Banks drive credit issuances in Q4 2024

PRIMARY MARKET ACTIVITY   

The fourth quarter of 2024 was the most robust quarter of primary market activity during the year, with R54.2bn of gross term issuance recorded, representing a 14% quarter-on-quarter increase.

Banks and financial services dominated, with total issuance at R30.9bn, followed by corporates at R15.3bn, securitisations at R4bn, and State-Owned Enterprises (SOEs) at R4bn. For the second consecutive year, municipalities remained absent from the debt capital market. The figure below illustrates the monthly gross term issuance over 2024, including January 2025’s small – but typical – gross term issuance of R1.3bn.

Figure 1: Primary market activity across sectors        

Source: RMB SA Credit Monthly

In October, banks issued R2.98bn: Absa Group Limited’s R500m subordinated Tier 2 issuance (which compressed by 5 basis points (bps) from the last Tier 2 issuance); and Standard Bank of South Africa Limited’s (SBSA) R2.48bn senior note issuance across 3-, 5-, and 7-year tenors. These notes cleared at 98bps, 118bps and 124bps over 3-month JIBAR, respectively. SBSA auction spreads cleared tighter than earlier auctions. The longer-dated notes garnered the most bids, reflecting the market’s search for higher all-in yields.  

In November, SBSA raised a further R2.73bn in senior notes across the same tenors. The 3- and 5-year notes cleared 1bps and 3bps tighter, respectively, than the previous auction. Spreads compressed further when FirstRand Bank Limited (FirstRand) issued its first social bond, raising R2.59bn across 3-, 5- and 7-year senior notes. Subordinated bank note spreads continued tightening when FirstRand, Nedbank and Absa Group issued notes across Tier 2 and Additional Tier 1 (AT1) instruments.   

In December, bank issuances were mostly private placements, with Investec placing R800m across two senior notes, with both notes clearing at 88bps over 3-month JIBAR. Investec and Standard Bank Group Limited raised R0.5bn and R3.6bn, respectively, in Tier 2 notes. FirstRand raised R2.37bn by tapping its Tier 2 and AT1 notes, which were issued earlier in the year. The tap issuance spreads tightened by 16bps for the Tier 2 note and remained unchanged for the AT1 note.  

Bank issuances in February 2025 continued the trend of spread compression. Absa’s senior unsecured auction in February was over 4x oversubscribed, with the 3- and 5-year notes clearing at 90bps and 111bps over 3-month JIBAR, respectively. Since the last bank senior auction in November, the clearing spreads tightened by 4bps on the 3-year note and 3bps on the 5-year note. A week after Absa, clearing spreads tightened even further in the Nedbank senior unsecured auction: the 3- and 5-year notes cleared at 86bps and 108bps over 3-month JIBAR, respectively. The figure below illustrates the trend in clearing spreads for big four bank senior paper to December 2024.   

Figure 2: Primary market spreads across 3, 5, 7 and 10 years  

Source: SBR Analysis

Corporate issuances in Q4 saw MTN Holdings Limited raising R1.7bn across 3.5-, 5-, and 7-year senior unsecured floating rate notes via auction. The auction was well supported, and all the notes cleared below guidance. Bidvestco Limited raised almost R2.9bn in its auction of floating rate notes across 1-, 3-, 5-, and 7-year tenors. The notes cleared at 70bps, 98bps, 113bps and 125bps over 3-month JIBAR, respectively. All three of the longer-term notes cleared below guidance.   

The auto sector saw Daimler Truck Southern Africa Limited and Toyota Financial Services (South Africa) Limited come to market with spreads tightening by 10bps on average across all tenors compared to the previous year. Daimler raised R1.5bn in its 1- and 3-year senior unsecured floating rate note auction, which was 6.4x oversubscribed. The 1-year note cleared at 59.5bps over 3-month JIBAR and the 3-year note at 85bps over 3-month JIBAR. Toyota’s senior unsecured floating rate note auction was also well supported, raising R1.2 bn across the 3- and 5-year tenors, which cleared at 85bps and 103bps over 3-month JIBAR, respectively.   

In the Real Estate Investment Trust (REIT) sector, Attacq Limited had its inaugural auction in October, raising R750m across 3- and 5-year floating rate notes. The auction attracted over R4bn in bids and both notes cleared below guidance. The 3-year note cleared at 129bps over 3-month JIBAR, and the 5-year note at 141bps over 3-month JIBAR. Resilient REIT Limited issued two floating rate notes at the 3- and 5-year tenors through a private placement, raising R750m across both tenors. Spreads tightened by 2bps on both tenors from the issuance in May 2024. Equites Property Fund Limited came to market on two occasions in Q4, raising R558m through an auction and a further R200m through a private placement. Through the auction, Equites issued 3- and 5-year floating rate notes, which cleared at 110bps and 125bps over 3-month JIBAR, respectively. Redefine Properties Limited privately placed 5- and 7-year senior unsecured floating rate notes, raising R781 million. The notes cleared at 145bps and 163bps over 3-month JIBAR, respectively.   

