Bank debt splurge pushes South Africa bond sales to 4-year high

As the four biggest lenders sought to refinance maturing securities and meet international rules on liquidity.

Banks pushed corporate bond issuance in South Africa to the highest since 2011 in the first quarter as the four biggest lenders sought to refinance maturing securities and meet international rules on liquidity.

Standard Bank, Africa’s largest lender by assets, FirstRand and Nedbank each sold more than R5bn ($419 million) of debt, while Barclays Africa raised in excess of R2bn. Their combined issuance rose to R22.2bn from R12.3bn in the first quarter of 2014, Standard Bank research shows. Banks accounted for 75% of total corporate bond sales of R29.7bn, it said.

“Several banks have indicated that there are significant funding plans for the year ahead,” said Mark le Roux, head of fixed-income investments at Coronation Asset Management in Cape Town, whose South African bond fund has outperformed its peers over five years. “2014 was an erratic year for funding given the turbulence in the market. We will see higher levels of issuance.”

The four banks have more than R40bn of bonds maturing this year and are expected to raise more than R50bn of debt, according to Standard Bank, even as loans and advances to customers differ little from 2014 levels. Total corporate bond sales will probably rise by about 6% to R115.5bn, according to the lender. Banks are doing more bond deals even after the August collapse of African Bank Investments made borrowing more expensive.

 

Mining Equipment

 

“It is costing more, but the effect should be somewhat diluted when pooled together with existing funding lines,” Le Roux said. “Banks use a variety of funding sources with different maturities to optimize their total cost.”

Banks are issuing more debt for reasons including “refinancing and lengthening portfolios, and to meet demand,” Sam Moss, Johannesburg-based FirstRand’s director of investor relations, said in a phone interview on April 20. FirstRand plans more bond sales this year, she said.

Barloworld, the southern African supplier for Caterpillar, the world’s biggest construction and mining equipment maker, was one of the only large non-bank corporate bond issuers in the first quarter. It sold a R710m bond in March that matures in 2022, according to data compiled by Bloomberg.

 

Electricity Funding

 

State-owned enterprises sold 18% less debt than a year earlier. Eskom, the electricity utility with a R225bn funding shortfall, raised R1.2bn in domestic debt capital markets, half the year-earlier figure.

“Corporate South Africa seems to be very nervous about undertaking substantial capital expenditure programs,” Alexi Contogiannis, a primary-market debt executive at Standard Bank, said in an e-mail. This trend will probably continue until South African companies need to use more debt on their balance sheets and also extend the length of their borrowings, he said.

Power shortages, a depreciating rand and high unemployment have increased the strain on the local economy. Consumers, confronted by increased taxes and electricity costs, have curbed spending, causing profit growth to slump at some retailers such as JD Group and Truworths International Even so, banks, which crimped consumer lending, still have to contend with maturing bonds and more stringent regulations.

 

Countering Volatility

 

“Senior funding requirements are dynamic and as such, issuances are tailored to current funding needs,” Barclays Africa said in e-mailed comments. While costs have risen on issuing both senior and subordinated debt, pricing is just one part of the decision-making process before selling debt and other factors such as liquidity play a role, the bank said.

The four largest banks, which all have more capital than regulators require, are also using the bond sales to lengthen their debt-maturity profiles. This will help them meet Basel III net-stable-funding ratios, aimed at limiting banks’ reliance on volatile short-term borrowings.

“According to our analysis, 88% of maturities take place in the first half versus the second half of 2015, so we therefore think issuance will likely wane in the second half,” Barclays Africa said.

Standard Bank issued R13.4bn of senior and subordinated bonds in the local market in 2014, compared with R7.3bn so far in 2015. Barclays Africa will refinance R3.1bn of maturing debt this year and issue more on top of that. Nedbank expects to sell more debt than in 2014, said Bruce Stewart, head of its debt origination team.

©2015 Bloomberg News

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