South African corporate borrowing is being driven through expansion into Africa coupled with refinancing activities, especially as a slower domestic economy curbs the need for bank loans and bond issuance required for local expansion.
Standard Bank South Africa has seen steady growth in the corporate market despite the contraction in South Africa's gross domestic product reflected in the first quarter of this year.
"We've had a good start to the year in terms of the South African corporate activity, with a number of large deals coming to play, such as the Woolworths acquisition of David Jones," says Mr David Veale, head of Diversified Leverage and Lending for Standard Bank South Africa.
"The bulk of the borrowing we're seeing is coming from large domestic corporates and leveraged buyout companies looking to lower their overall cost of funding by refinancing existing facilities. Additional borrowing is coming from those companies looking to borrow money domestically to expand operations in the rest of Africa." Mr Veale says the bulk of the refinancing activity is taking place "at the short end" of the spectrum with facilities typically of around three-years to five years in duration. In addition, companies arecurrently continuing to source a significant portion of their liquidity requirements from banks, due to the flexibility that bank loans provide in terms of repayment.
"If you have a bond in issue you can't always settle the outstanding debt as you need to see out the terms agreed upon when issuing the instrument," says Mr Veale. "In that sense, the bank loan market offers more flexibility in terms of adjusting your repayment terms or schedule."
Mr Veale says many domestic firms are now using their domestic balance sheet to borrow locally before deploying the capital in other African countries rather than their previous tendency to ring-fence borrowing for a subsidiary elsewhere in Africa. This is because the strength of the South African balance sheet enables them to borrow more cheaply and efficiently.
The number of loans taken out by domestic corporates has grown significantly in recent years. Mr Veale says that the size of the South African market relative to the rest of the continent means that between 70% and 80% of all deals are still centred on the domestic economy. One challenge for banks in this market is competition, he says.
"All the domestic banks are very well-capitalised at the moment so there's a fairly big pot of money chasing a relatively small pool of deals. That means the competition for deals has resulted in favourable pricing on a number of deals that have closed in 2014." Investment grade and leveraged buyout South African issuers are still driving the refinancing market while the steady stream of merger and acquisitions is helping that sector emerge from the doldrums of 2013 as domestic companies go in search of targets in markets offering better growth prospects. Businesses centred on consumer financing activities have slowed down dramatically.
For more on Standard Bank South Africa's services to corporates and institutions, see www.standardbank.co.za/cib.
Standard Bank South Africa is part of Standard Bank Group, which is Africa's biggest lender by assets and market value, has a presence in 20 countries across the continent. This allows it to offer on-the-ground banking expertise to any of its corporate clients looking to conduct transactions in any of the African markets in which it operates.
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