The Ongoing Pursuit Of Higher Yields Continued Into October

Primary Market

In the third quarter of 2023, primary market activity saw a 7% increase, rising to R29 billion from the R27 billion recorded in the second quarter. Corporate and financials took the lead in issuing new instruments, contributing over R7 billion and R14.2 billion, respectively, to the market. Meanwhile, municipalities and state-owned enterprises (SOEs) refrained from introducing any new instruments during the third quarter.

Cumulative YTD bank issuance – as of end-September 2023

With respect to financial issuances during the third quarter, the local primary market witnessed a total issuance of R5.38 billion for subordinated bank instruments, which includes Tier 2 and AT1, marking a decrease from the R6.5 billion recorded in the second quarter. Senior unsecured notes worth R6.8 billion were also issued.

(Post the quarter end, banks issued R15.6 billion in gross term issuance in October 2023, representing a little more than two-thirds of October’s issuance worth R23 billion.)

Notable issuers in the third quarter included Absa Group, FirstRand Bank, and Standard Bank of South Africa, each issuing approximately R3 billion in paper. FirstRand Bank conducted an auction for AT1 notes, receiving bids of nearly R4.4 billion and placing close to R2 billion in notes. These notes were issued at a spread of 296 basis points over the 3-month JIBAR, significantly lower than the initially guided range of 310 to 325 basis points. We believe this can be attributed to the ongoing pursuit of higher yields, as evidenced by the substantial compression of AT1 spreads throughout the year. For instance, the FRB34, issued in December 2022, cleared at a spread of 340 basis points over the 3-month JIBAR.

This trend continued during October, when Absa Group came to the market to issue an AT1 note, which was 1.95x oversubscribed, raising R2 billion and clearing at 294 basis points (bps) over 3-m JIBAR. We still maintain that the tightening of AT1 spreads can be attributable to the ongoing pursuit of higher yields.

Source: JSE, RMB Markets (data as at end October 2023) 

The Absa Group note issued in August 2023, classified as a Green Tier 2 instrument, cleared below the price guidance at 172 bps, which was 28 bps tighter than Absa's Tier 2 auction just over a year ago and 16 bps below the FirstRand Tier 2 auction in June 2023. In terms of Tier 2 spreads, the international Bank Tier 2 to Senior unsecured ratio stands at approximately 2.4 times to 1.9 times, offering a pickup of around 128 bps to 150 bps over senior unsecured spreads. However, the ratio of the current spreads in South Africa is 1.5 times, providing a 57 bps pickup over senior unsecured spreads. This trend is, in our view, driven by the continued search for higher yields. Considering the above factors, we believe that the attractive base rates are fuelling the demand for bank capital instruments.

However, in October a Standard Bank Group Tier 2 bond auction, which was 1.07x subscribed, raised R3.639 billion and cleared at 190 bps over 3-m JIBAR. The widening of the spreads from the last issuance that cleared at 172 bps, suggests that the market has reached or is close to reaching the bottom of the tightening momentum in Bank Tier 2 capital, given the compression over the period.

Source: JSE, RMB Markets (data as at end October 2023)

As mentioned above, during the third quarter we saw that bank senior spreads remained relatively stable, with a noticeable increase in demand for longer-dated 5-year and 7-year instruments, and increased demand for higher yields, leading to a tightening of spreads in Tier 2 and AT1 instruments.

Corporate issuances, however, decreased to R7 billion in the third quarter from R11.4 billion in the second quarter. Notable issuances during the period (namely AECI Ltd, Fortress REIT, MBSA, MTN, and Redefine REIT) each raised approximately R1 billion. AECI marked its return to the local debt capital markets (DCM) after a five-year absence, refinancing the maturing R520 million AECI02 and R300 million AECI04. It successfully issued R1 billion, with bids exceeding R3 billion, and the pricing for both sustainability-linked instruments came in below the initial guidance, with the 5-year note being particularly well received. Redefine initially sought to raise R750 million with a green bond issuance but ended up raising R1 billion, with the 3- and 5-year notes clearing within the price guidance, but Increased demand for the longer-dated 7-year note clearing below price guidance. As seen below, there has been a slow start to sustainable, green and social bond issuance to date.

Source: Standard Bank research/ JSE data

Daimler Truck Southern Africa (DTSA) conducted an auction to offer investors 1- and 3-year notes, with the longer-dated instrument receiving R4.1 billion out of the total R5.9 billion in bids. It ended up issuing R700 million, and the clearing spread was below the initial guidance.

