2023 Sees Excess Liquidity Chasing Limited Assets

Primary Market

The fourth quarter of 2023 saw robust primary market activity, where quarter-on-quarter new issuances increased by 91% to R55.4 billion from R29.0 billion. Corporates and financial entities dominated the market, issuing R14.8 billion and R31.7 billion, respectively. Municipalities remained absent from the debt capital market with no issuance in the quarter or the year.

In financial issuances during the fourth quarter, the local primary market saw a total issuance of R15.2 billion for subordinated bank instruments (comprising Tier 2 and AT1), up from R5.6 billion in the third quarter. Additionally, senior unsecured notes worth R13.1 billion were issued - up from R6.8 billion in the previous quarter. This, in addition to spreads tightening, is an indication of an ongoing quest for higher yields.

Noteworthy issuers in the fourth quarter included Absa Bank, FirstRand Bank and Standard Bank of South Africa, each contributing more than R5.5 billion in paper. Standard Bank conducted an auction of Tier 2 notes, receiving bids of R3.9 billion, and placing R3.6 billion. The note was issued at 190 basis points (bps) over 3-month Jibar, which was at the upper end of price guidance of 180bps to 195bps, and higher than the low of 172bps observed for the ABSA and Nedbank issuance in August and October, respectively.

For the full year, the credit market saw an increased demand for longer dated paper on the back of investors’ increased appetite for yield pick-up, with continued appetite for higher yielding Bank Additional Tier 1 (AT1) paper.

Source: RMB SA credit monthly

Meanwhile, bank senior spreads maintained relative stability during this period, witnessing an uptick in demand for longer-dated 5-year and 7-year instruments. This demand is also driven by the persistent search for higher yields, resulting in a tightening of spreads in the Tier 2 and AT1 instruments in comparison to the prior year.

Source: RMB SA credit monthly

Source: RMB SA credit monthly

Corporate issuances increased from R7 billion in the third quarter to R14.8 billion in the fourth quarter. Notable companies such as Barloworld, Bidvest, Growthpoint, Mercedes Benz South Africa (MBSA), Redefine, Sasol and Super Group, each raised more than R1 billion. Growthpoint raised R910 million in an auction in October, followed by a sustainability-linked private placement where it raised R1 billion. Across both capital raises, Growthpoint raised R876 million in the 7-year tenor and R650 million in the 10-year bracket.

Bidvest had a strong auction where it offered investors 3- and 5-year notes which attracted R4.9 billion in bids, out of which Bidvest only allocated R1.4 billion. The 5-year note allocated R709 million, and the clearing spread was 5bps below price guidance which was set at 130bps to 140bps over 3-month Jibar, indicating the ongoing search for yield from investors. Barloworld raised R1 billion and attracted R2.9 billion in bids, whilst MBSA privately placed R1.5 billion across 1-year and 3-year notes, clearing at low spreads of 70bps and 90bps, respectively. The MBSA private placement was 12bps and 15bps lower than the March 2023 auction for the 3- and 5-year tenors, respectively.

The Development Bank of South Africa (DBSA) - one of South Africa’s most profitable state-owned enterprises (SOEs) - remains the most active SOE in the capital market. In the quarter under review, DBSA raised R1.7 billion of which R1 billion was by way of a private placement.

The fourth quarter redemptions (excluding banks) amounted to R20.9 billion. The redemptions were dominated by the SOEs the Industrial Development Corporation, SANRAL and Transnet, which redeemed R1.7 billion, R2.9 billion and R7 billion, respectively. Transnet funded R4.6 billion of its maturity by way of tapping a CP Note maturing in March 2024.

The total 2023 issuances, excluding commercial paper, amounted to around R164 billion, and marked a 16% increase when compared to the 2022 calendar year. The 2023 issuances were dominated by banks and financial services, which issued over R80.2 billion (48.9% of total issuances), and corporates, which issued over R44.0 billion (26.9% of total issuances). SOEs issued R19.5 billion, which was mostly the DBSA, and Eskom which tapped R11.65 billion in January 2023.

Source: SBR data

As per SBR data, the bond market (net issuance and redemptions) grew by around R20.0 billion in 2023, more than double the growth  recorded in 2022. However, this growth is low when compared to the decade preceding the pandemic, which is largely due to the  contraction in issuance recorded by the SOE and Municipal sectors, given negative sentiment towards the sector. The decreased issuance from SOEs and municipalities was countered by an increase in financials and corporates issuance, which was responsible for most of the growth in 2023.

Source: SBR analyst and JSE data

Non-property corporates issued R25.5 billion of bonds in 2023, with R21.6 billion of redemptions. Sasol was the largest net issuer (R2.4 billion), followed by Daimler Truck SA (R1.8 billion) and Super Group (R1.7 billion). MBSA (which Daimler Truck SA was spun out of) issued R3.0 billion but had R4.4 billion of negative net bond issuance as a result of R7.4 billion of redemptions. Other noticeable net issuers of bonds were Sappi and Northam Platinum.

