Signs Say Yes for South African Bond Sales But Issuers Say No

  • Issuance by financial companies heading for five-year low
  • Emerging-market spreads are hovering near 2007 levels

With emerging-market credit spreads near their best levels in more than a decade, 2018 should’ve been the year to borrow. Yet bond sales by South African banks, insurers and property companies are headed for a five-year low.

Not everyone is missing the boat. Capitec Bank Holdings Ltd., the country’s fastest-growing major lender, last week sold 500 million rand ($40 million) of three-year floating-rate notes at 153 basis points above the quarterly three-month Johannesburg Interbank Agreed Rate. Last May, it had to pay a premium of 200 basis points for the same amount.

The Situation

Financials' bond sales have slowed to five-year lows amid an emerging-market rout

Source: Bloomberg

*Data shows flows for Jan to May 22 in each year

The sale came in the midst of a rout that saw emerging-market assets from Brazil to Turkey dumped because of the prospect of higher U.S. yields. and concerns of spillover from Argentina -- which had to raise its key interest rate to 40 percent to defend its currency. Even so, spreads for the dollar bonds of emerging-market companies are still only about 40 basis points off 10-year lows reached in February, according to data compiled by Credit Suisse Group AG.

“The recent weakness in emerging-market appetite is a setback rather than a reversal in current sentiment,” said Adrian Saville, the chief executive officer of Cannon Asset Managers in Johannesburg. “To boot, you have specific sentiment favoring South Africa.”

Africa’s most industrialized economy has been riding a wave of optimism since Cyril Ramaphosa replaced Jacob Zuma as head of the ruling African National Congress in December and took over the national presidency in February. Ramaphosa has been on a drive to restore investor and business confidence that was eroded under Zuma’s scandal-tainted tenure of almost nine years.

Good Demand

The shortage of paper this year follows record levels of debt issuance last year, when sales jumped 40 percent, as companies refinanced existing debt. Lenders also boosted bond sales in 2017 and 2016 in order to comply with new rules under the Basel III global reforms, which requires banks to hold more liquid and long-term capital, curbing their need to issue debt.

The lack of supply helped Capitec, which in 2016 had to cough up 220 basis points over the benchmark to borrow 250 million rand from investors -- half of what it sought this year and in 2017.

Demand for the latest notes exceeded supply by almost four times with bids from 21 domestic investors totaling 1.9 billion rand, according to the lender, based in Stellenbosch, near Cape Town. With the bank experiencing strong retail deposit and capital growth, there is a “low likelihood” it will issue further debt this year, Capitec said.

“Demand for credit, bank paper as well, has been robust for some time now,” said Rand Merchant Bank fixed-income analyst Gordon Kerr. “Capitec still remains a favored bank to invest in for bond investors.”

— With assistance by Robert Brand

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