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Why a cash-strapped arms maker can still sell debt

Denel is tapping the bond market.

Denel, South Africa’s state-owned arms manufacturer, is tapping bond markets — and finding buyers for its debt — even after seeking emergency funding in the past two months to pay staff salaries.

The company, one of several state-owned entities struggling to stay afloat after years of financial mismanagement, sold R50 million ($3.3 million) of two-year floating-rate notes this week, according to a stock exchange notice.

The bonds offered a coupon of 9.333%, or 250 basis points above the benchmark three-month Johannesburg Interbank Rate, which partly explains why they found buyers. They’re also government-guaranteed, meaning investors are reaping that yield with very little risk.

Read: SA to seek budget spending cuts as debt climbs

Although there are no details on who bought the notes, the Public Investment Corporation, or PIC, has acted as a backstop for Denel in the past. The PIC, which manages most of the South African government’s pension funds, owns about 88% of the company’s existing bonds.

Pensions push-back

But ex-government service pensioners may not put up with that for long, according to Peter Attard Montalto, the London-based head of capital-markets research at Intellidex.

“A crunch is clearly coming,” Montalto said. “They have only managed to issue R50 million today. Clearly there is a lot of push-back from the Government Employees Pension Fund on the PIC that is creating problems here.”

Denel has R3.27 billion of bonds outstanding, according to data compiled by Bloomberg. Almost R3 billion of that is due this year. Should the company be unable to roll over the debt, it would put further strain on state coffers at a time when public enterprises including Eskom, the electricity utility, are in need of cash to stay afloat.

South Africa’s potential liability for government-guaranteed debt of state-owned companies was R879.6 billion in March, according to the National Treasury.

© 2019 Bloomberg L.P.

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