Futuregrowth is tired of ‘ridiculous’ rules for bonds

Money manager wants industry collaboration to boost governance.
Futuregrowth CEO Andrew Canter says there's no obligation for SOEs to report changes to their structure or management. Picture: Supplied

South Africa’s biggest specialist fixed-income money manager is fed up with state-owned companies’ lack of disclosure.

“There’s no obligation for the companies to report” changes to their structure or management, Andrew Canter, the chief investment officer of Cape Town-based Futuregrowth Asset Management, which manages about R177 billion ($15.3 billion), said in a video posted on YouTube on February 25. “It’s just ridiculous.”

By way of example, Canter referred to governance lapses at Umgeni Water, which operates in the eastern KwaZulu-Natal province and provides drinking water to about 6 million consumers. It didn’t tell its bondholders in June last year when the entire board was fired, according to Canter. Shami Harichunder, a spokesman for Umgeni Water, didn’t answer a call to his office phone or an emailed request for comment. Futuregrowth 

The lack of information from state-owned companies “is a classic, visibly Hollywood-style good versus evil situation,” Canter said in the video. To fix it “we need other asset managers to read what we’re writing, to listen to us, to start asking the same questions,” he said.

The company, which told Bloomberg it plans to release a full report on the issue later on Tuesday, announced in 2016 it will stop buying bonds of six state-owned companies because of concerns over governance. Last month it said it wasn’t ready to start lending again to cash-strapped Eskom, even after the company published delayed financial statements.

Colin Cruywagen, a spokesman for the Department of Public Enterprises, said he wasn’t immediately able to respond.

Scandals

State-owned companies are the second-biggest issuers of debt in South Africa, according to data compiled by Bloomberg. Some, including Eskom and Transnet, have been mired in corruption scandals. Power utility Eskom has been unable to auction debt in South Africa’s open market since 2014 because of concerns about governance.

Borrowers of listed debt need to let bondholders know of material changes, “and it needs to be done by the stock exchange news service,” Olga Constantatos, Futuregrowth’s credit and equity process manager, said in the same video. “Why should we be subject, as bond investors, to less disclosure when actually we need more because we have the longer time horizon and much less liquidity.”

Johannesburg’s stock exchange has different sets of rules for listed bonds and listed equities. While the document that outlines the listing requirements for debt is about 80 pages, a similar one for stocks is a sizable 454 pages. 

“There are several areas where the debt listings requirements can be closer aligned with the equity listings requirements,” said Andre Visser, the general manager of issuer regulation at JSE. “The rights of a bondholder are very different from that of an ordinary equity shareholder. We are proposing to create very specific debt listing requirements for corporate debt issuers, which will include debt issued and listed by state-owned enterprises.”

‘An enabler’

The regulator met with Futuregrowth on the issue earlier this month, according to Visser, adding that some rule changes may be announced this year. It’s not soon enough for Canter, who said in the video that the JSE has become “an enabler of maladministration” and needs to pay better attention.

“We strongly object to the accusation,” Visser said.

See the video from Futuregrowth Asset Management’s YouTube channel below:

© 2018 Bloomberg

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It must come as quite a shock when you realize that your cash-cow, your most trusted “risk-free” investment opportunity, where you committed most of your funds, actually became a high-risk investment that is on the brink of default. There comes a point when a guarantee is only as good as the institution that stands behind the guarantee. It is becoming clearer by the day that government won’t be able to honour all the state guarantees, that the house of cards is about to implode.

But there is always a plan B for government. The Zim government never ran out of money, they merely ran out of people who accepted the money as payment.

The idea also crossed my mind. What happens when an SOE simply default on bond debt? Or rather, the wider ramifications?

Bonds/Gilts are traditionally regarded as a “low risk” asset class. If there’s a default, the market will be shaken and % will readjust to reflect the real higher risk. Or as the % goes up, so the appetite for foreigners looking for higher yield/risk-return? Who knows..(I think was saves SA at present, is foreign markets actively looking for good bond yields….once the Emerging Market run fades, such foreign risk-appetite will dry up.

What is the risk of any SOE defaulting? (Taxpayer will usually bail the SOE out I suppose)

The credit rating describes the probability of default. We are rated as junk status or speculative, which means “don’t blame us if you don’t get your money back”.

The SOE’s will only default if government itself defaults, because government guarantees their debt. It is common knowledge that the Eskom debt alone is enough to cause a government default, so what about all the other sinking SOE’s? The government can print the money to pay Rand-denominated debt, so only foreign-currency denominated debt can cause a default.

A country can default in different ways – restructuring of the loan, deferring of interest and principal payment, paying with depreciated currency and refusing to pay.

The USA defaulted a few times already. It is defaulting at the moment as it is paying Chinese bond-holders with depreciated currency. The USA also defaulted in 1971 when it unilaterally decided to stop the convertibility of the Dollar for gold.

The country that owns the biggest army in the world and prints the reserve currency of the world can default regularly, and nobody can do anything about it.

You bet! (About us tax payers)

Gosh, that’s interesting.

It just seems logical and right that the JSE makes the changes – SOEs enjoy too much leniency

End of comments.

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