There was a marginal 6% increase in green, social and sustainability-linked bond issuance in 2023 to R18.6 billion, with the majority (around 68%) issued by the financial sector, and the remainder issued by corporates. SBR data indicates that 79% of the issuance was in the form of green bonds, with the remainder being sustainability-linked notes.

Source: SBR

Over the past few years, we have observed limited price differentiation in terms of market appetite for “ESG” bonds. Auctions have consistently cleared within 1bps to 3bps tighter than vanilla corporate bonds, despite extensive efforts by issuers and banks to develop the criteria and reporting required for this type of bond issuance. Our observation is that, due to the limited pricing benefit and increased disclosure, monitoring and reporting costs, issuers are likely to see little advantage in issuing these bonds in the current market. It could also be the case that South African banks are issuing these loans to corporates on their balance sheets, potentially obtaining better pricing, given the subdued economic growth and limited corporate loans and advances due to weak economic conditions.

Banks participation in corporate auctions

Another trend of 2023 was the SA banks’ participation in corporate issuer auctions, with RMB data indicating that of the total amount of R72.2 billion in bids received across 22 auctions in 2023, R21.8 billion (or 30.2%) was from the banks. When taking the auction allocation into account, banks received R8.7 billion (or 34.8%) of the R24.9 billion final allocations, higher than the R6.5 billion (or 29.1%) of the R22.4 billion allocated in the 2022 auctions.

The fact that banks received a higher allocation than their initial bid (in percentage terms) indicates that South African banks are pricing tighter than other investors in the auctions, leading to a reduction in spreads. It is encouraging to see that SA Bank arrangers of the auctions are disclosing the banks' bid percentages and allocation percentages in the auction results.

In our view, banks were aggressive bidders in higher-rated corporate auctions throughout 2023, and as long as yields (base rates) remain high, we believe this trend is likely to continue. Evidence of this is seen in the Banking BA900 report, which shows that for the year-on-year period from November 2022 to November 2023, deposit growth exceeded loan and advance growth. This is likely due to consumers being under financial strain given high interest rates, inflationary pressure and the adverse impact of loadshedding. The resulting impact is a reduced demand for credit and a reduction in consumer spend (i.e. less withdrawal of deposits), or a possible increase in non-performing loans in the books of the banks, driving them to implement stringent credit granting policies. This potentially indicates that banks are exploring alternative ways to invest excess cash, with high-quality liquid (listed credit) assets such as South African corporates, potentially offsetting the weaker bilateral loans and advances growth.

We believe 2023 can be summarised by continued spread compression driven largely by excess liquidity chasing limited assets, with a strong demand for higher-yielding assets. However, towards the end of the year there were more bids within guidance, or that were close to the end of price guidance, indicating less aggressive pricing.

Secondary Market activity

The secondary market experienced subdued trading activity throughout the quarter due to, in our view, the lack of available supply due to high base rates, leading to some investors’ preference to hold onto their investments until maturity and, in addition, weak demand for credit because of significantly compressed spreads during the year. In addition, pessimism towards municipalities and SOEs persists, which limits trading volumes in the secondary market.

2024 Outlook

The 2024 outlook has a scheduled nominal bond redemption of R135.1 billion, a slight reduction of 5% year-on-year. Financials account for close to half of the total (R66.7 billion, +42% year-on-year), followed by corporates (R37.9 billion, +19% year-on-year), SOEs (R13.9 billion, -72% year-on-year), securitisations (R13.1 billion, +40% year-on-year) and municipalities (R3.5 billion, -27% year-on-year).

As a result of the above redemptions, we anticipate a potential increase in financial and corporate issuance throughout the year, driven by the need to refinance the redemptions. While there is a possibility of witnessing growth in the size of the listed credit market (i.e., positive net issuance growth), this outcome hinges on several well-known factors. These include sustained demand driven by spreads at attractive levels (although the decline in interest rates could exert pressure on credit spreads and lead to reduced demand). Additionally, a potential reduction in loadshedding could improve sentiment and boost GDP, but uncertainties related to the upcoming general elections may keep the private sector cautious, particularly if market volatility occurs.

Looking ahead into 2024, our view is that we are likely to start seeing spreads slightly widening from their 2023 levels due to a reduction in base rate (repo) levels, as interest rates are reduced. Additionally, the subdued macroeconomic environment will continue to put pressure on new issuance which, in our view, will likely be led by refinancing maturing notes rather than funding expansion initiatives.

At the time of writing, the first auction of the year had just taken place, with Toyota Financial Services (South Africa) Limited raising R1.3 billion out of bids totaling R3.977 billion and issuing both 3-year and 5-year bonds. This auction garnered strong support, evident in a subscription ratio (bids over allocation) of 3.1 times. Banks' bids constituted 22% of the total bids, with 43% of the allocation going to banks. Furthermore, in line with the trends observed in 2023, there was greater demand for the higher-yielding 5-year bond, which raised R800 million from R2.28 billion in bids, compared to the 3-year bond that raised R500 million from R1.17 billion in bids. This leaves us thinking: “So, for as long as base rates remain high, more of the same in 2024 then?”