Eurobond sale will test investor confidence in SA
Brussels/Lagos/Johannesburg — Investor confidence in SA’s new administration will be tested as the country sells its first eurobonds under President Cyril Ramaphosa at a time when emerging-market currencies and debt are under pressure amid rising US rates and geopolitical tensions.
The country is marketing dollar securities maturing in 2030 and 2048, with initial price talk of about 6% and 6.375%, respectively, according to a person familiar with the transaction, who asked not to be identified because they’re not authorised to speak about it. This would be a premium over existing yields, which rose as developing-nation currencies plunged on Tuesday.
The rand has gained 15% since mid-November, the most globally, as Ramaphosa manoeuvered to succeed Jacob Zuma as president. Standard Chartered and Goldman Sachs, among others, have recommended long positions in South African assets as the new administration moved to curb the budget deficit, cut debt and stimulate growth.
This may not be enough to lower the country’s dollar-borrowing costs. The premium investors demand to hold SA’s dollar debt rather than US treasuries has climbed 25 basis points since the beginning of February, and widened eight points on Tuesday to 267, more than the two-point increase for the emerging-market average. Pricing on the new eurobonds will depend on how investors weigh the improved fundamentals against an aversion for risk.
"They have a good window to issue now, on the back of policy decisions and year-to-date reforms," said Richard Segal, a senior analyst at Manulife Asset Management in London. "They will have to pay a meaningful concession, but they have to balance this against the risk of waiting. Were the government to wait, conditions might be even tougher."
SA had budgeted to sell $3bn of international bonds this fiscal year, according to Treasury documents. External debt accounts for less than 10% of the country’s overall borrowing and just 4.6% of GDP, according to a prospectus for the eurobonds filed with the US securities and exchange commission.
While the new government has put in place programmes to stimulate the economy and stabilise debt, the success of those measures depends on Ramaphosa’s ability to implement them against political opposition from within and outside the ANC, the prospectus states.
"There can be no assurance that such initiatives will achieve or maintain the necessary political support in the short or long term," the prospectus states. "The political environment in SA has remained challenging with continued tensions between populist and reform-oriented politicians."
SA last issued eurobonds in September, when it sold $2.5bn of 10-and 30-year notes. Yields on the former rose nine basis points to 5.48% by 11.21am in Johannesburg, while the longer dated securities traded at 6.05%. South African dollar bonds have lost 2.4% this year, well below the emerging-market sovereign average loss of 4.3%, according to data compiled by Bloomberg.
"It’ll be interesting to see how it clears, given the global sentiment to emerging markets today," said Michelle Wohlberg, a fixed-income trader at FirstRand Bank. "Given that SA has taken concrete steps to turn the country around — cleaning up state-owned enterprises, providing political stability, trying to keep a lid on the fiscus — I think we should see good demand from the offshore players."
Deutsche Bank, Nedbank, JPMorgan Chase, FirstRand’s Rand Merchant Bank and Standard Bank are managing Tuesday’s deal.
African governments have been prolific issuers this year. Egypt, Angola, Nigeria, Senegal, Ivory Coast, Ghana and Kenya have raised more than $20bn in dollar-and euro-denominated securities, already a full-year record for the continent.