Listed credit market quarterly update as at 30 September 2022
OVERVIEW
The REITs and diversified industrial sectors had the strongest issuance quarter since the COVID crisis. The two sectors had R1.75 billion and R1.56 billion net issuances, respectively, which is substantial considering the degearing undertaken over the past few quarters. Both the REITs and diversified industrials had drastic derating off the back of the negative forward view on the operating environment. Consequently, the spread widening was consistent with the perceived credit risk. In hindsight, the derating proved to be excessive, hence the reversal of spread movement. The gross issuances for the aforementioned sectors were only surpassed by Banks and Structured Finance.
The total market was somewhat flat with a total net issuance of R2.84 billion. The SOEs continued to shed market size with R4.36 billion maturities which were not refinanced. This amount is largely made up of SANRAL maturities, and the market awaits the Medium-Term Budget Policy Statement (MTBPS) appropriation decision on issuer funding requirements. Bank issuance slowed down during the quarter, with R21 billion gross issuance (down from R32 billion in the previous quarter) and R0.8 billion net redemption. We understand the banking sector remaining circumspect in its credit issuance activity as it continues to assess the impact of FLAC (First Loss Absorption Capital) that is to be fully phased in by 2028. FLAC is a bail-in instrument, senior to bank sub-debt, that the South African Reserve Bank (SARB) will use to recapitalise banks at the point of resolution.
Figure 1: Net issuance/redemption
Source: JSE, Futuregrowth
Primary Market
Total market gross issuance in Q3:2022 was R52 billion (down from R62 billion in Q2:2022), mostly due to banks issuing around R20 billion less issuances (including structured credit). Nedbank, Investec and ABSA were the main contributors on a bank senior net redemption position. It is also worth noting that there were other regulatory interventions, such as the Monetary Policy Implementation Framework (MPIF), during the quarter which could have had in impact on Bank Structured Products’ R3.7 billion net issuance position
Figure 2: Bank net issuance/redemption
Source: JSE, Futuregrowth
FirstRand tapped three bank senior bonds - FR26 (3.5 years), FRJ28 (5.75 years) and FRJ29 (6.8 years) - raising a total of R2.3 billion. The bank also issued new Tier 2 instruments - a 5-year and 7-year instrument, clearing at 205bps/3m Jibar and 220bps/3m Jibar, respectively. Standard Bank and ABSA also issued two 5-year Tier 2 instruments clearing at 215bps/3m Jibar and 210bps/3m Jibar.
REITs spreads continue to compress as the operating environment improves. Vukile Property Fund issued 3-year and 5-year senior notes at 3m Jibar plus 139bps and 159bps, respectively. Redefine Properties issued R1.5 billion in a series of green bonds across four tenors – 3 year (3m Jibar/155bps), 5 year (3m Jibar/168bps), 7 year (3m Jibar/200bps) and 10 year (3m Jibar/230bps). The issuer’s bid was anchored by IFC. Accelerate Property Fund also came to market for R450 million 3-year secured issuance that cleared at 300bps/3m Jibar. The major theme in REITs’ primary issuance is the spread tightening which is also evident in the secondary market.
The industrials sector was led by Barloworld KAP industrials and Supergroup. The former issued the first gender-linked bond in the country, which showed no pricing differential to its vanilla senior unsecured notes – 3 year (142bps/3m Jibar) and 5 year (160bps/3m Jibar). KAP and Supergroup 3-year notes cleared at 164bps and 139bps over 3m Jibar, respectively.
Secondary Market
The secondary market still favours a spread tightening, with a weighted average value gained worth R178 million against value lost due to spread widening of R107 million (only FRN instruments observed). The largest spread widening notes during the quarter were large securitisations – Eskom Finance Company’s RMBS (Residential Mortgage-Backed Securitisation), Nqaba Finance and Bayport’s unsecured lending receivables securitisation. Nqaba Finance is winding down and close to breaching covenants, thus the widening is reflective of the increased credit risk. There were also anomalous spread widenings - EQT009 maturing in Quarter 4:2022 (which moved from 98bps to 115bps) and GRT20 with 1.5 years term to maturity moving from 120bps to 170bps.
Figure 3: Spread movement (widening)
Source: JSE, Futuregrowth
MTN’s two bonds - MTN24 (maturing in 2026) and MTN22 (maturing 2024) - saw spread compressing by more than 100bps after the issuer’s R2.5 billion debt placement. The compression was normalisation to new tighter primary market issuance. MTN24, as at quarter end, was trading at 160bps (from 295bps) in line with the new 3-year issuance that cleared at 140bps. REITs had a number of counterparties in the tightening list including Hyprop, Redefine and Growthpoint. Supergroup, KAP, Barlows and Netcare also saw favourable repricing after strong primary market debt activity, which attracted high bank participation.
Figure 4: Spread movement (tightening)
Source: JSE, Futuregrowth
Bank Credit Activity
Bank issuance decreased for the second quarter from just under R40 billion in Q2:2022 to R21 billion in Q3:2022. The 5- to 7-year bucket had the largest bank issuance, especially the structured notes which have previously been shorter dated. This is largely due to the SAGB sell-down in various structures/formats. The shorter-dated issuance was mainly propelled by the FX basis-linked structure which has now disappeared as the FX basis has waned.
Figure 5: Bank issuance
Source: JSE, Futuregrowth
The upcoming bank maturities for Q4:2022 are just under R17 billion. The outer quarterly maturities are expected to increase as short-dated issuances increase.
Figure 6: Bank maturities
Source: JSE, Futuregrowth
CREDIT MARKET OUTLOOK
A total of R45 billion maturities are expected during Q4:2022, with Banks, Structured Finance and SOE making up over R30 billion collectively. The SOE sector’s upcoming R5.84 billion is made up of SANRAL (R4 billion), IDC (R1.3 billion) and DBSA (R540 million). Both IDC and DBSA are expected to come to market during this quarter, while it remains uncertain whether SANRAL will refinance its maturing bonds. The issuer currently has sufficient liquidity to extinguish its Q4:2022 maturities; however, it remains doubtful whether SANRAL will be able to retire its Q2:2023 CPI linked bond without refinancing. Eskom’s R20 billion ES23 and DBSA R8 billion DV23 mature in Q1:2023. The MTBPS is expected to shed light on Eskom and SANRAL government interventions, which is expected to address their refinance requirement. REITs and Diversified Industrials have R6.5 billion worth of maturities across 32 instruments and 15 issuers.
Figure 7: Maturity schedule
Source: JSE, Futuregrowth
