A South African Corporate Bond Market?

Abstract

This paper explores the attitude of major players in the capital markets to the question of why there is virtually no corporate bond market in South Africa. Information was sought as to whether investors ought to be provided with a broader range of risk instruments; what criteria investors seek in a corporate bond market; whether these overlap with the criteria important to potential debt issuers, and what hurdles restrict the development of such a market.Information was elicited through the medium of a mailed questionnaire sent to a sample of listed companies. Included were all life assurers and banks, together with the larger pension funds, investment companies and merchant banks.It was found that the attitudes of South African financial managers were generally positive towards the issuing of corporate bonds. Enough potential issuers with appropriate attributes existed. High inflation was seen as a critical stumbling block impeding formation of such a market. Needed too were market makers and the establishment of a rating agency. The presence of derivative markets and the introduction of more floating rate debt were also seen as factors which would lead to the formation of a formal bond market.Major South African companies, in the six years 1984–89, raised in excess of R9,6bn in new equity but only R1bn in debentures (Davey, 1990: 2). The total market capitalisation of the Johannesburg Stock Exchange (JSE) was of the order of R300bn at end-1989 whereas that of listed corporate bonds was only some R2,4bn.Trade in fixed interest securities is dominated by institutions which until recently were required by law to invest a substantial portion of their funds in so-called prescribed assets. This has resulted in the relatively higher importance of the gilt and semi-gilt markets in South Africa which had a nominal market capitalisation exceeding R96bn in 1989. Although the corporate bond market traded 13,5% of its nominal value during 1989 compared to the 6,9% in the equities market, the overwhelmingly larger size of the JSE completely overshadows the bond market.These figures beg the question: “Why do South African companies generally raise their capital through equity instruments? This paper explores the attitude of major players in the South African capital markets to this issue.