SA’s bond market is vrot with danger, and it affects us all

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When I started off as a company research analyst in Diagonal Street in 1982, times were very different.
There was a Red Room which hosted drinking from 11am; stock price manipulation was blatantly evident; lunches went on late into the evening; and the bond market did its own thing, functioning in illiquid and opaque conditions.
While the equity platform of the JSE now demonstrates lauded international best practice, and the stockbroking fraternity has been “dehooliganised”, our bond market continues to lag.
Its weaknesses persist decades later and resistance to change is strong.
You may not think the longstanding shortcomings of the institutional bond market are relevant to you – but take a look at your balanced portfolio and pension pot. Who of us wasn’t somehow invested in African Bank or Steinhoff debt as they trundled towards failure, as well in as state-owned enterprise (SOE) bonds such as Eskom, Transnet or Umgeni Water while they were severely mismanaged? 
As bond investors, particularly those with interests in public sector entities, continue to be prejudiced with impunity, a group of investment managers are campaigning for change.  These members of the Association for Savings and Investment SA (Asisa) want enhanced listing standards in the public debt market, wider disclosure requirements, greater scrutiny and transparency, and improved debt investor safeguards.
“The Asisa members have lived through several defaults and degradations in the last few years,” says Andrew Canter, Futuregrowth chief investment officer. “Acting as fiduciaries for investors the Asisa team has engaged deeply and diligently to improve investor protections.”
There are several shortcomings in the way the fixed income market operates. One that particularly irks bond investors is the mismatch between the JSE’s debt listings requirements (DLR) against its equity listings requirements (ELR), meaning that lower standards of disclosure apply to listed debt instruments.
For example, there is no requirement in DLR for listed debt issuers to notify the market promptly via SENS of any director appointments or resignations – but this requirement applies to listed equity issuers. Canter points out that listed bond investors have to rely on equity listing SENS dispatches to get the information they need. And even more acutely, this anomaly reduces the disclosures required from organisations with listed bonds but no listed equity – mostly municipal and SOE issuers. These are the ones which actually require exceptionally high disclosure requirements.
Another problem is that the unlisted loan market, unbelievably, affords better investor protection than the listed market. “In the unlisted bond arena, normal practice is for two sets of lawyers to be appointed – one for the issuer, the other for investors, with the issuer bearing all costs. We must see this sensible practice being offered in the listed credit market,” Canter says.
The JSE – now the owner of the bond market, after having bought it a decade ago – is finally paying attention. It is considering proposals for raised issuer disclosure, and governance proposals that should better balance bond investor protections against the needs of other stakeholders. It will also draw quasi-government organisations with listed debt into the fold, making it a requirement that they publicly disclose details of their procurement policy and material procurement contracts.
Canter believes these additional communications are reasonable. “They are not onerous, competitive or proprietary. They are required in order to raise debt funding in a public capital market, enabling bond investors to assess inherent risks.”
As part of the DLR overhaul, many stakeholders would like to see an investor representative acting for bondholders. This role would ensure transparency in the negotiation of bond terms and make sure that the views of all contracting parties are considered. Canter says: “At present, arrangers and issuers are able to operate in the shadows and tend to dismiss investor concerns on draft legal agreements and inclusion of suitable protections.”• Chris Gilmour is an investment analyst.

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