Bank Participation Supports Continued Demand For Credit

Primary Market

The first quarter (1Q2024) saw a slow start to the 2024 calendar year, with primary market issuances of R31.71 billion compared to 1Q2023 which saw R52.27 billion in issuances. In line with 2023, corporates and financial institutions were the leading issuers at R10.83 billion and R10.58 billion, respectively. State Owned Companies (SOCs) and Municipalities issued R7 billion in the first quarter compared to R17.86 billion in 2023. (SOCs and Municipalities’ issuances in 1Q2023 were dominated by a R15.80 billion issuance by Eskom.)

Source: SBR SA corporate bond market overview, March 2024

Banks and financials had a slow start to the year. In January 2024, BNP Paribas Personal Finance South Africa Limited and Investec Bank Limited privately placed R400 million and R100 million, respectively. Investec privately placed a further R250 million 5-year senior unsecured note in March 2024. The March 2024 private placement was priced at 125 basis points (bps), remaining unchanged from the January placement. ABSA Bank was the largest gross issuer in February, raising R3.3 billion of senior unsecured paper. The auction was 2.09 times oversubscribed and cleared within price guidance.

The issuance of bank Tier 2 instruments was prominent in March. FirstRand Bank Ltd and Standard Bank Group Ltd (SBG) placed R1.5 billion each in well supported public auctions, where the only differences between the two auctions was the clearing spreads of 186bps and 180bps over 3-month JIBAR due to the 6-year and 5-year tenors, respectively. These spreads were 4 to 10bps tighter than the last SBG 2023 Tier 2 issuance in October 2023. The tightening of these spreads likely indicates the increase in demand for higher yielding assets, considering the minimal issuances that took place during the quarter, particularly by the aforementioned banks.

Source: RMB SA Credit Monthly

Corporate issuances fell from R14.8 billion in 4Q2023 to R10.8 billion in 1Q2024. The 1Q2024 issuances were, however, in line with Q12023, which saw R10.8 billion in issuances. Corporate issuances were dominated by Growthpoint, Mercedes Benz of South Africa (MBSA), Pepkor, Super Group and Toyota Financial Services (TFS), each issuing more than R1 billion. Growthpoint and MBSA issuances were via private placements.

We continue seeing bank participation in auctions, which, in our view, has a further tightening impact on spreads. The Pepkor Holdings Limited auction in March received 51% bank bids and was allocated 76% of the total R2.1 billion. The Pepkor 5-year note compressed by 14bps from 138bps over 3-month JIBAR in the March 2023 issuance to 124bps in the current year issuance.

Toyota Financial Services (SA) Ltd (TFSA) raised R1.3 billion and R1.1billion across two auctions in Q12024, with both auctions being 3.1x oversubscribed. The March auction received R3.4 billion in bids across 3- and 5-year notes. The 3-year clearing spread was in line with TFSA’s January 2024 auction, with the 5-year note clearing 1bp tighter than the January auction at 117bps, below pricing guidance of 118bps - 128bps over 3-month JIBAR. MBSA privately placed a 3-year FRN at 88bps over 3-month JIBAR, tightening by 2bps since its last issuance at the same tenor.

REITs continue to be prominent issuers, with Growthpoint, Vukile and Redefine coming to market through auctions in the first quarter, all looking to raise roughly R750 million. Redefine Properties Ltd set out to raise R500 million with an option to upsize to R750 million at 5- and 7-year tenors. Both tenors were well supported, with the 5-year attracting bids of R733 million and the 7-year R649 million in bids. The 5-year notes cleared at 149bps and the 7-year at 165bps above 3-month JIBAR. Growthpoint continues to privately place long-dated bonds, placing a R1 billion 10-year note in February 2024, up from R650 million in November 2023. The February 2024 private placement was priced at 185bps above 3-month JIBAR, 5bps tighter than the November issuance.

