Bloomberg
Daimler’s South African unit is selling the most bonds on record this year as the vehicle maker gears up for production of a new model amid the lowest borrowing costs in at least 30 years.
Mercedes-Benz South Africa sold R1.5 billion of debt due in October 2015 at 112 basis points over the three-month Johannesburg interbank agreed rate (Jibar), Rand Merchant Bank, which arranged the sale, said on September 27.
In May Toyota South Africa Motors sold R200 million of paper maturing in November 2013 at 67 basis points over Jibar.
Volkswagen sold e500m (R6bn) of floating-rate debt due April 2014 on September 28 at 28 basis points above the euro interbank offered rate.
Demand for highly rated issuers such as Daimler is increasing as investors seek higher returns after the strongest foreign buying on record pushed yields on government securities to near-record lows.
Mercedes-Benz SA wants to make the the latest version of its C-Class car at its East London plant from 2014.
“When the likes of Mercedes come to market there is demand as they are higher rated than the rest of the industrials in the market due to their performance and the parent guarantees they hold,” Vaneshen Naidoo, a credit analyst at Cadiz Asset Management, said last week. “There is a shortage of good-quality paper in the market.”
Mercedes-Benz SA has sold R4.1bn of bonds this year, the most since at least 1999, according to data.
The company is rated AA on Fitch Ratings’ national scale, the third-highest investment-grade assessment, matching Old Mutual’s local life-insurance unit and Nedbank Group’s ratings.
“It makes sense for them to come to market now as rates are quite low,” Naidoo said.
Investors bid for more than twice the amount of bonds Mercedes offered, he said.
The company also sold R500m of floating-rate debt due in October 2017 at 135 basis points over Jibar.
A floating-rate note pays a coupon linked to the interest rate of another financial instrument, such as Jibar.
These provide protection against increasing interest rates, while paying lower yields than fixed-rate bonds.
The Reserve Bank, which cut its benchmark repo rate for the first time in 20 months in July to spur the economy, held the rate at a 30-year low of 5 percent on September 20.
The yield on the rand-denominated government bond due March in 2021 rose for the first time in three days, gaining 5 basis points, or 0.05 percentage point, to 6.61 percent at 6.09pm in Johannesburg on Thursday last week.
The rand weakened 1 percent to R8.5168 against the dollar on Thursday and almost 2 percent to R8.663 on Friday.
Investor demand for floating-rate bonds was strong and companies issuing these instruments protected themselves against the risk of rates rising, Naidoo said.
The yield gap between five-year fixed-rate bonds and similar-maturity inflation-linked notes increased 3 basis points to 5.47 percentage points on Wednesday, after reaching 5.5 percentage points on October 1, the widest since August 20. The so-called breakeven rate has climbed 12 basis points since the end of August, signalling that investors see consumer prices rising in coming months.
The cost to insure against a default on South African bonds over five years, using credit default swaps, rose for a second day, adding 7 basis points to 151, indicating a deterioration in risk perceptions.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if the government fails to adhere to its debt agreements.
Argon Asset Management, which holds Mercedes-Benz SA bonds, had not participated in this sale, said Mokgatla Madisha, because he expected the key interest rate to be cut further.
“They issued a floating-rate instrument which was not particularly attractive,” Madisha, who helps manage R11.5bn, said on Wednesday. “I think there is still a possibility of a cut.”
Mercedes would not comment on the bond sale or its expansion plans at the East London plant, Mercedes-Benz SA spokeswoman Lynette Skriker said last week.
The premium investors demand to hold South African dollar bonds instead of US treasuries rose 3 basis points to 180 on Wednesday, compared with a 3 basis-point drop for the average of emerging-market debt, according to JPMorgan Chase indices.
Mercedes-Benz SA’s bond sale has contributed to record issuance of corporate bonds in South Africa. Financial companies including Standard Bank, Absa and FirstRand have led sales of R77.2bn this year as they move to longer-term funding to meet Basel 3 liquidity requirements, which come into effect in 2018.
“The big attraction of industrial companies is the diversification benefit that they provide away from financials,” Madisha said. “Mercedes is a repeat issuer, so it’s a name that’s generally well received in the market.”
Local vehicle sales increased at the slowest pace in two-and-a-half years in September as mine and trucking strikes damped consumer and business confidence in the economy, an industry group said.