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Global asset manager confident SA bonds will not follow Brazil into junk status

20 October 2015 PineBridge Investments

The recent announcement of S&P downgrading Brazilian bonds to “junk” status has raised questions about whether the South African bond market will be the next emerging market to be downgraded. However, according to PineBridge Investments, it is not likely that South Africa will lose its Investment Grade imminently.

According to John Bates, Corporate Analyst of Emerging Market Fixed Income at PineBridge Investments, Moody’s are a notch inside investment grade at Baa2 with a stable outlook, as are Fitch at BBB (albeit with Negative Outlook), while S&P, who are on the threshold of investment grade, have a stable outlook. He says that although S&P may downgrade the local bond market, the other two agencies appear to be more positive, at least for the time-being. 

Bates says that in the US dollar international bond markets in which PineBridge Investments invests, there are several broad categories of issuer. “Firstly, there are the state-controlled “quasi-sovereigns” such as state owned Transnet, and the top-tier banks such as First Rand, which are rated in concert with the sovereign. These are unlikely to be reduced to junk status, in line with the country level ratings.” 

Another category is the second tier banks and privately-owned companies such as Naspers and Gold Fields. “These companies are rated either at or below the investment grade ratings band, and there could be some negative impact for those at the ‘BBB-‘ level in a downgrade scenario. One other outlier is Eskom, the national power company, which has its own set of challenges. As this company is already rated below investment grade (Ba1/BB+), any downgrade at the country level would be unlikely to have any material impact.” 

Bates says that currently GDP growth is a key component of investor sentiment, and levels in South Africa have lagged the growth of many peers, such as Morocco, Turkey, India and Thailand. This may well form the basis for any downgrades at the sovereign level. 

“It is also worth noting that Fitch recently announced that it will be closing its rating operations in South Africa, and that all corporate ratings from Fitch in the country will cease. Although this will have no major impact overall as a number of other ratings agencies operate in the country, it could potentially impact on those companies currently rated by only one other agency,” concludes Bates. 

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