ZAR Bond Market Discussion

Institute for Municipal Finance Officers Conference

9 October 2012
Prasanna Nana

Outline

Overview of ZAR DCM

Key Considerations for Municipal Issuers
Ekurhuleni Case Study

ZAR DCM: R1.5 trillion in Listed Bonds

Outstanding
Issuer Type

Term to maturity

Three Municipalities have Accessed the DCM

Over R14 billion of outstanding municipal issuance in the market

City
Johannesbur
g
Cape Town
Ekurhuleni

Debut
year

Amount
outstanding
(ZARbn)

Size of
DMTN*
(ZARbn)

2004

7.5

53%

13

2008
2010

4.2
2.4

30%
17%

7
4

Source: JSE
*Domestic Medium Term Note Programme

Municipalities/ Entities rated by Moodys

Aa3.za
City of Cape Town
Ekurhuleni

A1.za

A2.za

City of Johannesburg

A3.za

East Rand Water Care

Company (ERWAT)

City of Tshwane

Rustenburg

Nelson Mandela Bay

Amathole
Mbombela

Metropolitan
Baa1.za

Baa2.za

Breede Valley

Sol Plaatje

Greater Tzaneen

George

Swartland

Knysna

KwaDukuza

Lephalale

Maluti-a-Phofung

Matlosana

Umgeni

Pricing: Base Rates

Foreign inflows into Government bonds at all time highs

Driving down long term government bond yields

_______________________
Source: Bloomberg, October 2012

Pricing: Credit Spreads

Spread blow-out
from the credit crisis

Corporate spreads recover

from peak 2009 levels on
the back of improved
economic prospects and
investor demand for credit

SOE spreads stabilise at higher

levels

Credit spread cycle

bottomed-out from
the second half of
2011

_______________________
Source: JSE, INET, Absa Capital Research, September 2012

Fixed Rate vs. Floating Rate

Margin(Credit Spread) over Government

Fixed Rate
Issuance

bonds
Coupon payable every six months for

duration of bond

Floating Rate
Issuance

Margin over 3 month Jibar rate

Coupon payable every 3 months for duration

of bond

Outline

Overview of ZAR DCM

Key Considerations for Municipal Issuers
Ekurhuleni Case Study

Factors for Consideration

MFMA
JSE Listing Requirements
Peer pricing

Legislation

Competing issuance
Timing

Commercial Paper Regulations

DMTN

Market
conditions

Documentation

programme
Listed on JSE

Commercial paper

Issuer
Basel III

Products

Secured /Unsecured

bonds
Fixed / Floating rate

bonds
Impact on bank

Inflation-Linked

funding costs

bonds

Credit rating

Investment / Sub-investment grade

Moodys, S&P, Fitch, GCR

Investors

Asset Managers,

Pension Funds,
Insurance
Comapnies
Mandate

requirements
Credit Appetite
Portfolio Liquidity

10

DCM Checklist: Key Prerequisites

Financial Management
Governance Framework
Risk Management
Unqualified/Clean Audits
Transparency
Good Credit Rating (single A and above): preferably from an

international rating agency: Moodys, Fitch Ratings, S&P

11

Sinking Fund
Bonds generally have a bullet profile

Pay interest/ coupons during the duration of the bond

Pay principal at maturity

Bullet Profile needs to be carefully managed to avoid liquidity squeeze

at maturity due to a single big principal payment

Sinking fund: set aside periodic payments for future retirement of

principal

Should be externally managed

Preferably guaranteed growth contract from a party with a strong

credit profile

12

Commercial Paper: Short Term Funding Needs

Requirement

Commercial Paper

Tenors

1 month to 12 months

Investors

Money market funds, bank conduits

Required rating

Short term rating of P1/P2 (equivalent of A- long term

and above)
Rating requirements

Committed Bank lines

MFMA requirements

Bridge shortfalls within financial year in expectations of

anticipated income
Repaid via funds from enforceable allocations or long

term debt
Debt must be paid off within financial year
Debt cannot be refinanced with other short term debt