Clindeb Investments Ltd (an issuer based on a guarantee by Netcare Ltd) raised R600 million across 3-year and 3.75-year floating rate notes via private placement: the notes were issued at 120bps and 127bps over 3-month JIBAR, respectively. Notably, Clindeb Investments Ltd issued a 3-year floating rate note via private placement 12 months ago, at a spread that was 10bps wider than the issue spread of the 3-year note issued this quarter.

Super Group raised R1.2 billion across 1-, 3- and 5-year notes, the auction was well supported attracting R3.9 billion in bids. Banks bids accounted for 18% of total bids received however, banks were allocated 40% of total issuance. The 3-year and 5-year notes cleared at 120bps and 134bps, respectively, pricing 25 and 30bps lower than the June 2019 auction.

Concerning SOEs, Transnet returned to the debt capital market after being absent for three years, privately placing R7.0 billion Government Guaranteed notes. Transnet’s issuances were long dated, with R5 billion of the total issuance having a tenor of at least 10 years.

The higher allocation received by banks relative to their initial bid percentage is a continuing trend. This suggests that banks are bidding tighter than other investors in auctions, thereby lowering spreads in certain high-quality liquid asset (HQLA) corporate auctions. We believe this is one contributing factor to a compression in spreads in the local debt capital markets. Our view is that Banks remain aggressive in auctions as the high quality credit on offer offsets the limited loan and advance growth in the weak economic environment, which is supported by high interest rates and inflationary pressure on consumers. Reserve Bank data shows that deposit growth continues to exceed loan and advances growth, resulting in additional capital available for Debt Capital Market participation.

Source: ABSA South Africa Credit Research

In summary, the first quarter saw a balance of auctions and private placements. The auction oversubscription reflects the continued demand for credit, with HQLA auctions being strongly supported by bank participation. The availability of credit continues to be constrained by a stagnant economy, exacerbated by issuers electing to privately place their debt at more aggressive spreads, putting added pressure on the ability to trade credit in the secondary market, as a result of tight spreads.

Secondary Market activity

Trading in the secondary market remained quiet over the first quarter, with our view being that the tighter spreads on offer limit demand for credit. The availability of credit was also affected by the continued higher base rates, prompting some investors to keep their investments to maturity.

Average spread moves across sectors

Source: SBR SA corporate bond market overview, March 2024

The total trading volume in the secondary market was R12 billion in March 2024, a reduction of 14% year on year. Over the quarter, the Financial and Corporate sectors recorded the highest trading volumes at 50% and 28%, respectively, of the total volumes traded, driven, in our view by the lower spreads on offer and investors choosing to hold their investments until maturity, as a result of high base rates. Although the coming quarter could provide broader market volatility, we expect limited trading and auctions in the build up to elections.

Total trading volumes

Source: SBR SA corporate bond market overview, March 2024

Outlook

The nominal value of scheduled redemptions and calls over the remaining nine months of 2024, excluding Commercial Paper (CP), totals R111.1 billion. CP redemptions over the same period total R5.6 billion. May 2024 is the most redemption-heavy month, with a significant R9.8 billion of Corporate paper maturing – R3.5 billion of Northam Platinum paper, R1.5 billion of Sappi paper, R1.4 billion of Pepkor paper and R1.0 billion of Mercedes-Benz SA paper.

Upcoming redemptions per sector – Bonds and CP

Source: SBR SA corporate bond market overview, March 2024

While we expect higher gross financial and corporate issuances based on refinancing requirements, the extent to which we see positive net issuances will be linked to economic growth and possible market volatility, pending election outcomes.

Our spread expectation for the year is a slight widening trend off the back of lower repo rate expectations – the timing of which is still uncertain – and increased supply of credit coming to the market (due to increased redemptions).

In summary, we believe we are at the bottom of the credit spread tightening cycle, but the demand dynamic and continued high level of bank participation in high quality liquid assets could result in certain auctions having continued tightening in the next few months.