SOEs: Is the PIC in too deep?

Johannesburg - The extent of the investment by the Public Investment Corporation (PIC) in the debt of state-owned enterprises (SOEs) has come under increased scrutiny amid the country’s downgrade to “junk” status, Transnet’s recent bond failures and fresh allegations of corruption.

The market for SOE bonds has swollen from R71 billion in 2007 to R243 billion last year, according to SA Reserve Bank data.

The PIC, on behalf of the Government Employees’ Pension Fund and smaller clients such as the Unemployment Insurance Fund, is by far the largest buyer of this debt.

However, neither the state asset manager nor the 1.2 million active members and 400 000 pensioners and beneficiaries it works for need to worry – taxpayers will foot the bill in any scenario endangering this colossal bond collection.

This is because the fund is a defined benefit pension fund and the benefits of the fund are guaranteed. Any material shortfall will ultimately be paid for by taxpayers through increased taxes.

The PIC has R190 billion in state company debt, comprising 10% of its assets of almost R1.9 trillion, which largely consists of shares in companies and central government debt.

Most of its SOE debt is held in Eskom, Transnet and Sanral bonds.

Since the credit rating downgrade, Transnet bond auctions – where it raises part of its funding – have failed to be fully subscribed.

Futuregrowth Asset Management last year said it would stop lending money to six SOEs.

It has since resumed lending to three of them – all development financiers.

Conway Williams, Futuregrowth’s head of listed credit, said that the recent slew of corruption allegations related to SOEs would weigh on Futuregrowth’s decision as part of broader environmental, social and governance concerns.

He added that Transnet’s recent disappointing auctions occurred during April and May, which were quiet months on the local capital market in general.

In a statement responding to questions, Transnet said that it had been receiving bids of over R400 million for its fortnightly auctions.

The reason it only sold R20 million at most at any given auction is that investors are seeking higher interest rates than Transnet is willing to accept.

“Bids above our benchmark were rejected,” said the company.

Transnet had a number of other funding facilities in place and could wait for the market to improve, it argued.

Unlike Eskom, Transnet does not rely on government guarantees.

Transnet is, however, also the subject of the most explosive revelations from the #GuptaLeak emails so far, with amaBhungane reporting that the rail monopoly’s recent locomotive investment programme may have been plundered for R5.3 billion in kickbacks to a company tied to the Gupta family.

In another development, National Treasury last month suggested that the PIC could help fund SAA, which has sustained billions of rands in losses for a number of years.

However, this caused an outcry from trade unions representing government workers and the government pension fund was quick to tell members that there had been no request of this sort.

“I don’t think they would ever simply stop buying the SOE bonds,” said Izak Odendaal, investment strategist at Old Mutual Multi-Managers.

“The concern is rather that the other asset managers pull out, like Futuregrowth.”

If the private asset managers also pull out of the SOE bond market, the PIC could find itself under pressure to take up the slack and defend its state company debt.

Ultimately, it comes down to the price, said Odendaal.

“Fund managers will keep buying if the price is right.”

This is precisely why asset managers have bought almost none of the Transnet bonds on offer since the Cabinet reshuffle earlier this year and the subsequent credit rating downgrades to junk status announced by S&P Global and Fitch Ratings.

When previously confronted with its large exposure to especially Eskom, the PIC has pointed out that no SOE has ever defaulted and that – even if one did – most of the debt was government-guaranteed.

Fitch Ratings this week said it was keeping South Africa’s credit ratings unchanged for now, but pointed to increases in the liability SOEs represent to government as one of the two major risks that could trigger a downgrade later.

The other was GDP growth, for which Treasury has overly optimistic forecasts, Fitch said.

National Treasury’s latest statistics on who owns the central government’s debt showed a continuation of the trend since at least 2006 – nonresident investors buying an ever larger share of the government’s bonds.

In April this year, nonresident investors owned 39.4% of government bonds – a new record after the old one was set in July 2014 at 38.8%.

The movement of foreign funds into South African bonds is part of a global search for yield by large institutional investors. Much of this money lands in South Africa owing to the country being part of emerging market indices, but Odendaal said it was hard to discern the relative roles of index and active investments.

“There is a lot of money in indices. It is unclear how much. If you look at Turkey, for example, there was no great big outflow, despite their recent problems.

“We overestimate the importance of our politics.”

Foreign investors becoming the dominant holders of South African government debt “have been a trend for a while”.

While large foreign holdings theoretically posed a risk, this also shouldn’t be overstated, said Odendaal.

“The fear is always that they might sell off rapidly. Unlike the local investors, when the foreign ones sell, they very possibly take the money across the border and that affects the currency. That is not necessarily the case. They might move the money to shares on the JSE.

“Most trading takes place offshore in any case,” he said.

“The local guys are possibly more attuned to the politics. They get more traumatised, more worried.”

Also, local asset managers not keeping up with foreigners in buying government debt is not an unambiguous signal about the country, said Odendaal.

“You can express your judgements in a variety of ways, like buying and selling bank shares or property.”

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