Cell C’s equity value, judging by the performance of its biggest shareholder, has tanked so far in 2019 — yet the mobile operator’s bonds have staged a big comeback.
The yield on Cell C’s dollar bond due August 2020 has fallen from 16.8% in early January to 11.6% on Wednesday. Lower yields imply higher demand and pricing.
But at the same time, shares in Cell C’s largest investor, 45% owner Blue Label Telecoms, have fallen out of favour. Blue Label shares have retreated by as much as a third in the year to date, partly on concerns that the mobile operator is carrying too much debt.
The sharp decline in yields on Cell C’s debt could be explained by lower government bond yields globally, which “normally pulls down corporate bonds also”, says Mergence Investment Managers portfolio manager Peter Takaendesa.
Alternatively, “it could just be that bond investors have a different view to equity investors”, Takaendesa said.
He added that Blue Label’s shareholders may be concerned that their stakes will be diluted, particularly if Cell C’s mooted recapitalisation deal is done at lower valuations.
In February, Blue Label said a consortium of investors, led by billionaire businessman Jonathan Beare, had agreed to take a minority stake in the heavily indebted mobile operator to bolster its balance sheet. The deal is yet to be finalised.
At the end of November, Cell C had loans and borrowings worth R8.9bn. In comparison, Blue Label’s market capitalisation is currently R3.3bn.
Imtiaz Suliman, portfolio manager at Sentio Capital, said the recovery of Cell C’s bonds might be explained by the fact that they are callable within the next month at par value. A callable bond can be redeemed by the issuer before it matures.
“They could also have rallied on the back of some news that Cell C will be able to refinance these bonds at a better level than the current 11% in dollars. Dollar funding is very expensive and they might have secured a line of local funding at better rates,” Suliman said.
On Wednesday, Vestact CEO Paul Theron wrote in a note to clients that government bond yields “are in great demand”.
“Bonds issued by the most established economies are trading at levels where they offer very low yields,” Theron said.
German 10-year bond yields recently fell below zero for the first time since 2016, while US 10-year bond yields are currently at about 2.5%.
“Despite being a country in a part of the world hard to find on a map, Tajikistan’s $500m bond offering in 2017 received $4bn worth of bids, which was eight times more than it offered… That was with a credit rating well below investment grade and absolutely no track record,” Theron said.
“When you consider the bigger picture, perhaps it’s no wonder Moody’s kept SA’s credit rating unchanged… Investors want to own them anyway.”