SA to issue first dollar-based bonds in nine months

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br Nene Independent Newspapers Nhlanhla Nene. Picture: Sam Clark

South Africa is returning to the international bond market for the first time in nine months as investors put the nation’s longest mining strike and a sovereign downgrade behind them.

Rand Merchant Bank, Barclays and Citigroup would manage the sale, which would be the equivalent of about $1.5 billion (R16bn), the Treasury said on Wednesday.

Average yields on South African dollar bonds fell to 23 basis points below the emerging market average, after investors demanded a premium for almost half of last month, according to JPMorgan Chase indices.

The drop in yields signals improving investor sentiment after platinum mines settled a five-month strike last week and Standard & Poor’s (S&P) moved the nation to a stable outlook following a one-step cut on June 13.

Bulgaria, Croatia and Kenya are among nations that sold eurobonds last month as European Central Bank stimulus and the US Federal Reserve’s pledge to keep rates low for a “considerable time” helped sustain demand for riskier assets.

“The downgrade has been priced in, so I don’t think it should be a big issue,” Lars Nielsen, a fund manager at Denmark-based Global Evolution, said on Wednesday. “It’s a good opportunity to issue at reasonably low-yield levels.”

S&P cut South Africa’s rating on June 13 by one level to BBB-, on par with Russia and Brazil. Fitch Ratings lowered the outlook on its BBB assessment, the second-lowest investment grade, to negative from stable on the same day.

The timing and currency of the issue would depend on market conditions, Tshepiso Moahloli, the director of debt issuance and management at the Treasury, said in response to questions.

“There is generally investor appetite for South African foreign currency bonds as the supply is limited,” Moahloli said. “The bond market does seem favourable at the moment and we have seen other issuers taking advantage of the favourable market conditions.”

The sale will be the first since South Africa sold $2bn of 12-year debt in September last year, paying a coupon of 5.875 percent. The yield has since dropped to 4.59 percent.

South Africa would probably pay less this time than at the previous sale as US treasury yields had fallen since September, while emerging market yield premiums had narrowed, said Kieran Curtis at Standard Life Investments in London.

Bulgaria, which shares South Africa’s rating at S&P, sold e1.5bn (R21.9bn) of 10-year bonds last week, paying a coupon of 2.95 percent. Croatia, rated two levels lower, paid 3.875 percent for e1.25bn of debt on May 22.

South Africa last sold euro-denominated bonds in 2006, paying interest of 4.5 percent. The bonds were yielding 4.19 percent on Tuesday.

“There is still decent demand for hard-currency bonds, as US monetary policy remains quite dovish,” Regis Chatellier, a London-based emerging markets credit strategist at Société Générale, said on Monday.

The yield on South Africa’s $1.5bn of bonds maturing in January 2024 dropped 36 basis points from the end of March to 4.43 percent on Wednesday.

Some investors may demand higher yields to compensate for weak economic growth, persistent fiscal and current account shortfalls and the threat of a protracted metalworkers strike.

“We think South Africa should be paying a bit more relative to its peers at the moment,” Standard Life’s Curtis said this week. “We probably won’t be buyers.”

The economy contracted an annualised 0.6 percent in the three months to March.

South Africa would probably miss its 2.7 percent growth forecast this year, putting pressure on the government’s budget targets, Finance Minister Nhlanhla Nene said on Wednesday. – Bloomberg


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