SA pays up for new $1.25bn Eurobond – investors see “snap back” opportunity

By Lyubov Pronina and Elena Popina

(Bloomberg) — South Africa is opening the market for the continent by selling its first Eurobond in almost two years as it seeks to capture lower borrowing costs to finance a widening budget gap.

Euro_bank_notesThe government sold $1.25 billion of notes due in 2026 at 335 basis points over Treasuries, according to a person with knowledge of the plan, who isn’t authorized to speak publicly and asked not to be identified. That’s down from about 350 basis points when it started marketing the deal, the person said. The spread compares with 307 basis points for securities due September 2025, data compiled by Bloomberg show.

Africa’s second-largest economy is tapping the market after the U.S. Federal Reserve scaled back forecasts for interest-rate increases, boosting demand for higher-yielding assets. The nation, beset by the worst drought in more than a century, falling commodity prices and weak demand from its biggest export market, China, is at risk of losing its investment-grade credit rating after President Jacob Zuma’s surprise firing of his finance minister in December followed by a court ruling last week that he violated the constitution by refusing to repay government money. Steve Hooker, managing director and portfolio manager at Newfleet Asset Management LLC, said the selloff creates opportunity.

“We are playing the South Africa new issue from a valuation standpoint,” Hooker, who helps oversee $11.5 billion at Newfleet Asset Management LLC, said by phone from Connecticut. “South Africa is among the places where we might see some identifiable catalysts to snap back.”

Hooker didn’t disclose how much he bought but said he added “across various accounts.”

“The price is attractive despite the negative economic outlook and the ratings downgrade risks,” said Koon Chow, a senior macro and currency strategist at Union Bancaire Privee in London.

National Treasury media statement

The Republic of South Africa has successfully priced and concluded a US$1.25 billion 10-year bond issuance in the international capital market.

The US dollar bond was priced at a coupon (interest rate) of 4.875 per cent, which represents a spread of 335 basis points above the 10-year US Treasury’s benchmark bond.

The global investor base was primarily located in Europe and the United States.

The transaction was more than two times oversubscribed. The South African government sees the success of the transaction as an expression of investor confidence in the country’s sound macro-economic policy framework and prudent fiscal management.

This issuance forms part of South Africa’s 2016/17 financing programme. Government’s borrowing requirement over the medium-term amounts to US$5.5 billion equivalent, which includes US$1 billion carried over from 2015/16. The proceeds of the bond will partially finance the government’s foreign currency commitments of US$6.4 billion over the medium-term.

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