As South Africa braces for a credit-rating downgrade, the nation’s companies are finding the bond market an unfriendly place.
Corporate bond sales in the second quarter have slumped 15% from a year earlier to R20.8bn, compared with a 10% decline across emerging markets, data compiled by Bloomberg show, as volatility and the threat of a cut to junk deter buyers. South African government 10-year yields – the benchmark for corporate issuance – have climbed 34 basis points this quarter to 9.45%, the highest after Turkey out of 23 developing nations tracked by Bloomberg indexes.
Higher yields and a “fear of the unknown” as liquidity dries up is prompting some issuers to sidestep the bond market, according to Zoya Sisulu, head of debt capital markets at Standard Bank. Companies are opting instead for less public forms of fundraising such as private placements and loans.
“They’ve almost shied away from launching public deals that may be seen to fail,” said Sisulu. “We’ve seen the curves pricing up quite significantly” compared with rates charged on bonds sold last year.
S&P Global Ratings is due to announce the results of its South African credit-rating review on Friday. Twelve out of 13 analysts surveyed by Bloomberg expect S&P to lower the nation’s ranking to below investment grade – or junk – by the end of this year. Four think they will cut this week.
The South African Reserve Bank on May 19 reduced its forecast for 2016 economic expansion to 0.6% as a slump in commodity prices and a drought hobble the economy. S&P cites weak economic growth as a key threat to South Africa’s rating. The cost of insuring the nation’s debt against default in the next five years is already higher than lower-rated Russia and Turkey.
Corporate issuance has been lower than expected this year, according to Peter Kent, who helps to oversee R1.7trn as money manager and co-head of fixed income at Investec Asset Management in Cape Town.
“There is no confidence, and as a result of that, the private sector just doesn’t seem willing to invest,” Kent said. “Good blue-chip corporates – they aren’t issuing at the moment because they’re not investing.”
A cut in South Africa’s rating would probably have a domino effect on state-owned companies, whose debt is partly guaranteed by the government.
Eskom said it is lining up some alternative sources of funding to the capital markets. The biggest borrower after the government, the utility is seeking to build a large coal-fired plant, approved by the government in August 2013, in partnership with private companies.
Even with the credit-rating concerns, “Eskom still has access to potential lenders and investors,” said chief financial officer Anoj Singh.
Transnet has also adjusted how it borrows. The rail and ports operator has cut the ratio of its debt charged at floating rates to that with fixed rates to 20% – 80% from 35% – 65%, to hedge against rising borrowing costs in the event of a rating downgrade.
“Given the economic environment, given the uncertainty, people are cautious,” Investec Asset Management’s Kent said. “There were a few auctions that didn’t go as well as potentially the issuer would have liked, so why go through that if you don’t have to?”