Bank participation still supports demand for credit

During the second quarter of 2024, bank participation continued to support demand for credit, although a slight widening in spreads is expected as we head towards the end of the year.

Primary market activity

Credit market activity recovered during the quarter, following a slow start to the year. Gross primary issuance totalled R36.71 billion, a 15.8% increase on the first quarter’s R31.72 billion. Financial institutions and corporates dominated market activity, issuing R19.04 billion and R14.52 billion, respectively. The uncertainties in the lead-up to the elections and Cabinet announcement saw issuers favour private placements over auctions.

Figure 1: Primary market issuance per quarter

Source: SBR SA corporate bond market overview, June 2024

April activity

April gross issuance was R5.8 billion, led by Investec’s R213 million senior notes private placement and Nedbank Group’s more than R1.7 million Tier 2 placement at 186 basis points (bps) over 3m JIBAR (3mJ). In addition, Standard Bank of South Africa (SBSA) raised R3 billion via senior floating rate notes (FRNs) in a primary auction. The notes cleared at 104bps, 122bps and 130bps over 3mJ, respectively, slightly tighter than Nedbank’s senior auction in February 2024, which was priced at 105bps, 125bps and 134bps over 3mJ, respectively, for the same tenors.

May activity

In May 2024, banks and financials had their strongest issuance thus far. Absa Group issued R1.5 billion additional Tier 1 bonds (AT1s), and Standard Bank Group also raised R1.5 billion in primary auctions, at spreads of 3mJ + 290bps, indicating that a bottom level of AT1 had potentially been reached. Another notable issuer was Investec Bank, which privately placed senior notes and raised R1.1 billion. FirstRand issued senior green bonds, offering 3-, 5- and 7-year notes that cleared at 103bps, 120bps and 130bps, respectively, and raised R3.3 billion.

June activity

There were fewer issuances post-elections in June. FirstRand led the pack, issuing slightly more than R2 billion in an AT1 primary auction. The auction cleared at 290bps above 3mJ +290bps, in line with the issuances in May 2024. Investec Bank privately placed senior notes again, raising R730 million during the month.

Second quarter spread activity

According to the Absa SA Credit Chart Book for the second quarter of 2024, bank senior pricing spreads continued to clear at the low end of the pricing curve, tightening marginally. The graph below represents the movement in spreads across the 3-, 5- and 7-year senior notes issued by banks during public auctions over this period. As shown, the Q2 2024 spreads fell below the Q1 2019 spreads, showing the continued demand for Bank paper, due, in our view, to the attractive high base rates.

Figure 2: 2Q24 spreads tightened across 3y, 5y and 7y

Source: JSE, Absa Research

In the second half of this year, we expect banks to come to market to refinance debt with upcoming maturities across senior paper, AT1 and T2 notes. Although AT1 and T2 spreads may have reached their lowest point, we expect bank senior debt to likely remain flat, with a slight widening expected following a reduction in base rates due to expected interest rate cuts near the end of the year.

Corporate activity

Corporate issuances increased from R10.83 billion in the first quarter of 2024 to R14.52 billion in the second quarter. Bidvest, Daimler Truck, Growthpoint, and Sappi Southern Africa dominated activity, each issuing more than R1.0 billion. Daimler Truck (DTSA) privately placed R1 billion with a 3-year FRN at 87bps over 3mJ, a spread tightening of 10bps since its last issuance in September 2023.

Sappi Southern Africa raised R1.5 billion in a sustainability-linked bond auction, which was well supported at 4.5 times oversubscribed. Banks accounted for 40% of bids received and were allocated 30% following Sappi’s decision to scale back bank allocation. Bidvest raised R1.6 billion in an auction that was 2 times oversubscribed. Banks accounted for 21.6% of bids and were allocated 32.5% of the total issuance. Bidvest bond pricing remains aggressive, with the 3-year paper clearing at 108bps and the 5-year at 120bps. This is 3bps wider than 3-year bank paper and at similar levels to bank 5-year paper at 120bps.

REITs remained prominent issuers in the second quarter of this year, with Fortress raising R900 million at a well-supported auction and 2.3x subscription rate.

Growthpoint (GRT) had a busy quarter where they raised R1.1 billion at a public auction on 18 April 2024, privately placing a R500 million green bond on 14 June 2024 and tapping its 6 February 2024-issued GRT62 note (R570 million) on 25 June 2024. An additional R500 million note was privately placed on 26 June 2024 at 3mJ + 130bps. GRT spreads have been compressing across tenors. The recent 3-year issuance was the first in two years, seeing spreads tighten by 10bps from 128bps (2022) to 118bps (2024). The group has issued longer-dated instruments, regularly issuing 5-, 7- and, more recently, 10-year tenors. Spreads on the 5-year notes compressed even more dramatically, with the last issuance clearing at 130bps from 166bps in October 2023. This suggests the market has turned dovish on REITs year on year. Stor-Age raised R500 million across 3- and 5-year notes at 132bps and 154bps over 3mJ, respectively, with a well-supported 2.7x subscription rate.