Equites REIT achieved a successful fundraising of R750 million during the same period, attracting nearly R2.5 billion in bids. It allocated this amount to 2.75- and 4.75-year notes, with the longer-dated floating-rate note (FRN) attracting the most investor interest. This FRN secured nearly R1.5 billion in bids and cleared 6 bps below the lower end of the price guidance, which was originally set at 145 to 155 bps over 3-month JIBAR.

Some notable issuances during October 2023 included a rise in insurers' issuance. Momentum Metropolitan Life Ltd (MML) successfully raised R750 million at its auction on 11 October, garnering substantial support with a 2.6x subscription rate. Similarly, Sanlam Life Insurance Ltd (Sanlam) secured R2 billion, achieving a 1.85x subscription rate.

Also in October, Barloworld Ltd (Barloworld) held an auction that was three times oversubscribed, resulting in the issuance of R1 billion, with a slight preference towards the longer-dated note. The 3- and 5-year notes cleared below guidance and were tighter than their gender-linked bonds issued in August 2022.

Growthpoint Properties Ltd (Growthpoint)’s October auction was 2.8x oversubscribed. The 5-year received R1 071 million in bids, with R384 million issued, while the 7-year note received R1 487 million in bids, with R526 million issued. Compared to Growthpoint’s June 2023 auction, the spreads for both tenors tightened, with the 7-year clearing where the 5-year cleared in June 2023.

Sasol Funding Ltd (Sasol) raised R2 368 million across 3- and 5-year senior notes, receiving bids of R3 275 million. The 5-year was better bid with R1 766 million and better issued R1 214 million, with both notes clearing mid-price guidance.

In its second auction of the year, Super Group Ltd (Super Group) offered investors 3- and 5-year paper, with just over R3.2 billion in bids received and R1 billion issued. The longer-dated 5-year note was better bid with R1 970 million in bids, but the final allocations were shared equally across the two notes. Super Group last auctioned a 3-year paper more than a year ago in July 2022 at 133 bps over 3-month JIBAR, and the latest issue cleared 10 bps tighter. The 5-year note also experienced spread tightening compared to a previous tenor issue privately issued in June 2023, with spreads narrowing from 147 bps over 3-month JIBAR to 139 bps over 3-month JIBAR.

The only SOE issuance during the period was The Development Bank of Southern Africa (DBSA), which entered the market for the third time this year in October 2023, but fell short of issuing its targeted R1 billion (with an option to upsize to R1.5 billion). DBSA only raised R700 million from R762 million in bids, with the notes clearing towards the top end of the guidance. In our view, the subdued demand is largely attributable to overall negative SOE sentiments as well as DBSA’s increasing exposure to struggling municipalities and SOEs.

In summary, we expect a continued absence of Municipalities and SOEs from the Debt Capital Market for the remainder of the year. The surplus of liquidity in the market, in search of limited investment opportunities, along with the continued search for yield, is expected to further decrease corporate and bank spreads during the remainder of the year. Moreover, the stagnant economy is exerting pressure on new issuances, which are primarily directed at refinancing existing notes rather than supporting expansionary projects.

Upcoming term bond maturities

Bond maturities in the fourth quarter will be dominated by Sanral and Transnet. SANRAL is scheduled to redeem HWAY23, a government-guaranteed CPI-linked note. We anticipate that SANRAL will redeem this bond using proceeds appropriated in the 2023 budget speech.

Transnet redeemed the TN23 note with a nominal amount of R7 billion. The redemption was partially settled in cash as well as the tapping of the TSP265 paper for R4.6 billion. The short-dated note provided Transnet with the much-needed liquidity whilst it works towards obtaining approval of its turnaround plan and a possible equity injection from the government.

Secondary Market

Secondary market trading activity remained sluggish throughout the quarter, primarily due to the lack of strong demand for credit at significantly narrower spreads, particularly for high-quality assets. The availability of credit was also impacted by relatively higher base rates, which likely prompted some investors to choose to hold their investments until maturity, to preserve yield returns. Additionally, we observed minimal trading volumes in Municipalities and SOEs, due to prevailing negative sentiments.

When analysing spread movements within the secondary market, we noticed a slight compression across most issuers during the quarter. This is a continuation of the trend of reduced spreads observed in the primary market.