Question mark hovers over bond issues in SA
• Ratings downgrade knocks wind out of lively first quarter • Sanral joins corporates in postponing auction
The South African National Roads Agency (Sanral) has delayed its return to the bond market amid concern that it would struggle to attract investors after SA’s sovereign credit-ratings downgrades.
The agency had planned to approach the bond market in May but elected to postpone a debt issue following the sovereign’s downgrade to subinvestment grade by S&P Global Ratings and Fitch, it said on Wednesday.
The announcement comes as Transnet raised only R20m of a planned R200m on April 10 by tapping existing bonds.
Transnet raised R300m in March by tapping existing issues, said Elena Ilkova, credit analyst at RMB global markets. The Development Bank of Southern Africa and the Land Bank were among other stateowned enterprises that had successful private placements in the first quarter, she said.
The downgrade would have a significant effect on stateowned enterprises (SOEs), said Wafeeqah Mallick, credit analyst at Futuregrowth Asset Management. “Many rely on government finances for capital injections and, in certain instances, benefit from explicit and implied support,” she said.
“The institutional weakening in many SOEs, coupled with the weakening ability of the sovereign to support them, may lead to further credit downgrades for weaker enterprises.
“Consequently, investors will demand a higher credit margin to compensate for these increased risks.”
Ilkova said Sanral was not the only issuer to postpone an issue following the cabinet reshuffle and credit ratings downgrades, with Barloworld and MTN among private issuers that had postponed listed debt auctions.
Three corporate bond auctions had been postponed following the cabinet reshuffle, said Conway Williams, head of listed credit at Futuregrowth.
This followed a very lively first quarter, with total issuance amounting to R35bn in the bond market, compared with R17bn issued in the first quarter of
2016, said Williams. Nearly R16bn was issued by corporates in March alone.
“March is historically a good month for issuance, with Easter holiday interruptions making April a quieter period.”
Despite the downgrade, repeat, quality issuers would be supported by bond investors for short-term paper (between one and three years), he said.
“We are of the view that investors will demand a higher premium for [longer-term investments], given the impact of increased volatility on credit fundamentals.”
The reluctance among SA corporates to invest in recent years meant balance sheets were relatively better positioned to withstand economic uncertainty.
“The uncertainty in the market has impacted planned issuances. There are also certain practical issues around how the downgraded debt securities should be accounted for in portfolios, which has distracted investors. Timing does matter. As things settle down, we will see issuance again,” said Ilkova.
Sanral finance chief Inge Mulder said the agency still had time to raise the R300m it needed until March 2018. This compared with the R600m a month it had previously required.
Bond auctions in this climate would make Sanral a bigger burden on the fiscus, said Sanral spokesman Vusi Mona.
Following two unsuccessful auctions earlier in the year, Sanral’s September 2016 bond auction was oversubscribed.
Sanral has about R38.9bn in government-guaranteed debt. It secured R15.4 bn from the Treasury in February for the medium term, which it will use to maintain and upgrade the national road network.
The postponed bond auction was not expected to directly affect current projects. It could, however, expedite attempts to pursue Gauteng motorists for failure to pay e-toll bills. Uncertainty about the enforcement of collections of about R6.4bn has been cited as a key risk by investors and ratings agencies.
Independent transport economist Andrew Marsay said the ratings downgrades and expected low growth would affect road maintenance and construction unless the state shifted priorities significantly.