Rating: Aa2/A+
Amount: R150m
Maturity: March 2, 2001
Issue price: 101.295
Fixed re-offer price: 100.17
Coupon: 14%
Launched: Thursday February 12
Joint leads: TD Securities (books), Bayer Hypo
Bookrunner's comment:
We had run out of 2001 product and were seeing good demand for the Commerzbank issue launched early last week by Hambros. We clearly needed some new product on our books and decided to bring a new three year transaction to the market.
Favourable swap rates enabled us to attain a 14% coupon which combined with a shortage of supply in the two, three and four year area in rand ensured the success of the transaction.
We have bought no bonds back in the brokers market whatsoever and there were bids away from us which is another very good sign.
With the market heading towards the next rate cut the whole environment in rand is looking a lot rosier. Potential weakness in the currency is not deterring investors at all as they feel that the interest rate cycle and the bond market performance will outweigh any losses.
There is a very positive tone to the market at the moment and with appetite firmly focusing on the short end of the curve this issue made perfect sense.
Market appraisal:
"...a great yield because it's not a particularly great credit. However, it's a well known name and the coupon's very seductive so it should sell.
There has been some issuance on the three year part of the curve and this looked pretty much in line with that. The three year Commerzbank transaction is now yielding 13.88% on the offer side while this was priced to yield 13.98% on the offer side. A 10bp spread is a fair reflection of the difference in credit. The cost to syndicate was 99.92 and the bonds are now (Thursday) trading at 99.95 to par."
"...TD does a lot of business for Bayer Hypobank and has a good relationship with them. 14% is
a nice headline coupon and although this reflects Bayer Hypo's lower credit rating it could give the deal a slight edge over the others in the market.
Optically it looks great and the yield is on market so it get placed pretty quickly. The fixed re-offer price of 100.17 could be a hindrance as some investors are not interested in buying bonds above par.
However, that is not a problem for us and at the moment the issue is trading under par at 99.97 -- less full fees level. We had a R2m ticket and will sell that pretty easily."
"...this has a very attractive 14% coupon which will be very well received by investors in Italy. They prefer the shorter maturities because they offer better coupons and better yields.
Although the rating is not one of the best it is still quite a well known name, especially in Italy as it has been a regular visitor to the Eurolira market. There is steady demand for rand but we now have more than enough product to meet the market's requirements."
* European
Investment Bank
Rating: Aaa/AAA
Amount: R300m
Maturity: March 12, 2003
Issue price: 100.695
Coupon: 13.25%
Launched: Thursday February 12
Lead manager: Hambros
Bookrunner's comment:
At R300m the deal is fairly sizeable and represents another step towards the building up of a solid Eurorand yield curve. The issue is the 11th coupon bond in rand this year and the fourth with a five year maturity.
We found that the three five year issues launched recently fared very well indeed despite the inverse yield curve and as we had sold out of these bonds we were keen to put another five year deal into the market.
Following profit taking in the domestic rand market earlier this week which brought local yields to resistance levels, stability has returned to the market and some modest gains made. The currency has been very resilient recently, particularly in the light of the fall in the gold price and expectations of further rate cuts.
Against this background an issue for a top borrower with a 13.59% return was seen as an excellent opportunity to re-enter the market.
The syndication process went very smoothly and we ended up syndicating about R139m of the issue. First day sales surpassed projections and were evenly spread between Swiss, Italian, Benelux and German investors.
At close of business today (Thursday) the grey market price was 99.82 to 99.85.
Market appraisal:
"...the yield on this is pretty much spot on, even a little bit generous compared to secondary market spreads. It came out with a yield of 13.60% which is slightly above where the EIB 13.5% of 2003 trades. It was priced to the group at 98.82 and is trading now at 98.82 on the bid side and 98.87 on the offer side.
Some investors prefer shorter maturities partly because of the potential depreciation in the currency and partly because of the general weakness in the emerging markets. However, if a deal represents value, which this clearly does, then it will sell despite a longer maturity."
"...standard product and a little bit expensive but not wildly so. 13.25% is the lowest coupon we have ever seen in rand so it will
be interesting to see how it
goes especially as it looks as if
the coupon has been set at this level in order to attain a lower issue price.
Hambros is probably expecting a rally in the market and wants to ensure that the bonds remain below par.
It is not a bad deal but it has a couple of negatives -- the coupon is too low and the pricing on the tight side -- and if any of the transactions launched this week are going to struggle it will be this one.
We had a R8m ticket which is a good sized ticket but we do not expect to have many problems placing the bonds."
"...this is the lowest coupon we have seen in the rand market and we are waiting to see how it is received by the market. I am assuming they launched it at this level because they want to keep the price below par in the event of a rally."
* General Electric Capital Corp
Rating: Aaa/AAA
Amount: R150m
Maturity: March 3, 2000
Issue price: 100.995
Coupon: 13.75%
Launched: Tuesday February 10
Lead mgr: Hambros
Bookrunner's comment:
This was a fantastic issue which has had tremendous support from the group.