13

Role of an Arranger: Strategic Advisor

Documentation
Assist with

appointing
all third
parties
Relevant

Disclosure
Terms and

Conditions of
bonds
Preparation

and listing of
DMTN
programme

Investor
Marketing
Marketing

Materials
Investor

Roadshow
Investor

preferences

Auction
Price

guidance
Volume
Auction/

Bookbuild
Settlement

Strategic
Advice
Optimal

volume,
pricing and
tenor

Closing
Settlement
JSE listing

Timing to

market
Auction

Strategy
Investor

negotiations
on DMTN
terms and
conditions

14

Timing: 8 to 10 weeks

Documentatio
n

Internal
Approvals

Week 1

Week 1

City
Manager
Council
Informatio
n
Statemen
t

Arranger
Debt
Sponsor
Legal
Counsel
Agents:
Settlement,
Transfer
etc)

Week 2-6
JSE Submissions
Ancillary
documentation
DMTN listing

Week 4 to 7
Roadshow
2-3 days:
Cape Town
2-3 days:
Johannesburg
& Pretoria
Present credit
story
Opportunity
for investors
to meet
management
and establish
a relationship

Week 9
Dutch
Auction
9am
11am

Week 10
T+5: Flow of
funds
Disclosure
Statement

15

Roadshow: Presentation to Potential Investors

4 to 6 day one-on-one meetings
Roadshow team: City Manager, Chief Financial Officer, Head of Departments (up

to 4 attendees) & Lead Arranger

Key Objectives:

Gives investors an opportunity to meet the leadership team responsible for

strategic decisions

Develop and maintain ongoing investor relationships similar to bank

relationships

Keep investors appraised on credit story

Determine investor appetite and preferences

Explore potential for lead orders (private placement)

1 - 2 roadshows per annum recommended

Deal Specific roadshow: discuss upcoming bond issue and garner interest

Non-deal specific roadshow: update investors on strategy, financials etc

16

Investor Base
Cape Town, Johannesburg & PretoriaCape Town

Johannesburg

Pretoria

17

Outline

Overview of ZAR DCM

Key Considerations for Municipal Issuers
Ekurhuleni Case Study

18

Case Study
Strictly Private and Confidential

Ekurhuleni
MetropolitanMunicipality
Municipality
Ekurhuleni Metropolitan
(Ekurhuleni)
(Ekurhuleni)
R815
mn 10-year
Inaugural
bond
debt issuance
Inaugural bond debt issuance

July 2010

July 2010

19

Expand and Diversify Funding Sources

Expand funding base

(current investor base of 20 investors

across 3 bonds)

Key reasons to access

DCM

Less restrictive covenants, terms and

conditions: no financial covenants

Single documentation and terms platform for all

lenders
Improve City profile

Good Timing

Historically low base rates

Scarcity value
Investor demand for term issuance
20

Key Highlights
Documentation

ZAR4bn Domestic Medium Term Note Programme (DMTN)

Municipal approvals (Disclosure statements etc.)

Approvals

Johannesburg Stock Exchange

Moodys rating agency notification
Roadshow marketing presentation

Marketing

Investor roadshow (1 day in Johannesburg and 2 days in Cape

Town)
Investor credit review process
Termsheet

Issuance

Auction
Settlement

21

Ekurhuleni Inaugural Bond Auction Salient Features

JSE Instrument Code

EMM01

Programme Rating

Moodys : National Long-term Aa2.za

Issuance Listing & Settlement Listed

Offered Securities

Senior Unsecured notes

Term

10 year Fixed

Settlement/Issue Date

28 July 2010

Targeted Issue Size

ZAR 815mn

Issued Amount

ZAR 815mn

Total Bids Received

ZAR 1,516mn
(Investor diversity with 1.86x oversubscribed)

Pricing Benchmark

R208

Issue margin

+185bps

22

Broader Funding Base

Bookbuild progression

Investor participation

23

Disclaimer
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