Life insurers were active issuers during Q4. All auctions were well-supported at over 2x subscription rates. Discovery Limited raised R1.75bn by tapping 3- and 5-year senior unsecured floating rate notes via auction, with the notes clearing at 130bps and 150bps over 3-month JIBAR, respectively, reflecting strong spread compression since May, when the notes were initially issued at 140bps and 159bps over 3-month JIBAR. Liberty Group Limited, Old Mutual Life Assurance Company South Africa Limited, and Momentum Metropolitan Life Limited raised R2.35bn in subordinated notes. Issue spreads compressed during the quarter.  

The Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) were the only SOE issuers in Q4. DBSA raised R2.3bn through tap issues of three of its senior unsecured floating rate notes. The remaining tenors of the notes were approximately 4.7, 6.7, and 9.6 years, with the notes clearing at 168bps, 190bps and 225bps over 3-month JIBAR, respectively. The IDC raised R1.7bn across 5-, 7-, and 10-year senior unsecured floating rate notes and a 10-year senior unsecured fixed rate note. The auction was 2x subscribed, with the floating rates notes clearing at 198bps, 214bps, and 244bps over 3-month JIBAR, respectively, and 99bps over R2035 for the fixed rate note.   

The auction oversubscription in the fourth quarter reflects the continued demand for credit. High issuance in the quarter was partly driven by the opportunity provided to issuers by the low credit spread market. Some issuers elected to privately place their debt, which exacerbated the spread tightening.  Upon analysis of the calendar year, the total 2024 gross bond issuances (excluding commercial paper) amounted to R170bn, which reflects 4% year-on-year growth. Issuance marginally exceeded 2019’s aggregate issuance of R169bn. The figure below illustrates the gross term issuance by sector on an annual basis.   

Figure 3: Gross term issuances across sectors (2015-2024)  

Source: RMB SA Credit Monthly

Accounting for issuance and redemptions over the year, the bond market (excluding commercial paper) grew by R19.2bn in 2024 – similar to 2023. The table below reflects the annual net bond market issuance on a sectoral basis. Last year’s growth is still well below the average annual growth of R48.9bn in the decade preceding the pandemic, which is largely due to the contraction in issuance recorded by the SOE and municipal sectors given the negative sentiment surrounding these sectors.   

Figure 4: Annual net bond issuance across sectors (2018-2024)  

Source: SBR analysis; JSE  

SECONDARY MARKET ACTIVITY  

Average spreads compressed over 2024 across most market sectors, as depicted in the figure below. Our view remains that the tighter spreads continue to limit demand for credit in the secondary market.  

Figure 5: Average spread moves across sectors   

Source: SBR analysis

2025 OUTLOOK: TIGHT SPREADS, STRONG DEMAND TO CONTINUE  

There is approximately R135bn in gross term issuance expected in 2025. As with prior years, this will be driven by banks/financials, which, in turn, are driven by capital instrument refinancing and balance sheet growth. There is downside risk in the estimated issuance for the SOE sector (illustrated in the figure below), as much of the expectation hinges on whether Transnet receives further guarantees in the March budget.   

Figure 6: Term issuance expected across sectors in 2025 

Source: RMB SA Credit Outlook 2025  

We are of the view that credit spreads will remain tight or even tighten – as we have seen in this year’s banking auctions – over 2025. Our outlook for spreads in the year ahead is motivated by the continuation of factors that have compressed spreads over the last year. These factors are outlined below:   

Demand is expected to continue to grow. There have been sizeable inflows into multi-asset and fixed-income asset classes over the past decade.   

Simultaneously, the supply side is not growing sufficiently to meet this demand. While Domestic Medium-Term Note (DMTN) programme sizes have increased, the median percentage of total amount outstanding relative to DMTN sizes has been trending lower in recent years. This implies that companies are engaging in alternate sources of funding. For example, the bulk of corporates fund themselves through bilateral bank loans.  

The pick-up offered by alternatives to credit is less attractive (i.e., government floating rate notes and credit-linked notes).  

While not a dominant factor, banks will still be a meaningful participant in corporate bids and allocation sizes. Given that the proportion of banks’ allocation sizes has been greater than the proportion of their bid sizes, bank participation has been biasing clearing spreads downward.   

Economic recovery will support the fundamental credit strength of issuers, which, in turn, provides support for a downward trend in spreads. Improved sentiment could also result in new names entering the domestic credit market and increased issuance, albeit insufficient to meet the growing demand.