FirstRand delays bond sale

FirstRand delays bond sale

Published: November 29, 2012

Investors deterred by Basel III-compliant issuance despite high yield.

South Africa’s FirstRand has delayed the sale of its Basel III-compliant bonds after investors got cold feet. The 10-year bonds, worth US$300-500mn, were to yield 5.875%, a level well above the current average for an emerging-market product.

Basel III-compliant bonds are so-called because they are written down or converted to equity as soon as a bank reaches ‘non-viability’ status. FirstRand’s would have been the first Basel III-compliant vehicle auctioned by an emerging-market bank.

The sale was marketed to UK and Asian investors, with demand exceeding supply by 1.2 times. This was well below the 3-times target, which would have ensured a healthy secondary market. According to Andries du Toit, FirstRand’s group treasurer, there are no fundamental issues to be resolved. Rather, circumstances conspired to make the sale unworkable.

“Feedback from investors showed that it wasn’t FirstRand specific, particularly given the group’s recent performance and prospects,” he explains. “It was a combination of the ‘untried’ nature of the instrument, particularly as we were the first emerging-market bank to road-show such an instrument; some concerns over the recent downgrade of the South Africa sovereign on the back of the weaker country macros; and a very risk-off day when the book-build started.”

Du Toit is confident that once investors become more familiar with the technicalities of the instrument, demand should reach the same level as that for Basel II-compliant sub-debt. FirstRand, he adds, is in no hurry: “[We will try a resale] when the market improves, either 2013 or 2014. From a capital management planning perspective we are not under any pressure to issue before 2014/5.”