South Africa: Investors seek credit products

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By:
Mark Brown
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Lack of liquidity and diversification still restricts managers’ strategies.

Despite strong growth in the domestic corporate bond market, South Africa’s asset managers are still starved of opportunities to buy credit, and want new tools and mandates to change this situation.

That was the message from IMN’s third annual South African securitization and debt capital markets conference, held in Cape Town in November.

Excluding banks, corporates brought to market seven deals totalling R9.9 billion ($1.47 billion) in the first 10 months of 2005, compared with four deals worth R4.4 billion in 2004. But the market is still illiquid.

“There’s a buy-and-hold mentality because investors are short of credit,” Adré Smit, a portfolio manager at African Harvest Fund Managers, told the conference. The absence of a repo market in corporates and of a significant credit derivatives market needed to be addressed, he said.

Clients are still uneasy with credit and won’t let asset managers invest in sub-investment grade debt. “We have had a corporate bond fund for more than a year and not much money has flowed into it,” said Henk Viljoen, executive director, fixed income at Stanlib. “We need segregated mandates, and we need the pension funds to change their outlook.”

But a combination of global spread compression and a limited number of corporate names to choose from means that South African investors will not get rewarded if they take extra risk, warned Paul Crawford, fixed income portfolio manager at RMB Asset Management. “The international credit market is driving the South African credit market,” said Crawford. This should change as the Reserve Bank of South Africa relaxes exchange controls. “You need thousands of names to get adequate diversification, and with the relaxation of exchange controls, we will get access to 5,000 credits,” he added.

With most South African corporates borrowing bank debt, synthetic CDOs would give fixed income investors access to credits that are not traded in the capital markets. But banks have little incentive to issue, and there have only been two synthetic CDOs since a change in the South African Reserve Bank’s rules in 2002 made them possible.

“Banks typically have diversification on their balance sheets,” said Mike Brunke, manager, securitization, at Standard Bank. “But the banking sector is really well capitalized and until that changes synthetic deals will not be a dominant feature of our market.”

If CDOs do take off, asset managers want access to lower-credit tranches. “We don’t want to see CDOs bringing AAA paper to market, we want single A paper,” said Mokgatla Madisha, a dealer in Investec Asset Management’s fixed income team. “We don’t mind if single As come from CDOs or corporate bonds. But there are very few single A names at the moment and everyone is chasing them, bringing down yields.”

Meanwhile, bank mortgage and consumer finance-backed ABS deals continued to grow this year and issuance could be between R30 billion and R40 billion in 2006.