Transcript PRESENTATION TO

New Trends in
Capital
Financing
October 2005
Different Markets and Their Features
Capital Market
•
•
•
•
Government, Corporate, Parastatal and Municipal bonds
Listed on BESA
Generally requires a public rating to be done
Daily price and trades
Institutional Market
• Direct investment by non-banking parties
• Form of loans
• INCA, DBSA, DFI’s
Banking Market
• Major 5 banks
October 05
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Debt Capital Market Update
• The listed SA Debt Capital Market (“DCM”) is R610 billion strong
market – BESA has seen issuance in total for the year to date of
approx R30 billion
• Borrowers in the listed debt capital market have historically been
Banks and State Owned Enterprises (“SOE’s”)
• In recent times, issuance size has decreased (previously R1bn per
issue, of late there have been smaller issuances)
• However funding from the capital markets should be sourced for
larger funding requirements due to the costs involved
• Spreads have also tightened and the low interest rate environment
has made funding through the DCM more attractive
• Investors in the Bond Markets seek long term capital bullet repayment
profiles
October 05
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Debt Capital Market
Options available in the Capital markets
Merits of a Domestic Medium Term Note programme (DMTN) vs. a Standalone Bond Issue]
DMTN
Stand-Alone Issue
Total authorized debt is specified under DMTN
Authorized amount is specific to a particular issue
More than one bond can be issued under the programme,
each having its own characteristics
Only one bond at a time can be issued under this method
Can issue bonds and commercial paper under the same
programme
Can only issue either bond or commercial paper
Bonds issued under the programme can have different
maturities
Only one bond, per issue, with a single maturity (excl.
bonds with optionality) can be issued
Incorporate financials by reference
Incorporate financials by reference
One set of documents (BESA, legal, etc) for all the issues
under the programme
A set of documents for each issue
Authorized listed amount. Only need Board of Directors'
authorization once.
Need Board of Directors' authorization for every issue.
Less administration
Repeated administration
Flexibility
Lack of flexibility
October 05
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DMTN vs. Standalone Issue Costs
DMTN
Standalone Issue
R 30 000
R 30 000
R 1 000
N/A
< R250m
R 2 000
R 2 000
> R250m < R1bn
R 6 000
R 6 000
> R1bn
R 12 000
R 12 000
R1bn issue
R 4 444
R 4 444
5. Legal
Legal costs once off
Legal costs per issue
6. Printing
Printing costs per issue per
pricing supplement
Printing costs per issue per offering circular
1. Initial Listing
*
2. Admin Fee
Annual Revision Fees
3. Base Fee
4. Surcharge Fee
*
Flat rate for DMTN programme but formula applies to Standalone Issue with cap at R30 000
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Expert Services Required
• Advisor/ Structuring Role
• Implementation Role – legal, rating agencies,
accounting/tax, credit enhancement, investors
• Underwriting and market-making Role
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Background on Institutional market
Institutional market
• DBSA
• INCA
• DFI’s
• Not regulated by the Banks Act and has little statutory
costs to comply with.
• DBSA focusing more on developmental funding
• FirstRand Group has 36% stake in INCA
October 05
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Background on Banking Market
Banking Market
•
•
•
Big 5 banks
Raise funds cheaper due to good credit ratings but has statutory costs as a result of
regulation
History of Regulations
•
Pre 1992
No legislated capital holding requirements
•
1992 – Basle I -
Legislated for capital holding requirements
Minimum Capital holding – 8% of risk weighted assets
Municipalities – 0 % risk weighting (0% of 8%)
Margin for ROE = 0% x 8% x shareholder exp ROE
All municipality risk was the same – NIL risk. Weak
municipalities advantaged.
SARB Result:
•
2000 – SARB
-
Result
•
2006 – Basle II -
October 05
Capital holding 10 % of risk weighted assets
Municipalities – 100 % of 10% risk weighting
Margin for ROE = 100% x 10% x shareholders exp ROE
All municipality risk is the same i.e 100% risk weighting. Strong
municipalities penalised.
Capital holdings based on economic risk.
Depends on rating of counterparty and security
Result – Correct pricing for risk and security
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Developments in the Municipal Market
• In the past year there has been renewed and increased activity from
the municipal sector in terms of long term borrowings
• Financial Services Charter (“FSC”) requirements put pressure on
financial institutions, life companies and Banks to invest in
Transformational Infrastructure with a focus on local government as
the agent of delivery
• This has resulted in a very aggressive pricing competition in an attempt
to acquire such assets – pure Bank on-balance sheet funding has not
proven to be advantageous due to the statutory costs involved
• Hence structured, tailor-made products are required which sources
capital market funding either directly or indirectly
October 05
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Bank Funding
• There is a more cost effective solution for municipalities to gain
capital market funding through Bank structuring (indirect capital
market funding) on terms more suited to municipalities e.g.
amortised cashflows with less onerous requirements than direct
capital market funding
• Although not publicly noted, Banks have been utilising structures
that tap into the capital market via Asset Backed Commercial Paper
Conduits to enable them to price more competitively
• Conduits are used extensively by most international banks to provide
clients with direct access to the capital markets where the client
does not want the cost of setting up its own capital market
programme(s)
• Viewed as on-balance sheet Bank funding by the Municipalities
October 05
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Direct vs. Indirect Capital Market Funding
RMB
RMB sets up the conduit and provides it
with liquidity and credit enhancement
Indirect Funding via RMB
Municipality
Conduit
Conduit provides
funding
Conduit issues
commercial paper
Direct Funding e.g. Bond Issue/s, DMTN, Commercial Paper
October 05
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Capital Market
Investors
Requirements for Indirect Capital Market Funding
• Conduits are set up to fund highly rated counterparties/borrowers
(AA- or better rating)
• Ratings slightly below AA- can be included into the conduit –
however tailor-made structuring is required
• Such structuring could include the participation of credit
enhancement from Foreign Development Finance Institutions e.g.
European Investment Bank, Proparco etc
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Alternative Bank Structures – CPI Funding
• CPI-linked debt has the advantages of:
• Offering the municipality longer maturities than term facilities
(20 year funding is achievable)
• Being comparatively cheaper due to investor demand
• The reference government CPI-linked bonds which represents
the base cost is at its lowest levels (R197 trading around
3.25%)
• This translates into a real funding rate of approximately 5%
• Providing a more efficient funding tool especially where
revenue increases are linked to the consumer price index
• Providing the municipality with finance diversification
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Alternative Bank Structures
Buyers and Sellers of Inflation
• Sellers of CPI-linked instruments in SA include
• Government
• TCTA
• Toll Road Consortiums (N1, N3, N4E, N4W, Chapman’s Peak)
• Corporates as part of a DMTN programme
• Buyers of CPI-linked instruments in SA are:
• Pension Funds
• Life Companies
• Collective Investment Schemes
• Banks
October 05
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RMB’s Team
• Forbes Padayachee
Tel: 011 282 1079
Fax: 011 282 8109
• Laurent Scholtz
Tel: 011 282 8108
Fax: 011 282 8109
October 05
Cell: 082 854 8777
e-mail: [email protected]
Cell: 083 381 1334
e-mail: [email protected]
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