Eqstra expects bond issue to cut debt costs

Miner and equipment leaser will not abandon banks completely, writes Kamlesh Bhuckory

EQSTRA, the mining and industrial equipmentleasing company that is selling bonds, expects its borrowing costs to fall as investors back its plan to expand from mining to construction.

The company would sell R500m of notes today at 245 basis points to 255 basis points above the Johannesburg interbank agreed rate, known as Jibar, compared with a 270 basis-point spread for a similar sale a year ago, chief financial officer Jannie Serfontein said.

That would price the securities as low as 7.58%, according to Bloomberg calculations.

The average yield of fixed-rate dollar debt of emerging market industrial companies in JPMorgan Chase & Co’s CEMBI index was 5.28% on Thursday.

Eqstra, which rents out forklift trucks, cranes and other heavy lifting equipment to mining companies operating in Southern Africa, is selling assets and making acquisitions to reduce its dependency on mining. Output of gold and platinum has dropped amid soaring costs and labour disputes.

Projects for Eqstra, spun out of Imperial Holdings in 2008, include a Rio Tinto coal mining venture in Mozambique.

The spread on the bonds might drop toward “the lower end” of the company’s guidance, which was priced within a “fair” range, said Abri du Plessis, chief investment officer at Cape Town-based Gryphon Asset Management, which manages the equivalent of about $440m.

“There are no financially failing big risks for the company.”

Mr Serfontein said the company had “spread our risk exposure. Platinum mining accounts for 20%, from 90% before.

“We have diversified in logistics. We are in some construction, food and beverages and communications businesses.”

Eqstra is joining companies, including Adcorp, SA’s largest recruitment company, and Growthpoint Properties, a realestate investor, in tapping the bond market for cheaper debt to replace existing bank facilities.

“There’s a lot of appetite from the market,‘‘ Mr Serfontein said. ‘‘It’s purely for cost of funds.’’

Eqstra has diversified its debt structure to reach a 50-50 level in bonds and bank liabilities with a target of increasing debt securities to 60% of the total.

The mining and industrial equipment-leasing company did not plan to abandon banks com-

The company has spread its risk exposure, with platinum mining now accounting for 20%, from 90% in the past

pletely, Mr Serfontein said. ‘‘They are there to support us when the capital markets dry up.’’

The shares have gained 8% this year, giving the company a market capitalisation of R2.8bn. That underperforms SA’s sevenmember FTSE/JSE Africa general industrials index, which advanced 9% during the period.

The mining index, accounting for 24% of the FTSE/JSE Africa all share gauge, has weakened 13%.

The rand strengthened 0.7% to 9.1633 per dollar late last week, paring its losses this year to 7.5%, the worst performer of 25 emerging markets monitored by Bloomberg. Yields of South African 10-year government bonds fell six basis points, or 0.06 percentage point, to 6.76%.

The South African mining industry has battled higher energy costs, labour unrest and pressure from the ruling party over job cuts in the past year. Sibanye Gold was criticised by African National Congress secretary-general Gwede Mantashe last week for its plan to fire 3,000 workers.

Mark Hodgson, an analyst at Cape Town-based Avior Research, said the mining and industrial equipment-leasing company’s exposure to mining has seen it perform ‘‘well below investor expectations” because of disappointing returns from the industry and poor working capital management.

“If Eqstra does not generate adequate returns for investors from its mining industry investment, it will look to shrink its exposure and reallocate capital into its industrial operations.”

Sales increased 7% to R4.3bn for the six months through December, while operating profit advanced 17%, Eqstra said on March 7.

The mining and industrial equipment-leasing company posted a loss in financial 2010 after strikes hurt output and lower sales at its mining equipment division.

“They have proved in the past that they can go through the ups and downs,” said Gryphon’s Mr du Plessis. Gryphon owns Eqstra bonds. “Eqstra ticks all the requirements from a bond-investor’s perspective,” he said.

SA’s economy will expand 2.7% this year, according to government estimates, from 2.5% in the previous one, the slowest pace of growth since a 2009 recession. Bloomberg