South African Corporate Bond Market and Basel 3 Implications

Market Volatility and Growth

• Local market has seen volatility
• Reflected in Government Bond price actions
• Comparison:
  • 2006: Issuance Market at 40 billion Rand
  • Last year: Increased to just over 90 billion Rand
  • Currently: Approximately 90 billion for this year
• Significant growth in bond issuance excluding government

Basel 3 and Corporate Funding

• Basel 3 requirements to impact corporate funding
• Fundamental shift expected in how corporates are funded
• Increased reliance on Capital Market space
• Deep and liquid market in SA
• 2011: Nearly a dozen new first-time issuers in the bond market
• Number of corporate names in the market has doubled
• Positive growth trend expected to continue into next year
• Potentially hitting 100 billion Rand issuance mark (excluding government)

Investor Appetite and Corporate Bonds

• Healthier corporate balance sheets with strong cash positions
• Investors wary of companies with weak cash positions
• Increasing selectivity among investors
• 2009-2020: Easy market for issuers
• Recent fatigue in certain sectors:
  • Pure corporates and Industrials have good appetite
  • Large financials leading in issuance (30+ billion Rand)
  • State-owned entities at 15 billion Rand

Guaranteed vs. Unguaranteed State-Owned Entities

• Guaranteed entities comfortably issuing paper
• Unguaranteed entities facing volume challenges
• Attractive pricing maintaining comfort levels
• Going forward, increased selectivity among investors expected

Corporate Bond Market Composition

• Historically underrepresented by corporates
• Dominated by government, state-owned entities, financials
• Basel 3 expected to normalize sector representation
• Market expected to double in size

Yield and Benchmark Rates

• Historically low benchmark rates
• Inverted yield curve pre-crisis
• Credit spreads widened slightly but remain attractive
• Weighted average corporate spreads against government:
  • Beginning of 2010: Around 270 basis points
  • Now: About 130-140 basis points

Trends and Shifts

• Shift towards floating rates: 90% of issuance in 2011
• Previously, fixed rate was standard
• Investors locking in tight spreads and low base rates
• 5-year benchmark rates: Recently 7%, previously north of 10%
• Basel 3's cost implications may lead to higher bank interest rates, impacting overall dynamics