Andre Janse van Vuuren
EUROPEAN Central Bank president Mario Draghi’s plan for fresh stimulus is offering investors a chance to buy South African papermaker Sappi’s bonds, which have underperformed the market in 2015.
Sappi’s euro-denominated bonds due in April 2018 have returned 0.5 percent this year, compared with an average 0.7 percent gain for all high-yield corporate securities, according to data.
Rates on the debt of the biggest maker of glossy paper have fallen 3 basis points to 5.25 percent in the period, compared with a drop of 24 basis points for Portuguese government notes due in October 2017. The nation is ranked BB at Standard & Poor’s, one step higher than Sappi.
“Over time, the appetite for riskier assets will probably increase given where benchmark yields have gone,” Victor Mphaphuli at Stanlib Asset Management said on Friday. “There will be demand for higher-yielding assets to improve the returns in portfolios.”
By committing to at least e1.1 trillion (R14.6 trillion) of quantitative easing last week, Draghi took steps to cement a bond rally that has sent yields to record lows in the euro zone, and has also driven down emerging market rates.
Sappi said in November that it might refinance some euro-denominated bonds when the debt becomes callable in three months’ time as the company plans to spend less on new plants.
Refinancing the bonds could offer investors another opportunity to buy Sappi debt.
The company would contain capital expenditure to below $300 million (R3.4 billion) for the year to September, using increased cash reserves to repay and refinance a portion of net debt to lower future interest costs, chief executive Stephen Binnie said in November.
It would specifically look at its bonds maturing in April 2018 and June 2019, which would enter a call window that allowed Sappi to repurchase them from April, he said last week.
The company’s net debt was $1.95bn on September 30, down $300m from a year before as annual capital spending decreased from $552m in 2013.
Sappi would not refinance R450m of rand notes, ring-fenced and differently rated from the debt it sells elsewhere, that were due in April, Andre Oberholzer, a spokesman, said.
“As
Sappi Southern Africa is producing good cash flow, we currently have no need to refinance this debt,” Oberholzer said, declining to comment on plans for its other bonds.
Sappi’s rand bonds carry an investment grade, while its offshore debt is rated junk.
The market’s initial reaction to Draghi’s announcement might be overdone, rendering it too early to predict what the demand for high-yield debt would be, Conrad Wood, the head of fixed income at Momentum Asset Management, said.
Sappi sold the 2018 bond, which carries a coupon of 6.625 percent, in 2011. The yield peaked at 11.42 percent on October 5 of that year.
Quantitative easing in Europe would make Sappi’s debt more enticing, enabling the company to refinance bonds, Cassie Treurnicht, a fund manager at Gryphon Asset Management, said. “As the bonds become callable they can roll them over to lower rates.
“You’ll see the benefit over the next few months and years,” she said.
Sappi shares rose by 0.66 percent to close at R47.35 yesterday. – Bloomberg