South African corporate bond market to continue recent growth

The South African corporate bond market has grown strongly in the past few years, both in terms of local issuance growth and high-yield issuance internationally, with three new issues coming to market in the first quarter of 2007 alone.

While global liquidity pressures have put a temporary halt to new transactions, at least one more cross-border, high-yield issue is likely to come to market during the last quarter of 2007, according to Moody’s Investors Service.

“The South African corporate bond market has grown substantially since 2003, following a stable yet low-growth environment during the late 1990s and early 2000s,” said Craig Jamieson, Moody’s General Manager (South Africa) and author of the report.

“The total volume of South African corporate debt, including debt issued by government-related issuers, listed on the Bond Exchange of South Africa increased from ZAR41.2 billion (eight issuers) in 2000 to ZAR125.5 billion (41 issuers) as at 31 July 2007.”

The growth achieved can mainly be attributed to a relative benign interest rate environment as well as corporate acquisitions — which are funded through debt — and the proposed infrastructure spending by the government, which will underpin additional debt issuance by the government and state-owned enterprises.

The robust performance of the South African economy has also been a key factor in the strong growth, according to the Moody’s report entitled “South Africa‘s Corporate Bond Market — An Update”. The country has recorded impressive GDP increases in recent years, underpinned by booming domestic consumption and strong external demand for the country’s metal and mineral resources. While Moody’s does not expect GDP growth to match the pace of 5% or more registered in recent years, the South African economy should continue to perform well over the short-to-medium term.

“Global credit liquidity concerns appear to have had a temporary slowing effect on issuance and pricing in the second half of the year. However, we expect the good growth experienced during recent years to resume, based specifically on anticipated increased infrastructure spending by the government and government-related issuers such as Eskom and ACSA,” said Jamieson.

Moody’s anticipates further high-yield, cross-border issues, although the current limited liquidity appetite for these higher-risk assets in Europe and elsewhere internationally may affect growth in the short term.

Furthermore, the rating agency expects some shifting by South African corporates towards more efficient balance sheets and higher leverage levels, funded either via increased bank funding or through bond markets.