FW: Credit Spreads of South African Bonds (Blue Dots) compared to the Actuaries Yield Curve (Red Curve).
Warwick Langebrink
Dear Philip, I have been meaning to prepare the graph below for some time, but needed to set aside some time to get the charting polished.. The ABSA, Standard, Nedbank and FNB bonds and fixed income securities are the cornerstones and building blocks of the Acacia business. If we issue a R100m callable note or debenture, or preference share, then that Acacia issue of R100m is ALWAYS backed by a R100m bond or NCD or instrument from one of the BIG 4 Banks. Banks’ yields are at an all-time high relative to the risk free yield curve. (i.e. Credit Spreads are v favourable at the moment – the chart explains this further.) This means that we can offer investors good yields for our products. Our products are , in a nutshell, Asset Backed Securities (“ABS”), the underlying assets being BIG 4 Bank paper including that charted below: The underlying securities sit at ABSA Custodial Services for the duration of the transaction and are directly Pledged in security to Investor to collateralise the transaction , or in case anything goes wrong (which event has not occurred to date). That is why, in simplistic terms, Acacia has the same credit rating as the BIG 4 Banks.
Please also note that although Banks’ bonds are trading at very favourable spreads (driven by international market forces) , the deposit and investment rates offered by the banks (driven by local bank forces) do not necessarily carry the same yield pick-up. Banks’ bond pricing and Banks deposit rates are driven by different forces and spreads do not necessarily move in lock-step.
I hope you find this chart interesting: Please feel free to get hold of us should you wish to discuss any further ideas in Money Market / Preference Shares..
As mentioned Acacia can play the role of disintermediating the Banks and provide you with yield pick-up, with liquidity. Should you be interested in benefiting from these spreads, Acacia is able to package this return in the form of issuing a Floating Rate / Senior Secured Note or Debenture direct to the client.
As an example, the Acacia redeemable preference share quoted below yields 9.05% on a pre-tax equivalent naca basis, which compares very favourably to the universe of bonds charted above. The reason that the Acacia Preference share is able to offer a higher pre-tax equivalent yield is that dividends are taxed at lower rates than interest, and the pre-tax equivalent rate attributable to preference shares is therefore superior to bonds. Please refer Acacia pricing sheet below for detailed pricing.. The preference share pays monthly dividends, and resets to a unit price of 100% at the end of every month because the investment is redeemable at 100% of the investment value at the end of the term, and secured as described above. The preference share is considered to be operational, and is liquid and therefore sits on the left hand side (short end of the yield curve above)
Kind regards
Warwick Langebrink
+27 11 268 0530 (SA)
+27 82 610 0444 (mobile)
