Leveraging technology to increase transparency and liquidity in the South African debt market
By Ian Norden, CEO of Intengo
One of the challenges we face in the South African debt market is lack of transparency around the information needed to ensure a reliable, fair value estimation of the market value of corporate debt instruments. This contributes to the lack of liquidity and these issues combined can significantly hamper growth of the market. Digitalising the marketplace can improve both transparency and liquidity, providing a platform for high-quality corporate issuers who want to raise funding in the debt capital markets, as well as the institutional investors who want to invest and trade in these instruments.
Supply and demand
Outside of government, banks are one of the largest issuers in the fixed income market. Banks traditionally extend funding to corporates through unlisted loan activity but also by holding high quality liquid (usually listed) assets on their balance sheets. South African Reserve Bank’s monetary policy shift from a deficit to a surplus over recent times has exacerbated banks purchase of high quality liquid assets. This in turn takes away from the supply available to other investor classes. Given the recent volatility of government bonds, diversity within portfolios is becoming more important than ever to the institutional investor.
However, investable assets are necessary for the institutional market to diversify. While demand for the right kind of investable asset remains high, our local debt market is not yet as sophisticated as the European and US markets, where private debt is well supported by the institutions and private debt funds who compete alongside the banks for these deals. This, coupled with the low number of listed companies coming to market over recent years, not only suggests a shortage of supply, but increases opacity regarding the true cost of corporate borrowing.
Steps toward a solution
One way of addressing this challenge is to increase transparency of information and level the playing field when it comes to the available investable universe. In practice, however, this is far from simple to achieve. Institutions need to be given more opportunities to advance funding in both public and private formats, with equally reliable pricing and transparency of information. However, pricing of corporate debt is often considered to be intellectual property by banks and asset managers, so they are typically reluctant to share this with their competitors.
Bucketing information into ratings bands and sharing this with market participants in a more aggregated format would be a significant step in the right direction. Ideally, though, there would need to be accurate price discovery as granular as possible, to the point where it could be split not only into rating buckets but also corporate issuer sub-sector level. It may not be a silver bullet, but it would go a long way toward improving investor confidence when making investment decisions. It would also be a key milestone on the journey to improving liquidity in our secondary market.
Centralising the marketplace
A better understanding of the entire market from a timing perspective can help to ensure a smoother alignment of those looking for funding and those with funding. Company treasurers need greater predictability of outcome and can also benefit from improved price discovery, for more realistic expectations and more confidence in approaching the market. Investors want diversity of choice, better price discovery, improved liquidity, and an increase in supply of the higher quality non-bank issuers. Many of these requirements can be addressed through information sharing and connectivity in a centralised meeting place, where both public and private deals can be offered to various investor types.
Intengo was created to enable a more liquid and transparent digital marketplace for the issuance and investment of listed and unlisted corporate debt instruments in the country, with the intention of improving the market for all participants by offering diversity of liquid assets and reduced cost of funding through increased competition for assets. The Intengo digital marketplace is accessible by all high-quality corporate issuers who want to raise funding in the debt capital markets, as well as the banks and institutional investors who want to invest in these instruments. There are also several banks and financial institutions accessing the platform to both issue and invest. This has served not only to aid in the goal of improving transparency and access, but it has also created a wealth of insight into trends in the cost of borrowing in South Africa over the past two years[1].
Some data-driven insights
Across the market over the last two years, we have seen R250bn worth of debt issued by banks, compared to just R95bn for corporates. Ironically, a lot of that bank funding is still being used to fund corporate debt in the private sector. Year-on-year, corporate debt increased by 20%, with 90% of that debt in seven year-plus instruments. Most state-owned entities (SOEs) are not issuing debt instruments in the volumes that we are used to seeing, with the exceptions being ACSA, DBSA, Transnet and Rand Water.
Regarding pricing trends, the average price has dropped from 101bps to 81bps for AAA 12-month floating rate debt. This is also 25bps lower for three- to five-year debt, which is a positive sign in the recent rising interest rate cycle, as it means that overall rates have increased, while the spreads have decreased to ease the pressure.
Supply can be both erratic and inconsistent – 10 issuers in 2022 did not issue in 2023, and 11 issuers in 2023 did not issue in 2022, and there were 32 unique issuers in 2022 and 31 unique issuers in 2023 in total. So, although it seems like the number of issuers did not change much, the individual issuers were very different from one year to the next.
On the demand side, high credit ratings are favoured, but are also in short supply. We saw a lot of activity in the seven year-plus asset space, but this was driven by banks rather than corporate issuers.
Intengo insights
On our platform, we saw 27 unique issuers and 70 investors engaging with one another over the past two years. R80bn was issued, with R178bn in bidding interest at an average subscription ratio of 2.2x. Although the subscription ratio does not always paint an exact picture, it does give an indication of the relative interest in a particular debt issue, and can be useful. We also saw the first-ever government Sukuk issuance, which accounted for an additional R20bn with R36bn in bids. Most of this came from the banks, who could treat it as a high-quality asset on their balance sheets.
Greater insights, improved transparency
Whilst South Africa is regarded, in global standards, as having a relatively progressive and sophisticated financial market environment, innovation in listed and unlisted corporate debt seems to be lagging. The local debt market still faces challenges of lack of transparency and liquidity, which can significantly hamper growth. Intengo believes that data-driven insights are essential for unlocking the potential of the local debt market and ensuring its growth and sustainability. A centralised ecosystem is equally important in driving change and improving these areas. Intengo is committed to helping the market address these inefficiencies by empowering clients, improving transparency, and democratising the marketplace through the provision of this central meeting point, coupled with enhanced market analytics. By leveraging technology to increase transparency and liquidity, we can level-up our local market and ensure a brighter future for the South African debt market.
More information about Intengo’s service offering to the market can be found at www.intengomarket.com.
[1] All figures are excluding government debt and are taken over the full 2022 and 2023 calendar years.
