Bank collapse is driving up borrowing costs
THE COLLAPSE of African Bank Investments is casting a shadow over South Africa’s corporate bond market, driving up borrowing costs and prompting companies to cancel debt sales.
Issuance was R4.6 billion in August, about a third of the monthly average in the first half of the year, and climbed to about 50 percent in September, Alexi Contogiannis, a primary market debt executive at Standard Bank, said on Thursday.
“A number” of clients had pulled sales since African Bank failed on August 10, said Prasanna Nana, the head of debt capital markets at Barclays Africa Group, without identifying any.
Three months after the Reserve Bank stepped in to rescue the lender, imposing losses on bond investors and wiping out shareholders, participants at Africa’s biggest bondmarket forum last week fretted about lacklustre investor appetite and dwindling issuance.
The yield premium of the nation’s corporate bonds over government securities widened 36 basis points to 206 in the period, the most in at least two years, according to JSE indexes.
“African Bank was a catalyst to create what we are now in, which is essentially a corporate bond drought,” Bruce Stewart, the head of debt origination at Nedbank, said at the annual Africa Capital Markets conference. “Some irreparable damage is being done and I don’t think we’ll see spreads back to where they were six, seven months ago.”
Corporate debt issuance climbed 14 percent to R88.6bn in the first three quarters, R37.9bn short of Standard Bank’s full-year projection of R126.5bn, Contogiannis said.
By comparison, local currency corporate issuance in Turkey doubled in the first 10 months of the year to 43.2 billion lira (R213.43bn), according to data compiled by Bloomberg.
“We are behind our forecasts,” Contogiannis said. “The extent of the miss will depend on how hesitant issuers are to access the market, given the shift in investor sentiment and pricing. The lingering impact of this will still be felt for some time.”
African Bank bondholders suffered a 10 percent loss when the Reserve Bank stepped in to rescue the lender after investors withdrew funding amid rising losses and bad loans. Toyota South Africa and BMW’s South African unit were among companies that withdrew bond sales in the wake of the collapse, and Moody’s Investors Service cut the credit ratings of the nation’s four biggest lenders.
The default, the second in South Africa’s R1 trillion corporate bond market, exposed the lack of secondary market liquidity that prevented holders from selling the debt when warning signals appeared, and raised concerns that the central bank would not necessarily bail out a failed lender.
“It reminded investors that investing in interest-bearing instruments isn’t a risk-free investment,” Philip Myburgh, the chief executive of Stanlib Credit Partners, which oversees the equivalent of $50bn (R554bn), said. – Bloomberg