JP Morgan launched the first depositary receipt programme for South African bonds in September. The programme allows international investors to buy DRs on bonds listed by Eskom, the state-owned electric utility, without having to bear the costs of trading in Eskom’s home market.
Eskom is South Africa’s second largest domestic bond issuer with a total outstanding face value of $6.9 bn as of August 31, 1995. The Level 1 OTC-traded DRs will cover four bond issues worth $5.8 bn, accounting for some 7 per cent of South Africa’s domestic bonds.
‘This was an innovative deal, which moved the market,’ says Eric Frank of JP Morgan’s ADR department. ‘There are very few ADRs for fixed income securities. This is a market that is liquid and sophisticated, but bonds couldn’t be cleared overseas. That put up hurdles for investors going into the local market. Now they can trade in dollars.’
From the beginning of 1995 to the end of August, JP Morgan’s South Africa Bond Index returned 28.5 per cent in US dollars, against a 12.9 per cent return over the same period in the firm’s Global Government Bond Index.
With the creation of Eskom DRs, foreign investors can buy and sell local Eskom bonds and settle through Euroclear, Cedel or the US Depositary Trust Company. This simplifies things: formerly, foreign investors had to open a custody account in South Africa. The DRs should also speed up trades: settlement for local bonds takes 8-14 days, whereas the DRs will settle five days after the transaction.
The DRs are rand-denominated but JP Morgan will also make prices in foreign currencies, including US dollars. On the other hand, bid-offer spreads on DRs are expected to be wider than on the local bonds at first, since JP Morgan will pay the fees to create and cancel DRs. But the bank predicts that spreads will narrow close to those of the underlying bonds as an active secondary market develops.
Dealer optimism greeted JP Morgan’s Eskom DR announcement, buoying key contracts. A further 250 mn rand three-year bond was set by the European Bank for Reconstruction and Development, with JP Morgan as lead manager, following the Eskom announcement.
And strong international demand for high-yield South African rand bonds spawned two rand-denominated Eurobond issues for Merrill Lynch and Deutsche Bank earlier in the same month.
