South African corporate bond market unaffected by sovereign downgrades

South Africa's corporate bond market remains resilient despite the series of sovereign downgrades experienced by the country over the past year.

Standard Bank Group estimates that total debt issuance in the South African market (excluding government) this year is likely to remain on par with the record sales of approximately R120-billion (US$12.2-billion) seen in 2012. That compares with total non-government debt issuance of about R40-billion in 2006.

"We had record growth in corporate debt sales last year so the concern this year is more about the lack of growth in the market, however that has very little to do with the sovereign downgrades," said Zoya Sisulu, Debt Primary Markets at Standard Bank Group.

"The biggest factor affecting issuance volumes is the lack of growth in the domestic economy which is causing companies to sit on their cash and refrain from acquisitions or expand their existing operations. Companies aren't going to borrow money by issuing bonds if they're not planning on investing."

Ratings agency Moody's Investors Service cut South Africa's sovereign credit rating in September last year by one notch to Baa1 due to concerns about poor economic growth and social unrest. Standard & Poor's followed suit a month later when it lowered South Africa's debt rating to BBB while Fitch Ratings took similar action in January this year.

"The sovereign downgrades don't really have an effect on the local currency bond market as their main impact is to affect the ability of South Africa's government, parastatals and corporate entities to raise debt on international markets," said Megan McDonald, Head of Debt Primary Markets at Standard Bank Group.

"All the corporate bond issues we've seen in South Africa this year have been well oversubscribed with spread compression continuing"

The South African Reserve Bank expects South Africa's economy to grow by just 2% this year, down from an earlier estimate of 2.4%. The International Monetary Fund also cut South Africa's growth forecast for a second time when it released its biannual World Economic Outlook in which it predicted an expansion of 2% this year, down from a forecast of 2.8% in April and 3% in October 2012.

Standard Bank expects a continued increase in the percentage of South Africa's over R5 trillion fund management market that will be allocated to investment in fixed income assets that currently stands at under 20%. The country's total fixed income market comprises roughly 21% of corporate paper and about 79% government and parastatal debt. Issuance within the corporate bond market is dominated by financial institutions (67%).

"The local bond market isn't all that diversified and is still dominated by financials," said Ms Sisulu. "There's still very little mining representation for example."

Standard Bank Group also predicts a continued contraction in South Africa's securitisation market, saying its value was likely to shrink to R12 billion in 2013 from R16.9 billion in 2012. Securitisation is the process in which banks sell off portions of their loan books in the form of special purpose vehicles to investors who purchase the assets to access their underlying revenue streams.

"Securitisation hasn't really recovered from the 2008 financial crisis but we are likely to see a recovery over the next three to five years as an improvement in economic conditions fuels demand for mortgages, credit cards and car finance," said Ms McDonald. "Banks will need to boost liquidity in order to provide that funding and securitisation offers them an effective way to do so."

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