IN TOO DEEP?

With bil­lions in­vested in SOE debt, the cor­po­ra­tion may have bit­ten off more than it can chew

CityPress - - Business & Tenders - DEWALD VAN RENS­BURG and JUSTIN BROWN busi­ness@city­press.co.za

The ex­tent of the in­vest­ment by the Pub­lic In­vest­ment Cor­po­ra­tion (PIC) in the debt of state-owned en­ter­prises (SOEs) has come un­der in­creased scru­tiny amid the coun­try’s down­grade to “junk” sta­tus, Transnet’s re­cent bond fail­ures and fresh al­le­ga­tions of cor­rup­tion. The mar­ket for SOE bonds has swollen from R71 bil­lion in 2007 to R243 bil­lion last year, ac­cord­ing to SA Re­serve Bank data.

The PIC, on be­half of the Govern­ment Em­ploy­ees’ Pen­sion Fund and smaller clients such as the Un­em­ploy­ment In­surance Fund, is by far the largest buyer of this debt.

How­ever, nei­ther the state as­set man­ager nor the 1.2 mil­lion ac­tive mem­bers and 400 000 pen­sion­ers and ben­e­fi­cia­ries it works for need to worry – tax­pay­ers will foot the bill in any sce­nario en­dan­ger­ing this colos­sal bond collection.

This is be­cause the fund is a de­fined ben­e­fit pen­sion fund and the ben­e­fits of the fund are guar­an­teed. Any ma­te­rial short­fall will ul­ti­mately be paid for by tax­pay­ers through in­creased taxes.

The PIC has R190 bil­lion in state com­pany debt, com­pris­ing 10% of its as­sets of al­most R1.9 tril­lion, which largely con­sists of shares in com­pa­nies and cen­tral govern­ment debt.

Most of its SOE debt is held in Eskom, Transnet and San­ral bonds.

Since the credit rating down­grade, Transnet bond auc­tions – where it raises part of its fund­ing – have failed to be fully sub­scribed.

Fu­ture­growth As­set Man­age­ment last year said it would stop lend­ing money to six SOEs.

It has since re­sumed lend­ing to three of them – all de­vel­op­ment fi­nanciers.

Con­way Wil­liams, Fu­ture­growth’s head of listed credit, said that the re­cent slew of cor­rup­tion al­le­ga­tions re­lated to SOEs would weigh on Fu­ture­growth’s de­ci­sion as part of broader en­vi­ron­men­tal, so­cial and gov­er­nance con­cerns.

He added that Transnet’s re­cent dis­ap­point­ing auc­tions oc­curred dur­ing April and May, which were quiet months on the lo­cal cap­i­tal mar­ket in gen­eral.

In a state­ment re­spond­ing to ques­tions, Transnet said that it had been re­ceiv­ing bids of over R400 mil­lion for its fort­nightly auc­tions.

The rea­son it only sold R20 mil­lion at most at any given auc­tion is that in­vestors are seek­ing higher in­ter­est rates than Transnet is will­ing to ac­cept.

“Bids above our bench­mark were re­jected,” said the com­pany.

Transnet had a num­ber of other fund­ing fa­cil­i­ties in place and could wait for the mar­ket to im­prove, it ar­gued.

Un­like Eskom, Transnet does not rely on govern­ment guar­an­tees.

Transnet is, how­ever, also the sub­ject of the most ex­plo­sive rev­e­la­tions from the #Gup­taLeak emails so far, with amaBhun­gane re­port­ing that the rail mo­nop­oly’s re­cent lo­co­mo­tive in­vest­ment pro­gramme may have been plun­dered for R5.3 bil­lion in kick­backs to a com­pany tied to the Gupta family.

In an­other de­vel­op­ment, Na­tional Trea­sury last month sug­gested that the PIC could help fund SAA, which has sus­tained bil­lions of rands in losses for a num­ber of years.

How­ever, this caused an out­cry from trade unions rep­re­sent­ing govern­ment work­ers and the govern­ment pen­sion fund was quick to tell mem­bers that there had been no re­quest of this sort.

“I don’t think they would ever sim­ply stop buy­ing the SOE bonds,” said Izak Oden­daal, in­vest­ment strate­gist at Old Mu­tual Multi-Man­agers.

“The con­cern is rather that the other as­set man­agers pull out, like Fu­ture­growth.”

If the pri­vate as­set man­agers also pull out of the SOE bond mar­ket, the PIC could find it­self un­der pres­sure to take up the slack and de­fend its state com­pany debt. Ul­ti­mately, it comes down to the price, said Oden­daal. “Fund man­agers will keep buy­ing if the price is right.” This is pre­cisely why as­set man­agers have bought al­most none of the Transnet bonds on of­fer since the Cab­i­net reshuf­fle ear­lier this year and the sub­se­quent credit rating down­grades to junk sta­tus an­nounced by S&P Global and Fitch Rat­ings.

When pre­vi­ously con­fronted with its large ex­po­sure to es­pe­cially Eskom, the PIC has pointed out that no SOE has ever de­faulted and that – even if one did – most of the debt was govern­ment-guar­an­teed.

Fitch Rat­ings this week said it was keep­ing South Africa’s credit rat­ings un­changed for now, but pointed to in­creases in the li­a­bil­ity SOEs rep­re­sent to govern­ment as one of the two ma­jor risks that could trig­ger a down­grade later.

The other was GDP growth, for which Trea­sury has overly op­ti­mistic fore­casts, Fitch said.

Na­tional Trea­sury’s lat­est statis­tics on who owns the cen­tral govern­ment’s debt showed a con­tin­u­a­tion of the trend since at least 2006 – non­res­i­dent in­vestors buy­ing an ever larger share of the govern­ment’s bonds.

In April this year, non­res­i­dent in­vestors owned 39.4% of govern­ment bonds – a new record af­ter the old one was set in July 2014 at 38.8%.

The move­ment of for­eign funds into South African bonds is part of a global search for yield by large in­sti­tu­tional in­vestors. Much of this money lands in South Africa ow­ing to the coun­try be­ing part of emerg­ing mar­ket in­dices, but Oden­daal said it was hard to dis­cern the rel­a­tive roles of in­dex and ac­tive in­vest­ments.

“There is a lot of money in in­dices. It is un­clear how much. If you look at Turkey, for ex­am­ple, there was no great big out­flow, de­spite their re­cent prob­lems. “We over­es­ti­mate the im­por­tance of our pol­i­tics.” For­eign in­vestors be­com­ing the dom­i­nant hold­ers of South African govern­ment debt “have been a trend for a while”.

While large for­eign hold­ings the­o­ret­i­cally posed a risk, this also shouldn’t be over­stated, said Oden­daal.

“The fear is al­ways that they might sell off rapidly. Un­like the lo­cal in­vestors, when the for­eign ones sell, they very pos­si­bly take the money across the bor­der and that af­fects the cur­rency. That is not nec­es­sar­ily the case. They might move the money to shares on the JSE. “Most trad­ing takes place off­shore in any case,” he said. “The lo­cal guys are pos­si­bly more at­tuned to the pol­i­tics. They get more trau­ma­tised, more wor­ried.”

Also, lo­cal as­set man­agers not keep­ing up with for­eign­ers in buy­ing govern­ment debt is not an un­am­bigu­ous sig­nal about the coun­try, said Oden­daal.

“You can ex­press your judge­ments in a va­ri­ety of ways, like buy­ing and sell­ing bank shares or prop­erty.”

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