A Different Kind
of Debt Instrument

The market reaction to the FRN reflects the general trend in the South African credit market, which – in terms of pricing – remains driven predominantly by supply/demand dynamics. “There is a lot more cash in the system than there are instruments to invest in,” says Misani. “Credit spreads tend to be tighter than where credit metrics would otherwise dictate, simply because there are fewer assets being chased by a lot of money.”

The government’s FRN has also caught the attention of corporate bond issuers. “All of a sudden you have this basis between where the government is issuing versus where the corporate bond market is issuing,” says Misani. “That changes the dynamic. Will we see a shift in investor appetite from the credit-risky notes issued by corporates into this government bond, which is pricing quite attractively? I think some investors would rather hold a risk-free note priced at an attractive level than a risky note issued by a corporate priced at a similar level.”

Historically, local credit market investors buy and hold instruments. This FRN presents an attractive alternative. “Now you can sell out of the corporate bonds, take the profits (because the pricing has tightened so aggressively), and while you wait for something better to come along, go and buy the government FRN. It’s at attractive levels, it’s risk-free … and I’m quite sure fund managers won’t be asked too many questions about the position they’re holding there.”

That, in turn, speaks to the state of local credit markets, where investors have money to spend, but also want it as de-risked as possible. “From that point of view, the government couldn’t have timed this FRN better,” Misani concludes.