Denel taps into demand to sell R1.4bn long bonds

Jaco Visser

For the first time since 2002, Denel is selling bonds due in more than three months as the state-owned armaments company switches focus to minefield clearing in its home continent.

Pretoria-based Denel had issued R815 million of notes due in January 2016 at 5.08 percent, or 80 basis points above the Johannesburg interbank agreed rate (Jibar), it said in a statement on Monday. The company also sold R585m of bonds due in September 2017 at 6.86 percent, it said. Both issues were backed by the government.

BMW’s local unit sold R2 billion of debt in October last year maturing in between two and five years at 95 to 135 basis points over Jibar.

“Denel was able to fund in the term market at the levels it did, largely due to the debt carrying a South African government guarantee,” Raven Moodley, an emerging-market credit analyst at Absa Capital, said on Wednesday.

Denel had increased revenue outside South Africa through equipment and services sales to Angola and Sudan to help clear minefields following decades of civil war, chief financial director Fikile Mhlontlo said on Tuesday. It previously spent about R8bn developing the Rooivalk helicopter, known in English as the Red Falcon, and tried to sell the aircraft outside its home market. “Various incentives to sell it outside were unsuccessful,” Mhlontlo said. “There is no market we’re actively courting.”

Denel returned to profitability in 2011 following almost a decade of losses and government bailouts.

Denel’s revenue from the continent excluding South Africa more than trebled to R356m in the financial year to March 2012, about a 10th of total sales, according to the company’s annual report. Sales to other African countries had “historically not been significant”, even as they grew in importance, Mhlontlo said. Last year it “was one of our key growth areas”.

Denel was now developing its business strategy to focus more on the rest of Africa, Mhlontlo said. Most African defence forces currently bought equipment from outside the continent rather than from South Africa, he said.

The biggest opportunities would come from de-mining in post-conflict states rather than the weapons trade, he said. Arms sales by local companies are regulated by the statutory National Conventional Arms Control Committee consisting of cabinet ministers and deputy ministers.

“We can only sell to countries on approval of the arms control committee,” Mhlontlo said.

Denel is taking advantage of record low interest rates for companies in Africa’s largest economy. The combined R1.4bn bond issue was 2.6 times oversubscribed, Mhlontlo said.

Over-subscription was common in the fixed income market because of strong liquidity, Bruce Stewart, the head of debt capital market debt origination at Nedbank Capital, said.

The rand has weakened 5.2 percent against the dollar since the start of the year, making it the worst performer among 16 major currencies tracked by Bloomberg. It was bid at R8.9405 to the dollar at 5pm yesterday, 12.7c firmer than Wednesday’s bid.

Denel entered the market at a time when debt was attractive because of low rates, Absa’s Moodley said. JPMorgan Chase’s corporate emerging-market blended-yield index for South Africa rose 5 basis points to 4.57 percent on Wednesday after reaching a record low 4.34 percent last August.

Finding evidence for a link between profitability and the issuance of longer-dated debt was difficult because investors could also look at the government guarantee as risk mitigation, Stewart said.

“Good assets are relatively scarce given the pedestrian growth of the economy and so, when good assets are available, it isn’t surprising to see strong demand.” – Bloomberg