Shake-up for bond regulations
Listing requirements for the debt market stand accused of being weaker than those for equities
In the wake of growing concern that bond market regulation and debt listing requirements are not tough enough, the JSE says big changes are on the way. Significantly, Futuregrowth, a fixed income asset manager, has called for better regulation of the bond market, fundamental change in how debt capital markets operate and better investor protections and disclosures.
South Africa’s capital markets are comprised of equity and debt (bonds), and both trade on the JSE.
But, according to a recent report by Futuregrowth, titled SOE Governance Unmasked, in its view, the disclosure and reporting requirements detailed in the debtlisting requirements are “woefully inadequate, fail to promote governance standards and make longterm investment decision-making difficult”.
Futuregrowth highlighted an “alarming decay” of governance in government departments and stateowned entities (SOEs). “It is now clear that there has been a systematic programme to capture and pillage the nation for personal financial gain,” the report says.
Several requirements that apply to companies whose shares are traded, including a high level of disclosure by directors, managers and advisers, don’t apply to those who have their debt traded on the bond market, says Olga Constantatos, co-author of the Futuregrowth report.
State-owned entities
Much of the concern about the regulation of the bond market relates to state-owned entities, which have issued debt on the market but have been plagued by poor governance.
Constantatos says that, although concerns about regulation apply to all issuers of debt on the market, there is a difference with corporates, which are typically also listed on the equity market and so by default adhere to more stringent requirements. Trading updates provided by these corporates serve to inform both equity and debt investors.
This is also the view of Carmen Nel, an economist and fixed income strategist at Matrix Fund Managers, who says the corporates able to access debt capital markets in South Africa are typically large and of a high credit quality already.
Constantatos says: “National government debt, in the bond world, is the safest debt you can get in the domestic context and is basically considered risk-free.”
Although SOEs may have government guarantees in place for some bonds they issue, many raise debt on the market themselves. SOE shares are not listed on the stock exchange and so are not subject to equity list- ing requirements. In these cases, in particular, better assurances about governance are required, Constantatos says.
For example, last year the former minister of water affairs, Nomvula Mokonyane, unilaterally fired the entire Umgeni Water Board, which had issued debt in the market, without notifying investors.
“We called up the JSE and, when asked, they didn’t even know about it and they said they can’t do anything. They said they would speak to the issuers,” Constantatos says.
Operating without a board, as Umgeni did, would have any listing on the equity market suspended immediately, she says.
But even when the law was broken, the debt listing of Umgeni was not suspended. The Umgeni matter was a clear transgression of national treasury’s Public Finance Management Act, which has material powers to hold people to account, although these are seemingly never enforced, Constantatos says.
Nel says the matter is complex because SOEs are often governed by their own Acts and have to follow government regulations rather than company law, which means the JSE should not be blamed when the government does not force public institutions to comply with the law.
The effect has been felt. “Last year the state-owned companies basically couldn’t come to market,” says Nel. “Their net issuance was flat, and that’s just because they knew there wasn’t going to be demand.”
New boards, such as that installed at Eskom, are not a silver bullet and it will take time for confidence to return, she says.
With state institutions failing to hold transgressors liable, the focus has shifted to private sector accountability.
André Visser, the JSE’s general manager of issuer regulation, says: “Certainly, if there are failures at SOE level, there is attention on the JSE to see the role we can play. There is a focus on the JSE to play a bigger role and enforce things through the listing requirements. If you think about it, a lot of these things sit with policy in legislation.”
JSE response
“There are big governance changes coming this year,” says John Burke, the JSE’s director of issuer regulation.
Although he could not divulge any details while consultations are under way, he said: “Be sure, watch this space, there’s quite a few coming.”
These changes will follow others implemented by the JSE since it acquired the bond exchange in 2009.
“The nice thing is we are pretty nimble. We can change listing requirements quickly. If you are going to change the Companies Act, it takes years and years. We come up with a change to the listing requirement, we consult, we go through our process and eight months later it’s a requirement,” Burke says.
Critics point out the JSE’s equity listing requirement document runs to 454 pages but the debt listing requirement document is just 81 pages.
But Visser says page numbers are not a fair comparison because equity rules have been developed over 100 years. In addition, there are many issues related to equities that are simply not applicable to debt markets — they are very different animals.
It’s important to note that, if a company is liquidated, bondholders are much higher up in the priority queue than shareholders, he says.
Even so, South Africa’s debt listing requirements are the same as those elsewhere in the world, if not more onerous in some respects. The JSE was careful to strike a balance here, he says.
Annalie de Bruyn, the JSE’s general manager of corporate finance, says the exchange has already introduced some requirements to enhance disclosure and address investor concerns, including that information about directors must be included in the issuers bond programme.
Difficult access
Access to information is another gripe.
“You have to trawl through websites to find pricing documents for each and every bond,” says Nel.
De Bruyn’s response is that an issuer must publish their bond programme memorandum and the applicable pricing supplements (the detailed terms of each instrument issued) on their website, which the JSE must also do. She did admit that the JSE’s site is not the easiest to navigate if you do not have the instrument code at hand.
But Visser and Burke maintain that the information is easily available from the issuer.
Part of the problem is the way bonds trade — that is, by phone.
“There is no electronics system where guys make prices like in the equities market … If I want to invest in something, I can immediately see where the price is. I can’t generally do that in bonds. I have to go phone a couple of dealers and ask them to make me a price,” Burke says.
“That is historical, that’s how they have always traded in the bond market. Is that the right way to trade? We don’t believe so.”
But the JSE will begin trading some bonds electronically this year on its bond electronic trading platform.
Burke says, when the JSE bought the bond exchange, it looked at the requirements, decided they were not up to speed and proposed many changes.
“At that stage, we had a hell of a lot of pushback from people in the bond market … saying some of the requirements should not be applicable at all. It was everyone at that stage: issuers, bondholders, originators.”
But the JSE still made some changes, such as requiring that any price-sensitive information must be announced through the SENS (the stock exchange news service). Visser says: “I would argue a lot of transparency was introduced [by the JSE].”
The effect of better regulation will not be immediate but, according to Nel: “I can only assume you advance your investor base over time if you are more standardised with disclosures.”
“We can change listing requirements quickly. If you are going to change the Companies Act, it takes years and years”