Liberty Pays Price for Rising South African Debt Costs

  • Corrects details about yield spread in second paragraph
  • Spreads over government securities may have peaked, Blood says

Liberty Group Ltd. paid more than ever this month to sell fixed-rate debt as South African borrowing costs increase because of higher political risk and an economy headed for its slowest expansion since the 2009 recession.

Liberty Group issued 400 million rand ($29 million) of unsecured bonds due October 2022 at a coupon of 10.2 percent, more than 1 percentage point higher than seven-year securities that the Johannesburg-based insurer sold in 2013, according to data compiled by Bloomberg. The spread of Liberty Group’s 1 billion-rand notes maturing in August 2020 over government debt maturing in January of that year was 227 basis points on Sept. 30 and narrowed to 218 basis points on Oct. 3, the lowest level since December.

South African President Jacob Zuma’s administration is struggling to reignite growth, which the country’s central bank expects to be 0.4 percent this year. S&P Global Ratings has urged the government to quell investor uncertainty and end political interference that’s weakening state institutions and threatening the country’s investment-grade status. Volatile equity markets, the highest interest rates in six years and consumers battling unemployment, as well as rising expenses, have all contributed to declining profit at the nation’s largest insurers.

“The company paying more for its debt than historically is more an indication of spreads widening generally for credit and not Liberty specific issues,” said Bronwyn Blood, who helps manage fixed-income debt at RMI Specialist Managers in Cape Town. “We do not see spreads widening further, however, and believe that for insurers they have reached their widest levels.”

Liberty Group, a unit of Liberty Holdings Ltd., also raised 600 million rand in floating-rate notes in October that were issued at the three-month Johannesburg Interbank Agreed Rate, plus 228 basis points. In December 2014, Liberty Group paid Jibar plus 250 basis points for a seven-year, 500 million rand bond. Jibar rose to 7.37 percent on June 27, the highest since August 2009.

The increased cost of selling debt is a “function of where interest rates are,” Casper Troskie, Liberty Holdings’s financial director, said by phone. South Africa’s central bank has raised interest rates four times since July 2015. “We’ve seen rates tick up. Long-term interest rates do reflect some of the risk seen in the economy.”

Police Probe

Reports in August that South African Finance Minister South African Pravin Gordhan is being probed by police led to a slump in the rand and bonds. To date no charges have been brought against Gordhan with opposition parties saying the investigation is an effort by Zuma to install a more pliant National Treasury chief.

Futuregrowth Asset Management, Africa’s biggest specialist fixed-income money manager, said last month that it will stop lending to state-owned companies because of concerns around how they are being run. It since resumed lending to the Land and Agricultural Development Bank of South Africa.

Liberty Holdings’s net income declined 8 percent in the six months of 2016 as sales fell below its expectations. The holding company’s capital adequacy cover dropped to 2.95 times the regulatory minimum in the period, compared with the 2.9 times cover reported last month by MMI Holdings Ltd., South Africa’s fifth-biggest insurer by market value.

Liberty Group, the country’s sixth-largest insurer, issued bonds because it is cheaper than selling equity to help fund the working capital of its insurance business, Troskie said on Oct. 3, adding that demand for the securities outstripped supply. The cost of selling bonds for the insurance business is tax deductible, leaving the effective rate on the securities at just over 7 percent, he said.

Wider Spreads

The sale will put the company’s debt-to-equity ratio at 16 percent to 17 percent, within its 15 percent to 20 percent target, he said. Liberty Group has a 1 billion rand bond maturing next August, with another 1 billion rand due in April 2018. The company hasn’t yet decided what it will do when the 2017 bond comes due, Troskie said, adding that any plans for new sales will depend on market conditions at the time.

“Bank spreads have widened significantly,” Blood said. “Insurance spreads have been widening, but are now starting to narrow again. State-owned enterprises have also been on a widening trend and there is potential for more widening as that sector comes under scrutiny from the rating agencies.”

Investor appetite is still strong for issuers with top credit ratings, according to Blood.

“There is a general lack of supply of corporate paper due to the subdued economy,” she said. Liberty Group, with a zaAAA rating from S&P, the highest national-scale investment-grade rating, “is a high quality issuer.”

(Corrects company name in first paragraph and details on yield spread in second paragraph, removes reference to Sanlam in fifth paragraph, adds market context in sixth paragraph, and corrects company’s credit rating in last paragraph of story originally published on Oct. 4.)
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