Real People considers bond sales to fund consumer loans

Renee Bonorchis

Real People was planning to sell as much as R1 billion of bonds to fund further lending even as the market slowed amid an increase in bad debts, the unlisted microlender said on Monday.

The company would decide on this year’s bond sales next week after issuing a R26 million one-year floating-rate note last week, said Werner Nel, Real People’s head of treasury.

This might include a 10-year note similar to the R220m security sold last November at an interest rate of 15.3 percent, 10 percentage points above the six-month Johannesburg interbank agreed rate. The yield on government bonds due February 2023 stands at 6.94 percent.

While growth in consumer loans not backed by assets is slowing in South Africa as concern about indebtedness grows, Real People intends to raise funding as it seeks to tap increasing appetite for its bonds.

Bayport Financial Services granted the fewest new loans in almost two years last month as it tightened customer criteria after unsecured lending nationally surged 39 percent in the nine months to September last year, to R140bn.

“Bad debt is part of our business and we aren’t at a level where we are uncomfortable,” Nel said. “We’re still new in debt capital markets but asset managers are getting more comfortable” with Real People.

The company, which started out as a debt collection agency for non-performing consumer credit portfolios in 2001, expected to pay less for its debt this year, Nel said. Since first accessing the capital markets in 2011, Real People had issued more than R2bn of securities, including 17 listed senior unsecured notes and the 10-year subordinated note, which was sold to a European development finance institution.

“My view is that we will follow a very similar strategy to last year.”

Scott Muzzell, a debt capital markets originator at Rand Merchant Bank, said the sale of the 10-year note “illustrates the comfort the market has developed with Real People”.

The number of unsecured loans granted in South Africa in the quarter to last September fell 2.4 percent from a quarter earlier, the first slowdown in 18 months, the National Credit Regulator said last month.

Growth in unsecured lending in the UK was “negative for the majority of 2012” on a three-month annualised basis, the Bank of England said last month.

The spreads from Real People were “very attractive on the two-, three- and four-year notes”, Arno Lawrenz, the chief investment officer at Atlantic Asset Management, said last week. “We’re still at risk of a bust in the unsecured lending market. It’s time to be cautious as fund managers.”

In November, the Treasury and the Banking Association of SA said they had agreed to tighten lending rules after the number of people with bad credit records rose to a record, threatening to trap poor families in a “debt spiral”.

Despite concern over the growth in unsecured lending, investors would continue to search for yield while the repo rate stayed at 5 percent, Lawrenz said. For Real People, he said, the critical issue was when interest rates would start rising and “I don’t think that will happen this year”. – Bloomberg