Listings rules for issuers of debt ‘need to be tightened’

As governance failures rock South African Airways, Transnet and Eskom, Futuregrowth Asset Management says the JSE needs to do more to tighten up listings rules for issuers of debt.

Conway Williams, head of listed credit at the asset manager, said a closer look at the 534-page JSE listing requirements for equities versus the 113-page Debt Listing Requirements was instructive: why was there such a big difference in requirements across these, “despite both being securities and being listed instruments?”

Futuregrowth, whose bond funds have about R150bn in assets under management, said it was concerned that the debt listing requirements “do not provide sufficient protection for debt holders”.

The JSE ascribes its light touch on listings rules to the fact that equity shareholders have more rights than bondholders.

“Equity instruments provide the holder with an ownership stake in the company, allowing the shareholder voting rights on specific company matters.”

These include acquisitions, which could be funded using shares, and rights offers. The JSE said shareholders’ right to vote meant equity issuers had to ensure investors were aware of what was happening in the companies in which they invested. Debt holders, on the other hand, only had rights to receive interest and principal payments, though in the event of a default, assets of the company could be attached. This meant ordinary shareholders faced greater economic risk to their capital than bondholders.

But one analyst, who asked not to be named, said bondholders placed a “significant amount of capital at risk and so should have better protection”.

The bond market dwarfs equity trade by multiples. At the end of 2016, the JSE had 1,666 listed debt instruments, amounting to more than R2.4trillion. More than half of that is placed by the government, while state-owned enterprises, corporations, banks and other African countries make up the rest.

Trade in debt accounted for about R29bn a day, compared with the equity market average of between R15bn and R20bn.

Futuregrowth is pushing for improvements to the listing process, more transparency in the auction process and more detailed post-issuance reporting requirements.

It said that its concerns related to all debt issued in the capital markets, not just that issued by state-owned enterprises.

Changes to present debt listings rules were sent to the market in December 2016, with public comment open until the end of January.

Amendments that are expected to take effect on September 30 2017 include reducing the period to release annual financial statements to within four months of the issuer’s year-end (from six months at the moment), the disclosure of price-sensitive information, as well as procedures for noncompliance if bond issuers fail to publish their financial statements on time.

“It’s definitely a step in the right direction,” Williams said, “but the process for making changes isn’t ideal because [there] isn’t any public interaction. Comments get taken under advisement and you get told what is going to be amended or not and what will fall into the next round.”

Futuregrowth is also unhappy that committees that deliberate on changes are more often than not heavily populated with bank representatives.

They were “skewed against investors”, Williams said.

“The JSE’s current debt advisory committee that considers proposed changes has very few investor representatives, which in itself is a problem.”