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Bookrunner tie-up overshadows South Africa's bond return
September 21, 2017 / 3:17 PM / in a month

Bookrunner tie-up overshadows South Africa's bond return

* Deutsche Bank/Nedbank partnership stuns bankers

* Sovereign issues first bonds since downgrades

* World Bank cuts growth forecasts

By Sudip Roy

LONDON, Sept 21 (IFR) - South Africa sold US$2.5bn of bonds on Tuesday in its first transaction since its downgrade to junk status - but all the chatter was about the line-up of the bookrunners.

The deal announcement said the trade was led by “Citigroup, Deutsche Bank/Nedbank, HSBC”. The reference to Deutsche Bank/Nedbank perplexed bankers, who (once they realised it was not a typo) were taken aback by the fact that the two banks were acting as a combined entity rather than as two individual bookrunners.

“That’s incredible,” said one banker.

Banks often work in concert to win bond mandates, and in South Africa cooperation between international and local firms is not unheard of. But no one could recall ever seeing two or more banks combining as a single entity on a public transaction.

South Africa’s National Treasury, which oversees the country’s international bond issuance, confirmed to IFR that the two banks should be “counted as one bookrunner”.

It remains to be seen how the compilers of league table data, including Thomson Reuters, will break down the accreditation for the deal, but bankers expect it to be split three ways instead of four, with Deutsche and Nedbank getting a one-sixth share each. Bankers also expect Deutsche and Nedbank to split their share of the fees.

Quite why Deutsche Bank and Nedbank worked together in the way they did is unclear - and neither institution was willing to say. Some bankers speculated it was because Deutsche has insufficient primary dealer volumes to be awarded the mandate on its own. Proving local credentials by local market activity is critical to winning mandates from the National Treasury.

The National Treasury declined to give any information about its primary dealer rankings, saying that data was confidential. But if that was indeed the reason, some sources said the end (winning the mandate) justified the means (potentially giving up league table credit and fees).

LAST DEAL

Deutsche Bank was last a bookrunner on a South Africa bond deal in September 2013, according to Thomson Reuters data. That was a US$2bn transaction, which also included Rand Merchant Bank and Standard Bank as lead managers.

Nedbank was one of four lead managers on South Africa’s last international bond - a US$3bn transaction in September 2016. It was also one of three banks to arrange a series of investor update meetings for the government last November.

The composition of the bookrunners overshadowed what proved to be a decent outcome for South Africa, which raised the funds despite a weakening market backdrop and more bad news on the economic front.

The sovereign sold a US$1.5bn 30-year note at a yield of 5.65% and a US$1bn 10-year tranche at 4.85%. The combined books peaked at more than US$7bn, though the final level of demand was about US$5.3bn.

The longer-dated note came 22.5bp inside initial price thoughts, while the 10-year tranche came 15bp tighter than where the leads began marketing. However, the yield on that note was at the wide end of final guidance of 4.80%-4.85%, reflecting the choppy backdrop.

US Treasury yields have been on the rise for the past fortnight, while the market was also having to digest a slew of new issues following the summer break.

While it looked as if South Africa (Baa3/BB+/BB+) paid a 15bp or so concession based on where its outstanding bonds were at Monday’s close, it was about 5bp once the moves on Tuesday in rates and credit spreads are taken into account.

The bonds were placed on the day that World Bank cut its growth forecast for the country after the economy fell into recession earlier this year.

The World Bank said in a report that 2017 growth would probably be 0.6%, down from an earlier estimate of 1.1%.

Poor economic data and political conflict has blighted South Africa’s prospects, with the sovereign losing its investment-grade status in April after downgrades from both S&P and Fitch.

A CreditSights note on Tuesday said that South Africa “has been one of the weakest performing sovereign credits this year, largely as a result of its downgrade to high-yield on the back of a cabinet re-shuffle in March which removed finance minister Pravin Gordhan”. (Reporting by Sudip Roy; additional reporting by Robert Hogg; editing by Matthew Davies and Philip Wright)

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