Stringent listings requirements help safeguard equity shareholders, but there are divisions over how to strengthen the hand of investors in SA’s corporate bond market
PUBLICATION: BUSINESS DAY | WRITER: GIULIETTA TALEVI | DATE: 23/04/2019
SA’s banks are fighting “tooth and nail” against reforms that would help protect pension fund investors in the bond market, according to asset manager Futuregrowth.
While shareholders in listed equities enjoy a raft of protections from stringent JSE listings requirements, investors in SA’s corporate bond market do not, despite the fact that the sector had as much as R880.9bn invested at the end of December 2018.
That is set to change, however, following a series of consultations held by the JSE with bond issuers and arrangers, as well as investors.
“There’s a presumption that listed instruments have a set of quality standards associated with them, but in the bond market it’s simply not true,” says Futuregrowth’s chief investment officer, Andrew Canter.
“There are no meaningful standards of quality or investor protections and you can sell just about anything. It’s incredible. The JSE should be rightfully embarrassed about this as they have owned the bond market for over ten years." The JSE bought the Bond Exchange in 2009.
Gill Raine, who represents bond investors under the banner of the Association for Savings & Investment SA (Asisa) says “the structure of the SA market is such that investor protection in the primary and secondary market is weak and that is what the proposed amendments aim to correct”.
The lack of protections afforded to investors in bonds was rammed home in the case of Umgeni Water, the KwaZulu-Natal water board which has bonds listed on the JSE. Former water affairs minister Nomvula Mokonyane was able to remove the management and entire board and nobody was any the wiser, as Umgeni had no obligation to inform the market.
But there have been other corporate failures, notably African Bank Investments and Steinhoff where, says Canter, investors “realised they had no rights, no protections and had to work through those situations without being able to work collaboratively with other bondholders”.
The JSE’s director of issuer regulation, John Burke, admits that there is a “big divide” between the investors, represented by asset managers, and the banks over what listings rules should make the cut.
The stock exchange plans to publish revised changes to debt requirements for public comment by the end of April.
But, says Burke, “nothing in this process is simple”. For example, bond investors want the establishment of an investor representative to act for them, as they say that arrangers and issuers are “dismissive” of their comments on draft legal agreements and the inclusion of suitable protections.
Says Canter: “investors engage and give comment on loan agreements, but the only person who sees that comment is the arranger - who works for the issuer - and then they ignore it. Worse, arrangers will say 'nobody else asked for changes’ but we’ll find out later that at least two or three other people made the same comments."
The problem is that debt issuers have no legal obligation to accept all or even any comments raised by investors, according to critics. There is “a lack of transparency in the legal drafting process. The system is rigged so that suitable investor protections are discarded: in effect borrowers write their own loan agreements” says Canter. The exchange argues that it’s not permitted, under the Financial Markets Act, to legislate the appointment of an investor representative or to intervene in commercial negotiations between investors, arrangers and issuers.
But in a recent letter to interested parties, the JSE said it is “important” that there is a “structured mechanism” for investors to convene meetings with bond issuers. It has urged issuers and investors “to establish communication channels” to “improve communications and negotiations”.
The other issue, says Canter, is that banks “don’t provide liquidity to this market. They sell bonds to us that they will not buy themselves.”
Asked whether banks are protecting the status quo, Barry Martin, who chairs a grouping known as the Debt Issuers Association, says “non JSE equity listed companies should not be deterred or prejudiced from accessing the debt capital markets to raise funding”.
But Asisa argues that better listings rules have a direct bearing on better corporate governance, which is to everyone’s benefit. “We have already witnessed failed auctions of SOEs due to concerns about corporate governance,” says Raine.
The Banking Association of SA said it is waiting for the revised listing requirements to be released by the JSE "and will engage further thereafter."
Business Day understands that some banks have threatened to take all listings to new exchanges where the terms may be weaker and Canter says that changing listings requirements on the JSE should thus only be a first step. “The fact is that we need to get this in the Financial Markets Act so they can’t go quality shopping.”
Read the original article here.