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As emerging market assets tumble, South Africa sells Eurobonds

Other emerging market currencies suffered their worst in over a year as US rates climbed and the dollar strengthened.

South Africa offered a premium for selling Eurobonds just as investors are fleeing emerging-market assets. That it got a sale away at all is evidence of investors’ faith in the country’s new leadership, according to Manulife Asset Management and Rand Merchant Bank.

Africa’s most industrialised economy raised $2 billion (R25 billion) from notes maturing in 2030 and 2048, and priced at 5.875% and 6.3% respectively, the National Treasury said in an emailed statement. Investors placed orders for 1.7 times that amount, it said. In comparison, Ghana’s $2 billion Eurobond sale last week attracted bids for four times the amount.

The sale was seen as a test for President Cyril Ramaphosa’s new administration, which has pledged to stimulate growth, tackle corruption and stabilise the fiscus. But it came as emerging-market currencies had their worst day in more than a year as US rates climbed and the dollar strengthened. A surge in issuance by lower-rated sovereigns including Angola, Argentina and Ghana has also dampened demand for riskier debt.

That prompted investors including Fidelity International and Vontobel Asset Management to say that the market is now all but closed for high-yield issuers.

“Unfortunately, the macro environment didn’t help,” said Michelle Wohlberg, a fixed-income trader at Johannesburg-based Rand Merchant Bank, a unit of FirstRand. With “We saw offshore investors reluctant to get overly involved. So a successful auction, but not as successful as it possibly could have been if the macro environment were supportive.”

South Africa’s rand has gained about 15% since mid-November, the most globally, as Ramaphosa, then deputy president and a former businessman and lawyer, manoeuvred to succeed Jacob Zuma as president. Goldman Sachs and HSBC among others, have recently recommended long positions in South African assets as the new administration moved to curb the budget deficit, cut debt and overhaul cash-strapped state-owned companies.

‘Investor confidence’

“The South African government sees the success of the transaction as an expression of investor confidence in the country’s sound macro-economic policy framework and prudent fiscal management,” the National Treasury said in an emailed statement.

The 12-year notes priced at a spread of 280.5 basis points above US Treasuries and the 30-year notes at 310.1 points. That compares with spreads of 260.5 for 10-year notes and 283.7 for 30-year securities at South Africa’s previous sale of Eurobonds last year.

South Africa had budgeted to raise $3 billion (R37 billion) in international markets this year to help plug a budget deficit forecast at 3.7% of gross domestic product this year. The country’s external debt accounts for less than 10% of total borrowings, and just 4.6% of GDP, according to a prospectus filed for the Eurobond sale.

Hedging bets

“The timing wasn’t perfect,” said Charles Robertson, the London-based global chief economist at Renaissance Capital. “A week or two earlier would’ve been better and, I would think, three weeks from now would be better. I guess they tried to hedge their bets by getting $2 billion out now.”

South Africa’s foreign-currency debt is rated sub-investment by S&P Global Ratings and Fitch Ratings, with Moody’s assessing it at the lowest investment level. Deutsche Bank AG, Nedbank, JPMorgan Chase & Co., FirstRand’s Rand Merchant Bank and Standard Bank  managed Tuesday’s deal.

“On the whole, the Treasury should feel comfortable about how the placement went,” said Richard Segal, a senior analyst at Manulife Asset Management in London.

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“The 12-year notes priced at a spread of 280.5 basis points above US Treasuries and the 30-year notes at 310.1 points. That compares with spreads of 260.5 for 10-year notes and 283.7 for 30-year securities at South Africa’s previous sale of Eurobonds last year.”. School me – I would have thought the longer term would have been at a lower spread. Not much to shout about at these spreads?

End of comments.

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