SAA’s plan to raise R1.5 billion in a debut bond sale will be aided by the government guaranteeing the debt, according to investors, including Bronwyn Blood at Cadiz Asset Management.
SAA was planning to sell the securities by the end of March to take advantage of yields near record lows, chief financial officer Wolfgang Meyer said yesterday.
Rates on 10-year rand bonds of Transnet fell 168 basis points in the past year to 7.78 percent on Monday, compared with a 95 basis-point average decline of emerging market corporate debt in the JPMorgan Chase corporate emerging markets bond indices.
SAA had already borrowed R1.3bn against a R1.5bn government guarantee earmarked for short-term operational expenses, the Department of Public Enterprises said. To tap more guarantees promised by Finance Minister Pravin Gordhan in October, it would have to show the government that the money was needed for longer-term initiatives under its turnaround strategy, ministry spokesman Mayihlome Tshwete said yesterday.
“If it is government guaranteed then we would view it as very similar to government debt, and we would not look at the fundamentals of the company,” Blood said. “It would cost them a lot more to come to the market without a government guarantee,” she said.
Gordhan gave the airline a R5bn guarantee in October as the company reported a R1.25bn annual loss, bringing its cumulative losses for the past eight years to R8bn. The government backing was given on condition SAA presents a plan to return to profit by the end of March.
SAA, which pays on average 2 percentage points below the commercial banks’ main lending rate of 8.5 percent for its existing bank debt, aimed to pay about 50 basis points above the Johannesburg interbank agreed rate, which was 5.081 percent on Monday, Meyer said. The securities would have a maturity of as long as two years, he said.
“SAA is not rated and it will be difficult to attract investors who are mandated to buy investment-grade debt without a government guarantee,” Meyer said. The backing would be from the existing R5bn facility and the money “will be raised against the R1.5bn portion of this guarantee that was earmarked for working capital”.
Gordhan is under pressure to fund other state companies as he struggles to keep spending in check after sovereign downgrades from three companies since last September.
In February last year, the government agreed to give the SA National Road Agency R5.75bn to help meet its debt obligations and said more money might be made available. Debt guarantees to state companies, including Eskom, amounted to R170.1bn at the end of March, the Treasury said.
SAA had not asked for a another guarantee and the bond sale might be covered by existing guarantees, Tshwete said.
“What the department is expecting of them is a turnaround strategy. Some of those initiatives may have financial requests attached to them”, which might be covered by the existing loan guarantees,” he said.
The government would not provide further guarantees to SAA, the Treasury said on Monday.
If the bonds were covered by the guarantee, investors might find them attractive as they would likely offer a yield premium over government debt, Gryphon Asset Management chief investment officer Abri du Plessis said.
The yield premium on Transnet’s 10.8 percent bonds due November 2023 climbed two basis points this year to 105 basis points on Monday.
Yields on benchmark 7.75 percent government securities due February 2023 were unchanged at 6.76 percent yesterday after rising two basis points on Monday. Robert Brand and Kamlesh Bhuckory from Bloomberg