Why a Cash-Strapped South African Arms Maker Can Still Sell Debt

(Bloomberg) -- Denel SOC Ltd., South Africa’s state-owned arms manufacturer, is tapping bond markets -- and finding buyers for its debt -- even after seeking emergency funding in the past two months to pay staff salaries.

The company, one of several state-owned entities struggling to stay afloat after years of financial mismanagement, sold 50 million rand ($3.3 million) of two-year floating-rate notes this week, according to a stock exchange notice.

The bonds offered a coupon of 9.333%, or 250 basis points above the benchmark three-month Johannesburg Interbank Rate, which partly explains why they found buyers. They’re also government-guaranteed, meaning investors are reaping that yield with very little risk.

Although there are no details on who bought the notes, the Public Investment Corporation, or PIC, has acted as a backstop for Denel in the past. The PIC, which manages most of the South African government’s pension funds, owns about 88% of the company’s existing bonds.

Pensions Push-Back

But ex-government service pensioners may not put up with that for long, according to Peter Attard Montalto, the London-based head of capital-markets research at Intellidex.

“A crunch is clearly coming,” Montalto said. “They have only managed to issue 50 million rand today. Clearly there is a lot of push-back from the Government Employees Pension Fund on the PIC that is creating problems here.”

Denel has 3.27 billion rand of bonds outstanding, according to data compiled by Bloomberg. Almost 3 billion rand of that is due this year. Should the company be unable to roll over the debt, it would put further strain on state coffers at a time when public enterprises including Eskom Holdings SOC Ltd., the electricity utility, are in need of cash to stay afloat.

South Africa’s potential liability for government-guaranteed debt of state-owned companies was 879.6 billion rand in March, according to the National Treasury.

To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, Justin Carrigan

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