RISK MANAGEMENT | 11 December 2023

The Case for Local Credit


Zine Misani

Senior Credit Trader


How recent and long-term returns make a strong case for South African credit as a passive investment.

If you’re not paying attention to South African credit markets, you’re missing out on a good – and stable – investment option. That becomes very clear, very quickly, when chatting to Zine Misani, Senior Credit Trader at Absa.

“South Africa has a very mature local credit market, with high-quality issuers across multiple sectors,” she says – and to support this, she points to one of Absa’s own products. “Our Credit Trading desk has created a basket credit-linked note (CLN) product, whose underlying references are names that issue corporate bonds in the local market.”

The basket has evolved over time, and it now has 40 names straddling multiple sectors, from financials to corporates, which include autos, REITs, industrials, miners, and more.

“We have also included metros and state-owned enterprises,” says Misani. “So it has a good read-through across sectors and gives us a good way for tracking the performance of the local credit market. In a way, this basket CLN can be seen in a similar light to the Top40 Equity Index.”

Stable investment choice

The basket CLN has consistently delivered markedly higher returns than money market indices like the Short-term Fixed Interest Index (STeFI), but it’s the stability of the issuers that Misani says makes a winning argument for local credit in general.

“Historically, the local credit markets have seen very few defaulting names,” she says. “One could literally name just a handful: Land Bank, African Bank, Steinhoff… But even in Steinhoff’s case, local credit market investors were insulated in the sense that the issuer early redeemed the bonds it had issued in the local markets, so you would have got your money back.”

It’s a remarkable record. “In a market that has over 60 issuers involved in the local listed credit space, we’ve only had three or four defaults over the past decade,” she says. “That speaks to the stability of the market.”

This volume of defaults is starkly better than what we have seen in the offshore markets where we have seen at least four events of default in 2023 alone.

Buy and hold

Absa ordinarily issues this particular basket CLN annually, as five-year notes. Typically, Misani says, investors in the local credit market will buy and hold them to maturity. “What we often see when we issue the CLN is that investors put it into their portfolios on day one, and then to an extent they forget about it,” she says. “They know the performance will continue to trickle up until the maturity date.”

That’s a view held by many investors in the local market as well. “Demand for the basket CLN product has been robust since the inception of the product in 2011,” she says. “We’ve obviously seen peaks and drops and nuances around specific names within the credit market space over this period, but the numbers are clear. Even on a single-name basis, local credit markets have proven to be a good and stable investment.”

Zine Misani

Senior Credit Trader Absa

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