A WEE DRAM
CHRIS GILMOUR: The dangerous and murky shark tank of SA’s listed bond market
The JSE has been reformed and stockbroker hooligans removed, but bond institutions lag behind
When I started off as a company research analyst in Diagonal Street in 1982, times were very different. There was a Red Room which hosted drinking from 11am; stock price manipulation was blatantly evident; lunches went on late into the evening; and the bond market did its own thing, functioning in illiquid and opaque conditions.
While the equity platform of the JSE now demonstrates lauded international best practice, and the stockbroking fraternity has been “dehooliganised” our bond market continues to lag. Its weaknesses persist decades later and resistance to change is strong.
As a reader, you may not think the long-standing shortcomings of the institutional bond market are relevant to you — but take a look at your balanced portfolios and pension pots. Who of you weren’t somehow invested in African Bank or Steinhoff debt as they trundled towards failure, as well as state-owned entity (SOE) bonds such as Eskom, Transnet or Umgeni Water while they were severely mismanaged?
As bond investors, particularly those with interests in public sector entities, continue to be prejudiced with impunity, a group of investment managers are campaigning for change. They are members of the Association for Savings and Investment SA (Asisa) and want enhanced listing standards in the public debt market, wider disclosure requirements, greater scrutiny and transparency, and improved debt investor safeguards.
“The Asisa members have lived through several defaults and degradations in the last few years,” says Andrew Canter, Futuregrowth chief investment officer. “Acting as fiduciaries for investors the Asisa team has engaged deeply and diligently to improve investor protections.”
There are several shortcomings in the way the fixed income market operates. One that particularly irks bond investors is the mismatch between JSE debt listings requirements (DLR) against its equity listings requirements (ELR), meaning that lower standards of disclosure apply to listed debt instruments.
For example, at this stage there is no requirement in DLR for listed debt issuers to notify the market promptly via SENS of any director appointments or resignations — but this requirement applies to listed equity issuers. Canter points out that listed bond investors are having to rely on equity listing SENS dispatches in order to get the information they need. And even more acutely, is how this anomaly reduces the disclosures required from organisations with listed bonds, but no listed equity — mostly municipal and SOE issuers. These are the ones which actually require exceptionally high disclosure requirements.
Another problem is that the unlisted loan market, unbelievably, affords better investor protection than the listed market. “In the unlisted bond arena, normal practice is for two sets of lawyers to be appointed, one for the issuer, the other for investors, with the issuer bearing all costs. We must see this sensible practice being offered in the listed credit market,” Canter urges.
The JSE — now the owner of the bond market, after having bought it a decade ago — is finally paying attention. It is considering proposals for raised issuer disclosure and governance proposals that should better balance bond investor protections against the needs of other stakeholders. It will also draw quasi-government organisations with listed debt into the fold, making it a requirement that they publicly disclose details of their procurement policy and material procurement contracts.
Canter believes these additional communications are reasonable. “They are not onerous, competitive or proprietary. They are required in order to raise debt funding in a public capital market, enabling bond investors to assess inherent risks.”
As part of the DLR overhaul, several stakeholders would like to see an investor representative acting for bondholders. This role would ensure transparency in the negotiation of bond terms and that the views of all contracting parties are considered. Canter notes: “At present, arrangers and issuers are able to operate in the shadows and tend to dismiss investor concerns on draft legal agreements and inclusion of suitable protections.”
Next week: Draining the Swamp, Part Two … learn the fate of the proposed bond market investor representative.
• Gilmour is an investment analyst.