In contrast to other issuers such as the supranationals which appeal very much to the Italians and Swiss investors or German banks which appeal to German investors, GECC has a very wide investor audience which straddles the Benelux, Switzerland, German and Italy.
It is a universal name which will tap into the widespread demand we are seeing. The South African fundamentals tell a positive story and demand for rand is pretty strong, especially on this part of the curve.
Confidence in the economy and the currency is growing and demand for rand especially at the two year part of the curve, where investors can pick up a nice attractive coupon, is very healthy indeed.
Market appraisal:
"...demand for rand, drachma and New Zealand dollars is very strong at the moment.
While the only way to get yield pick-up in lire is through either structures, long dated bonds or higher credit risk, in these currencies investors can get comparatively high coupon with triple-A names and at short dated maturities.
As these currencies appear to have achieved a certain stability demand for them is growing."
"...good choice of maturity and a nice coupon. It is very similar to the Rabobank issue launched last Friday but its distribution will probably focus more heavily on Switzerland and Germany than the Benelux.
Otherwise they are much of a muchness and there's not a lot to chose between them.
From our point of view we liked the larger sized allotments on the GECC issue. It is preferable to have a R5bn allotment than the usual R2bn allotment that is handed out to syndicate members.
However, if you are going to give participants larger tickets then you should limit the size of the group. With 19 banks receiving R5bn each about R95m of this issue was syndicated which is really too much.
Hambros probably expected some of those invited into the group to turn it down because the tickets were slightly larger than normal."
"...we have had pretty good demand for rand at the short end of the curve where yields are highest and have sold our allotment without any problems. The deal was fairly priced and GECC is the sort of name that has universal appeal. It will sell to investors across Europe."
* Rabobank Nederland
Rating: Aaa/AAA
Amount: R150m
Maturity: March 2, 2000
Issue price: 101.065
Fixed re-offer price: 100.065
Coupon: 13.75%
Launched: Friday February 6
Joint leads: Toronto-Dominion (books), Rabobank
Bookrunner's comment:
We launched this deal because we didn't have any product on offer in the two year maturity and we were seeing continued interest for rand at the short end of the curve.
Driving the demand for short dated paper is the expectation of a rate cut. It has been expected for a while but the feeling is that it is now imminent. As a result of this people are expecting the curve to disinvert and are keen to invest in the shorter maturities.
A few market participants initially suggested that the issue was slightly expensive but in fact they were comparing it to issues which were completely illiquid. We only bought back something in the region of R3m which was a clear vindication of our pricing.
The issue is targeted at retail investors who feel that a rate cut is on the way and want short dated product. When we launched this issue, although we were seeing good demand at two years there wasn't much two year paper in the market.
Since we brought our deal another two year was brought to the market by Hambros which suggests that other banks are finding the same thing.
Market appraisal:
"...correct coupon, correct maturity, I like it. It was good to move to an area where there has been less supply and offer investors another choice of maturity. The name is one which will work very well for German and Benelux clients."
"...a retail driven issue which was fairly priced and should sell okay. We sold our allotment quite quickly to retail buyers.
There is quite a good bid at the short end of the curve at the moment because that is where you can get the best coupons. This is the second two year deal launched on Monday but both should get placed relatively easily because there has been a lack of supply at shorter end of the curve."
"...this was perfectly in line with the market but we are just not
seeing the flows in rand to justify a new deal. Sentiment in the market seems to have taken a downturn.
At the moment we are seeing a preference for zero coupon rand product and have observed some selling of fixed income bonds in favour of zero coupon stock.
This issue was fairly priced but the market is very quiet in terms of volumes. The only currency we are seeing appetite for at the moment is drachma."
Market commentary
Compiled by Mark Goddard, Hambros Bank Ltd, London. Tel: +44 171-865 1087
Despite the absence of important economic data releases this week, the South African rand market has been quite active, largely on account of comments from some of South Africa's influential figures.
President Mandela gave his annual address to parliament last Friday -- outlining and reaffirming the government's policies and targets for the year ahead -- with little in the way of surprise. Of more market interest were the comments from the governor of the Reserve Bank, Chris Stals which almost ruled out a bank rate cut before March 9 and sparked a bout of profit taking in the bond market.
Stals stated that "if market conditions remain the same, there will probably be no change in the bank rate before the introduction of the repo system". However Stals did suggest that the current market view is correct, with interest rates likely to fall over the course of 1998.
The market's recent rally was largely driven by speculation that an interest cut is imminent. Stals' comments therefore resulted in profit taking and the bond market fell from the highs it reached last week. However, there continues to be support at key levels (on account of the longer term picture that monetary easing is necessary) and the market appears to have stabilised at a new level. The yield on the benchmark R150 bond has risen to 14.43% from 14.31% last week.
The currency has traded weaker against the dollar this week, to R4.9320/$ compared to R4.9050/$ a week earlier. *
