Loan exploits a shift in sentiment

South Africa’s finance officials have been through the mill in recent months. It has been hard enough to keep the country’s hardline economic policy on track in the face of slowing growth but that was only one of a list of woes.

The situation has been worsened by the rand’s collapse late last year, political turmoil in neighbouring Zimbabwe, the ever-worsening Aids disaster, Argentina’s meltdown, a domestic banking crisis and the global market downturn.

So it was hardly surprising that South African Reserve Bank officials warmly welcomed the signing of a new $1 billion syndicated loan in July as a strong show of support for the country from the international financial community.

The new term loan, which was signed at a ceremony in London attended by Reserve Bank governor Tito Mboweni, attracted total subscriptions of $1.725 billion from banks.

Mboweni described the response as “amazing”. “The banks contributed significantly more than we thought,” he said. “In view of the world financial market conditions and the emerging-market jitters at the moment, it is a clear vote of confidence.”

He added that among the 26 mandated lead arrangers, lead arrangers and arrangers were several banks that had not participated in previous South African loan deals.

Such was the level of oversubscription that allocations to all participants were scaled back heavily. The 13 mandated lead arrangers saw their final takes fall from $100 million to $53 million, with the four lead arrangers’ commitments being cut from $50 million to $32.75 million each and the nine arrangers’ takes dropping from $25 million to $20 million.

The new loan replaces an existing $1 billion loan that was arranged in 2000 and was due to mature next July. It has two tranches – of three and five years – and can be drawn in either dollars or euros.

Rating upgrade opportunity

Daniel Mminele, general manager of the Reserve Bank’s international banking department, said the timing of the deal was designed to capitalize on Moody’s upgrade of South Africa’s sovereign credit rating at the end of November.

In April, the National Treasury Management Agency – the debt management arm of the finance ministry, which is responsible for bond issuance – took advantage of the credit upgrade to launch a $1 billion bond issue.

The 10-year dollar bond, which completed the finance ministry’s foreign currency borrowing requirement for the current fiscal year in one fell swoop, also attracted new investors – with around one-third of the 130 accounts being first-time buyers of South African debt.

For the first time in the bank loan market, the Reserve Bank has been able to extend its borrowing maturity out to five years. By doing so, it hopes to set a benchmark for South African corporate and financial sector borrowers in the international markets.

Although international banks have previously extended five-year amortizing loans to South African borrowers, this is the first bullet loan at that maturity.

“The upgrade presented a good opportunity to set a new tenor,” said Mminele. “The new loan also reflects our strategy of reducing the size of our transactions and improving the pricing.”

The three-year tranche of the new loan carries a margin of 70 basis points over Libor/Euribor, compared with 85bp for the 2000 loan that it replaces. The five-year tranche carries a margin of 90bp.

Both financings have gone some way to reducing South Africa’s net open forward position – which ballooned to $4.8 billion as a result of the rand’s sharp fall last year.

The finance ministry and Reserve Bank hope to eliminate the forex debt position as soon as possible. Already it is down to a more normal level of $1.8 billion.

With the rand having recovered and stabilized at around $10, overseas investment in the South African bond and stock markets has created inflows of some R10 billion since the beginning of the year.

Mminele and his colleagues believe that international sentiment towards South Africa has changed. Despite delays to the privatization of national telecom operator Telkom, investor confidence in the government’s commitment to the privatization programme has been buoyed by the sale of a stake in mobile telecom company M-Cell by state-owned transport agency Transnet.

“South Africa is a bit of a safe haven in emerging markets,” says Mminele. “At a time when people are cutting down exposure to other countries, South Africa is an interesting proposition.”