marketmuse.com blog post courtesy of extract from moneyweb.com and Robert Brand and Mike Cohen of Bloomberg
South African companies’ borrowing costs risk increasing after African Bank Investments Ltd.’s failure exposed flaws in the continent’s biggest corporate bond market that prevented investors from selling the lender’s debt.
Buyers of company notes will demand higher premiums to compensate for a lack of liquidity and pricing transparency, according to Andrew Canter, chief investment officer at Futuregrowth Asset Management (Pty) Ltd., the nation’s biggest bond investor. South African businesses sold $6.5 billion worth of bonds this year, compared with $14.9 billion in similarly rated Malaysia, data compiled by Bloomberg shows.
African Bank’s collapse shut smaller competitor Real People Investments Holdings (Pty) Ltd. out of the bond market, while the local units of Toyota Motor Corp. and Bayerische Motoren Werke AG canceled debt sales. South Africa doesn’t have central electronic trading for corporate bonds, which are bought and sold over-the-counter, with prices compiled by the Johannesburg Stock Exchange.
“The corporate bond market is an orphan,” Canter, who oversees the equivalent of $13.1 billion, said by phone from Johannesburg on Aug. 25. “It’s just outrageous that in 2014 we don’t have a place where people can set prices.”
Inadequate Pricing
While corporates have listed 1,386 fixed-income securities on the Johannesburg exchange only 8 million rand ($750,000) worth of bonds trade on average a day, according to data on the JSE’s website. Thirty-eight corporate bonds trade more than 25 times a month and 56 trade more than 10 times monthly, it said.
The JSE has been working for two years to improve the mark- to-market process, a measure of the fair value which relies on pricing information supplied by bond market participants, Bernard Claassens, manager of fixed income at the JSE, said by phone from Johannesburg yesterday. A new system will begin operating within the next month to improve transparency, he said.
“We could investigate market-making so that we get more bid and offer prices, but there are always pros and cons,” Claassens said. “It’s not so much that people can’t get out when they want to, it’s that they can’t get out at the price they want.”