Diversifying funding sources: Corporate bonds are becoming more popular in locally based banks

While international bond issuance slowed slightly in 2011, dropping 5.3% to $3.37trn from the $3.39trn the previous year according to Bloomberg, debt issuance by African sovereigns and corporates outside the northern Arab states hit a record high of $12.4bn in 2011, a 17% rise on 2010, as data from Dealogic show. Corporate debt issuances in South Africa mirrored this regional growth, putting in a performance that improved on a corporate bond recovery seen in 2010.

CONTINUED GROWTH: Alexi Contogiannis, the manager of debt capital markets at Standard Bank, spoke in November 2011 on the market’s relatively strong showing. “In 2006, South Africa was a R40bn ($4.9bn) a year issuance market. By last year [2010] we saw that increasing to just north of R90bn ($11bn), and as we speak now this year we are at about R90bn ($11bn). We have had a significant growth in our bond issuance, if you exclude government, in our local market.”

Of central importance to this result was South Africa’s healthy investment climate. In mid-year, Moody’s reported that the outlook for South African corporate bonds was generally stable with a “positive rating pressure likely to develop over the next 12 months”, only giving two of its 21 rated South African corporate bonds a negative outlook. The need to refinance the maturing debt accounted for much of the momentum behind the issuance of corporate bonds, which, as usual, were dominated by offerings from the financial sector.

ISSUANCES IN 2011: The preponderance of issuances in 2011 by financial institutions in South Africa was not atypical. These included a R1.25bn ($153m), five-year issuance from Goldman Sachs that brought with it a degree of innovation. The inwardly listed bond – one of the largest in South Africa to date – was the first by a non-African multinational, and received a local credit rating of AAA.za from Moody’s. The issuance, arranged by Standard Bank, was placed on Johannesburg Stock Exchange’s (JSE) interest rate market.

While South Africa-based investment bank Investec’s 2011 issuance of nearly $800m reinforced the financial institution’s status as the debt market’s heavy hitter, the arrival of more than a dozen first-time issuers to the arena proved to be another welcome feature of the year’s activity. One such newcomer was Growthpoint Properties, which in 2011 became the first South African listed property company to issue a senior unsecured corporate bond. The R500m ($61.2m), four-year offering was 3.8 times oversubscribed, demonstrating significant appetite for well-rated property firms with a favourable track record. The firm has a portfolio of retail, office and industrial properties in South Africa and a 67% holding in Growthpoint Properties in Australia. Growthpoint previously had turned to local debt markets for relatively short-term debt, introducing a R5bn ($612m) DMTN Programme in November 2009 after Moody’s issued the company a favourable national scale investment-grade rating of A1.za (long term) and P-1.za (short term). Explaining the company’s decision to diversify its funding sources with this new issuance, Growthpoint’s chief executive, Norbert Sasse, told the local press, “It was always our intention to issue longer-term corporate bonds. Investors have indicated a desire for longer-term Growthpoint paper and this, together with the compression of margins in the market, prompted us to make our entry.”

LOOKING AHEAD: The outlook for the nation’s corporate debt market remains positive. A faltering global economy and concerns about the stability of the European financial system has made emerging market debt – both sovereign and corporate – increasingly attractive to investors. In a viewpoint document released in early 2012, locally based Investec struck a bullish note on corporate debt growth prospects of markets such as South Africa’s, pointing to the 136 ratings upgrades enjoyed by emerging markets since 2008. Moreover, as banks gear up for the implementation of Basel III in South Africa, many expect to see a shift in how corporates are funded. Turning to the capital markets for fresh funding may soon become an even more appealing proposition for South Africa’s growing businesses.