A collection of Futuregrowth thought leadership pieces, media articles and interviews.

Enter the bond market

02 Sep 2016


So, the discipline of the market is finally being brought to bear on state-owned enterprises (SOEs). Asset manager Futuregrowth’s decision to suspend new lending to six SOEs is a significant step forward for shareholder activism in SA, although in this case it is, more accurately, bondholder activism.


The decision, Futuregrowth said, was driven by "growing concerns about the governance and decision structures of the SOEs", and it pointed to months of information flow about possible patronage networks, and recent reports of conflicts within the government and a seeming challenge to the Treasury’s independence.

Its decision was followed by some lenders, and rejected by others, while still others took a more nuanced position.

Nevertheless, this is new and uncharted territory. But it is significant that a specialist lender, such as Futuregrowth, should take the lead. The 20-year-old lender is SA’s largest specialist fixed-income manager, with R170bn under management. It is a leader in responsible investment and in funding infrastructure developmental projects. Where it goes, others will follow.

Until now, activism by institutional or individual investors has tended to focus on executive pay in listed companies, or on the pricing and structure of proposed deals. Governance in listed companies has been an issue too, but we haven’t seen open attacks on SOEs, and certainly not on issues so clearly in the domain of politics.

But, there are strong reasons why they should have, and could have — reasons that perhaps have become clear only now that Futuregrowth has gone out on a limb with strong action that other fund managers might well follow.

The consequences for SOEs such as Eskom or South African Airways (SAA), with their heavily geared balance sheets, could be devastating, not just raising the cost of borrowing, but potentially cutting their ability to borrow at all. So too could the consequences for the fiscus, which has R467bn of guarantees in place for SOE debt. Already bond yields have jumped, with investors seeking higher returns in return for the higher risk, while the rand has fallen even further.

But somebody has to put a stop to the Zuma-led efforts to plunder the SOEs and prevent professional, independent managements and boards from turning them around, and the best people to do that are surely the private sector managers who, through the bond market, are providing much of the funding for these SOEs and, indeed, for the government’s own debt issues.

And it is not just that those private sector fund managers are in a position to intervene, but that they surely have a responsibility to do so on behalf of those whom the money belongs to — the millions of South African savers, in pension and provident, and life funds and unit trusts. Futuregrowth took care to emphasise exactly that, opening its statement by saying it was acting out of fiduciary duty.

The point about SOEs, and indeed development finance institutions, such as the Industrial Development Corporation and the Development Bank of Southern Africa, is precisely that they are enterprises — not government departments. They have corporate structures that enable them to borrow in the market to fund their activities, issuing longer-term bonds and shorter-term commercial paper to private sector investors. Those investors are entitled to be assured the entity into which they are putting the money of millions of savers are properly governed and managed.

Clearly, SA’s SOEs do not meet that criterion and it only gets worse, with the president himself having taken control; and the destructive SAA chairwoman Dudu Myeni having her contract renewed; open battles between Eskom and the Treasury, and Denel and the Treasury; and, of course, the rumours of Finance Minister Pravin Gordhan’s imminent arrest.

Who could blame institutional fund managers with heavy exposure to the debt of SOEs asserting their rights to hold back on providing any further funding?

We can only hope the pressure that is being applied yields some results.

Read the original article here. 

All tags:

SOEs / Eskom / SAA