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SA’s Small Corporates opting for bond issues in 2013

There has been significant interest among the smaller to medium sized (R500-million to R1-billion) corporate business segment in South Africa opting to go to the bond market to raise funding since the start of 2013.


This is according to Eyal Shevel, Head: Corporate Ratings at Global Credit Ratings (GCR), who says there has been a noticeable increase in interest in bond issues among smaller to medium sized corporates over the last 8 weeks. “While the larger corporates have successfully approached the bond market for issues in recent years, there is an emerging trend of smaller companies also choosing to raise capital through the bond market.”


He notes that these companies have made great strides in realigning their businesses since the global recession in 2008, with the result that many are now emerging much stronger. This is also reflected by the number of downgrades among this group having decreased significantly since 2008.


“Companies within the corporate sector have been forced to take some very large write-downs over the last few years and as a result have focused on cleaning out their books, cutting out unnecessary costs and getting back to basics by focusing on their core business. These companies are now more effectively managing their operating costs and their operating income, whilst identifying ways to better structure their balance sheets in order to reduce their interest charge.”


Shevel says that while smaller corporates may often have to sweeten the package to attract investors, as they are not necessarily investment grade companies, they can offer a package of securities as collateral such as bonds on properties or their debtors’ books.


He adds that while some companies may be looking to raise capital in order to fund expansion, others are simply looking to refinance their debt. “During the tougher economic climate, some companies had to take on debt at onerous interest rates; however, having streamlined their operations and improved their balance sheets, many are now in a stronger financial position to be able to refinance their debt.”


“The bond issues that are taking place are also getting placed quite comfortably – and there is a clear demand among investors for higher yielding bonds. While bonds remain a comparatively safer investment to equities, investors looking for yield enhancement can often obtain a higher return from bond issues by smaller corporates, as the interest earned is higher as a result of the increase in perceived risk.


Shevel cautioned that GCR has only noted this trend among the stronger corporates that have managed to clean out their books. “For those companies that have taken the pain in recent years, there are excellent prospects for them to achieve good solid organic growth of between 8% and 12%.”


“Clearly there may be a number of other companies who are not in such a strong position, and are therefore unable to raise further capital. However, this also presents acquisition opportunities at fair prices for those companies that are still able to raise funding,” concludes Shevel.


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