two days after ruling party lawmakers quashed an attempt to impeach President Jacob Zuma and in the same week Standard & Poor’s, which may cut the country’s credit to junk, lowered its forecast for South African growth. While that sounds like a difficult time to approach investors, things could yet get worse, according to Abri Du Plessis at Cape Town-based Gryphon Asset Management.

“The sooner you do it, the better,” said Du Plessis, who helps manage $236 million in funds and isn’t looking to add any South African debt to his portfolios. “Things can go a bit more downhill from here. Yes, it’s an unfortunate day, just after an announcement like S&P’s and a week like we’ve had, but on the other hand, economic fundamentals, especially, can just worsen from here.”

The cost of insuring South Africa’s five-year debt against default and the premium investors demand to hold the nation’s dollar bonds over Treasuries climbed this week as politics combined with the renewed ratings concerns to unsettle investors. After South Africa’s highest court ruled Zuma broke the law when he refused to pay back taxpayer money used to upgrade his private home, opposition parties led a failed charge to impeach the president.

S&P on Wednesday cut its estimate of the nation’s growth rate in half and said it was worried that increasing political tension would divert the government’s attention from the need to reverse slowing economic growth, the primary pressure on the rating. The company, due to publish a review of South Africa in June, ranks the country BBB-, one level above junk status.

The Treasury had planned an international bond sale before the end of March, but said it could delay the issue if conditions did not meet its requirements. “What we look for is stable market conditions, with less volatility and noise, conditions characterized by stable indicative pricing observed over a period of time,” Tshepiso Moahloli, its chief director of liability management, said in an e-mailed response to questions.

After falling 25 percent in 2015, the rand has gained 3 percent this year as emerging market currencies rallied to their best month on record in March. The MSCI Emerging Markets stock index added 13 percent in March, the most since May 2009. Yields on South Africa’s dollar bond due September 2025 dropped to their lowest in five months this week.

Expected Downgrade

“In terms of timing, it is not so bad,” said Guillaume Tresca, a senior emerging market-strategist at Credit Agricole CIB in Paris, who holds a negative outlook on South Africa. “The window of opportunity is very tight: emerging markets have really improved recently and the deterioration could come back very rapidly, especially for South Africa and with an expected downgrade in June.”

Even so, Tresca doesn’t recommend buying the South African currency or bonds as the latest rally in the nation’s assets had more to do with the global appetite for emerging markets than improving conditions in the country, he said.

The bond sale was more than two times oversubscribed, with most of the investors in Europe and the U.S., the South African Treasury said in a statement. The government sees the successful sale as an expression of confidence in its economic policies and management, it said.

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