SA towns borrow as bond yields dip

SOUTH African yields near record lows are luring cities to the debt market after a more than 50% slump in municipal bond sales last year.

Tshwane’s R1.39bn of securities maturing in 2023 and 2028 were priced to yield, respectively, 9.11%, or 229 basis points above similar-maturity government debt, and 10.2%, a premium of 283 basis points.

Those low borrowing costs are tempting municipalities to raise debt funding to address infrastructure shortages ranging from housing to water and roads.

Tshwane, which includes the capital city, Pretoria, may sell more, and Johannesburg, which needs to spend R100bn over 10 years on service infrastructure, may follow.

“It’s a really good time for issuers across the board, including municipalities,” said Raven Moodley, an emerging-markets credit analyst at Barclays’s Absa Capital. “If your house is in order, there’s nothing stopping you from coming to the market.”

Sales of municipal debt dropped to R800m last year from R1.65bn in 2011, according to data compiled by Bloomberg.

Ekurhuleni, which is between Pretoria and Johannesburg, was the only metropolitan council in SA to sell debt last year.

SA’s R20.5bn of city bonds make up 4% of debt not issued by the central government, compared with 14% in Poland, according to data compiled by Bloomberg and Fitch Ratings.

Tshwane sold R830m of bonds due in April 2023, and R560m of notes maturing in April 2028.

“Tshwane was a first-time issuer, so the market doesn’t know them that well,” Mokgatla Madisha, who helps manage the equivalent of $1.3bn at Argon Asset Management, said.

The municipality cancelled a bond sale in June amid concern about its legality. The opposition Democratic Alliance said the sale contravened the Municipal Financial Management Act as it sought, in effect, to refinance debt. This was denied by the municipality.

The plan was revived after the Treasury said in July it was within the law.

Rating agencies have warned of further sovereign debt downgrades, citing concern that mining strikes last year curbed economic growth and pressure on the government to raise spending.

SA raised its budget deficit target to 5.2% of gross domestic product in the year through to March, from 4.8% estimated in October, Finance Minister Pravin Gordhan said in his budget in February. Bloomberg