Other corporate issuers, such as Life Healthcare, raised R1.1 billion in two FRNs via auction; the notes were issued at 115bps and 132bps over 3mJ, respectively. The auction was well supported at a 4.8x subscription rate and cleared below price guidance. Banks received 15% of the final allocation. Pricing was tighter than Life Healthcare’s inaugural issuance in July 2022, when the 3- and 5-year notes cleared at 135bps and 154bps, respectively. Comparing the two auctions, the bid-to-cover ratio increased to 8.3x (July 2022: 5.0x) for the 5-year note and decreased to 3.2x (July 2022: 4.7x) for the 3-year note. In addition, Life Healthcare raised a further R445 million via private placement, with the 5-year floating paper priced at 132bps over 3mJ, showing continued spread compression.

In the life insurance sector, Old Mutual Life Assurance Company (South Africa) Ltd raised R1.0 billion in a 5-year subordinated note via auction, which cleared at 134bps over 3mJ. Old Mutual last accessed the market in November 2023, raising R641 million via private placement. Its 5-year floating rate clearing at 134bps over 3mJ. Discovery Limited also returned to the capital markets after a nearly two-year absence and raised R1.5 billion across 3.5- and 5.5-year senior unsecured FRNs via auction. The shorter-dated note cleared at 140bps (price guidance: 140-150bps), while the longer-dated note cleared below price guidance at 159bps (price guidance: 160-170bps), indicating continued demand for higher-yielding credit.

SOE activity

The Development Bank of Southern Africa (DBSA) was the only state-owned enterprise (SOE) to access the capital market during the quarter and raised R600 million in two private placements across a 5-year and a 10-year note in May. The 10-year note was priced at 235bps, 52bps wider than the last 10-year note issued in April 2019. The 5-year was priced at 185bps, unchanged from the issuance in December 2023. Despite DBSA’s track record of strong profitability and good governance, we believe the market still views it through the lens of state-owned enterprises, with spreads not yet back to pre-COVID levels.

Second quarter trends

We believe that the uncertainty around the Government of National Unity resulted in issuers preferring the private placement market in May and June. Furthermore, some trends observed in the first quarter of the year carried through to the second quarter, with oversubscribed auctions reflecting the continued demand for credit with continued strong support from our SA Banks. Issuance supply remains constrained by a stagnant economy, with auctions still supported by bank participation.

Figure 3: Issuance by channel

Source: Absa South Africa credit chart book, 2Q24

Secondary market activity

According to data from SBR, the secondary market's turnover was R29.1 billion in the second quarter of this year, up 19% quarter on quarter but down 12% year on year. The financial and corporate sectors recorded the highest trading volumes, at 60% and 33%, respectively, of the total volumes traded.

Figure 4: Total trading volumes per quarter and per sector

Source: SBR SA corporate bond market overview, June 2024

Figure 5: Average spread moves across sectors

Source: SBR SA corporate bond market overview, June 2024

Upcoming redemption bonds and commercial paper

The nominal value of scheduled redemptions over the remaining six months of 2024, excluding commercial paper (CP), totals R63.0 billion, with CP redemptions of R5.0 billion.

In the non-property corporate sector, KAP has R1.5 billion of paper maturing over the next six months, followed by Toyota Financial Services (R1.3 billion), Telkom SA (R1.2 billion), Woolworths (R1.2 billion), Mercedes-Benz SA (R1.0 billion) and MTN (R1.0 billion). Redefine has the highest volume of property sector paper maturing (R1.9 billion). Across banks, SBSA’s maturities in the second half of the year total R5.7 billion, followed by Investec Bank (R4.1 billion), FirstRand Bank (R3.5 billion) and Absa Bank (R3.4 billion). Absa Group has only Tier 2 (totalling R1.4 billion) paper reaching call dates in the second half of the year. FirstRand Bank has the most AT1 paper reaching first call date (R3.5 billion). In the insurance sector, Liberty Group has R1.1 billion of paper maturing, followed by Momentum Metropolitan Life (R0.8 billion). IDC will see R3.1 billion of unguaranteed paper mature, followed by DBSA (R1.5 billion). SANRAL has R1.5 billion of government-guaranteed paper maturing.

Given the up-and-coming maturities in the second half of 2024, we could see increased refinancing across those maturities – and, with the election behind us and an improved economic outlook, a further increase in issuance.

Figure 6: Upcoming redemptions per sector – bonds and CP

Source: SBR SA corporate bond market overview, June 2024

Looking forward

Taking all the above into account, we still expect a slight widening in credit spreads during the second half of the year, based on lower repo rate expectations and an increased supply of credit coming to market due to high redemptions and a better economic outlook. Given the latter, we think banks would find alternative assets to listed credit, with declining demand at auctions resulting in wider spreads.

In summary, we believe the bottom of the credit spread tightening cycle may have been reached, but the demand dynamic and continued high level of bank participation in high-quality liquid assets could result in certain auctions continuing to tighten in the next few months, as long as base rates remain high.