Prospects for SOEs improve

• Forecast for debt issuance among companies reflects optimism public sector will regain access to listed market

Embattled state-owned enterprises (SOEs) such as Eskom and roads agency Sanral, are expected to regain access to the bond market in 2018, despite their financial woes, keeping debt raising among public and private sector companies at elevated levels.

Embattled state-owned entities (SOEs) such as Eskom and roads agency Sanral are expected to regain access to the bond market in 2018, despite their financial woes, keeping debt raising among public and private sector companies at elevated levels.

RMB Global Markets expects gross debt issuance among companies, excluding private transactions and commercial paper, to reach R138bn in 2018.

This “reflects some optimism that the public sector will regain access to the listed market, but bank issuance will moderate after an extraordinary 2017”, it said last week.

Eskom, which has been racked by corporate governance failures, cash flow concerns and corruption allegations, posted net issuance of less than R800m in 2017. Net issuance refers to gross debt issued less any debt that was repaid.

In a “normal year”, Eskom could issue R10bn to R12bn in longer-dated debt, Elena Ilkova, head of fixed income and credit research at RMB Global Markets, said on Friday.

The absence of large SOEs, such as Eskom, Transnet and Sanral, from the bond market in 2017 meant debt issued by the sector was about half its historical number, she said.

This did not stop gross issuance in the local credit market from reaching a new record of R141.8bn.

Banks happily filled the gap left by SOEs, issuing R69.3bn in senior and subordinated debt, partly to prepare for funding requirements under Basel III that came into effect in January.

Insurers issued debt of R4.3bn, with nonfinancial corporates raising R37bn. SOEs raised R15bn, a third of which was obtained by the Land Bank.

Alongside tackling corporate governance concerns, Eskom would need to put in place a credible financial plan to restore investor confidence, Ilkova said.

The problem of the large shortfall in e-toll revenue would need to be resolved for Sanral to regain access to the market.

The Steinhoff debacle was unlikely to hurt companies’ ability to raise debt, although those with more complex financing arrangements would be subject to greater scrutiny, she said.

Global investor appetite for SA’s sovereign debt was likely to remain robust in 2018, said Giulia Pellegrini, portfolio manager in BlackRock’s emerging markets debt team.

SA’s gross borrowing requirement for 2018-19 is about R270bn, according to the medium-term budget policy statement, suggesting considerable local currency issuance in the year ahead.

SA would benefit from continued strong inflows into emerging markets, with Cyril Ramaphosa’s victory at the ANC elective conference further boosting enthusiasm for South African assets, she said.

Moody’s was unlikely to junk SA’s local currency credit rating before the February budget, Pellegrini said. Such a move would boot SA from Citi’s World Government Bond Index and could propel up to $9bn out of the country’s bond market.

“SA’s challenges haven’t changed, but there is a perception in the market that it is better placed to handle its challenges with a reformist leadership,” Pellegrini said.

SA’S CHALLENGES HAVEN’T CHANGED, BUT THERE IS A PERCEPTION … IT IS BETTER PLACED TO HANDLE CHALLENGES