Debt costs may rise as Abil exposes flaws

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BR_BR ABIL0 Bloomberg African Bank's collapse shut smaller competitor Real People Investments out of the bond market, while the local units of Toyota and BMW cancelled debt sales. Photo: Bloomberg

Johannesburg - Firm’s borrowing costs risk increasing after the failure of African Bank Investments Limited (Abil) exposed flaws in the continent’s biggest corporate bond market that prevented investors from selling the lender’s debt.

Buyers of company notes will demand higher premiums to compensate for a lack of liquidity and pricing transparency, according to Andrew Canter, the chief investment officer at Futuregrowth Asset Management.

South African businesses have sold bonds worth $6.5 billion (R70bn) this year, compared with $14.9bn in similarly rated Malaysia.

Abil’s collapse shut smaller competitor Real People Investments out of the bond market, while the local units of Toyota and BMW cancelled debt sales. South Africa does not have central electronic trading for corporate bonds, which are bought and sold over the counter, with prices compiled by the JSE.

“The corporate bond market is an orphan,” Canter said.

“It’s just outrageous that in 2014 we don’t have a place where people can set prices.”

While corporates have listed 1 386 fixed-income securities on the exchange, only R8 million worth of bonds trade on average a day.

Thirty-eight corporate bonds trade more than 25 times a month and 56 trade more than 10 times monthly.

The JSE had worked for two years to improve the mark-to-market process, a measure of the fair value that relies on pricing data supplied by bond market participants, Bernard Claassens, a manager of fixed income at the JSE, said on Tuesday.

A new system would kick in within the next month to improve transparency, he added.

“We could investigate market-making so that we get more bid and offer prices, but there are always pros and cons,” Claassens said.

“It’s not so much that people can’t get out when they want to, it’s that they can’t get out at the price they want.”

Finance Minister Nhlanhla Nene said the central bank’s rescue of African Bank should help restore confidence in the bond market and facilitate new issuance.

South Africa’s largest unsecured lender collapsed after its August 6 announcement that it would post a record loss and needed more capital as a buffer against soured loans, eight months after a rights issue.

“Our intervention in my view actually did bring about some calmness,” Nene said on Monday.

“People are waiting now, they are just allowing the process to unfold. I would imagine once they see the seas have calmed… we should see some activity coming back.”

The average monthly turnover of bonds on the JSE was R477bn in the first half, 25 percent less than a year earlier.

Low trading volumes prevented investors, including Jonathan Meyerson of Cadiz Asset Management and Piet Viljoen of Regarding Capital Management, from transacting in African Bank debt for more than a year before the lender had to be rescued.

“The issue is to get more liquidity in the corporate bond market,” Meyerson said.

“Generally when you buy these things, you are buying them till they mature.”

African Bank’s rand bond yields as recorded by the JSE were little changed while those for foreign-currency debt soared.

That left money managers guessing the value of their holdings even after the central bank rescued African Bank and impaired its debt by 10 percent.

Bond investors faced “bigger issues than African Bank” with spreads on corporate bond yields at risk of widening over government debt should rising interest rates and the end of stimulus in the US spur capital outflows amid slower growth in South Africa, Elena Ilkova, a credit analyst at Rand Merchant Bank, said.

“A number of asset management companies are still focused on risk management rather than outward investment” and the market might normalise in the next two weeks as issuers that had postponed auctions returned, she said.

“It’s more an issue of timing… than flight.”

Canter said bond investors’ ability to adapt to changing circumstances and manage their risk was undermined by an inefficient trading system.

“The JSE’s mark-to-markets can be wrong,” he said.

“Some bonds haven’t traded for three years. Price discovery is pathetic.” – Bloomberg



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