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Pricing Corporate Bonds

Pricing Corporate Bonds. Should Corporate Bonds be priced off the BOND CURVE or the SWAP CURVE? David Rajak, Rand Merchant Bank, IMN Conference 30 October 2007. Comparison of markets. Snapshot of SA bond market. Primary dealer system for government bonds 9 primary dealers

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Pricing Corporate Bonds

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  1. Pricing Corporate Bonds Should Corporate Bonds be priced off the BOND CURVE or the SWAP CURVE? David Rajak, Rand Merchant Bank, IMN Conference 30 October 2007

  2. Comparison of markets

  3. Snapshot of SA bond market • Primary dealer system for government bonds • 9 primary dealers • R153/ R201/ R157 very liquid • R203/ R204/ R206 less liquid • R186 even less liquid • Rest – don’t even bother R204 R206 R203 R186 R153 R201 R157

  4. Dilemma – what benchmark do we use for a 5-year bond? • Issuing for 5 years from 30 October 2007 • Final maturity will be 30 October 2012 • Liquid benchmarks are • R153 (31 Aug 2010) = 2.2 years shorter • R201 (21 Dec 2014) = 2.1 years longer • Less liquid benchmark is • R206 (15 Jan 2014) = 1.2 years longer • Now for the dilemma • Bond funds will want to benchmark most liquid bond • If issuer wants to swap, then swap desk would prefer R153 or R157 to manage delta • Yield difference between the bonds is as follows (19 October 2007): • R153: 8.94 • R206: 8.36 • R201: 8.36 • Interpolated point is 8.65

  5. Dilemma – what benchmark do we use for a 5-year bond? • If credit prices at interpolated point +100 (9.65) • If we were to benchmark the following bonds then this would be the credit spread • R153 + 0.71% • R206 + 1.29% • R201 + 1.29% 71 100 129

  6. Which bonds are the better issues? • Snapshot of 28 bonds rated between AA+ and A- issued since 2001

  7. Which bonds are the better credits?

  8. Which bonds are the better credits? SMF02, R1 billion, September 2007, R1 billion, AA- MTN01, R5 billion Gov + 145, July 2006, A+/A3 SBS5, R1 billion Gov + 75, Dec 2006, AA+ SBS1, R3.5 billion Gov + 65, NOV 2004, AA+

  9. Why the difference? • Bond swap spread • As the bond swaps spread has widened, so has the absolute credit spread

  10. Are we in fact pricing off the swap curve already? • SA Home Loans case study • Frequent issuer (7 issues since 2001) plus a conduit • Traditionally issued fixed and floating tranches • All AAA rated, 5 years 62 26 46 122

  11. Graham Hilton Smale, Consultant,BOND EXCHANGE OF SOUTH AFRICA Bronwyn Blood, Credit Portfolio Manager,CADIZ AFRICAN HARVEST ASSET Andries du Toit Strategic Funding and Capital Management,FIRSTRAND BANK Simon Howie Credit Portfolio Manager,INVESTEC ASSET MANAGEMENT Richard Klotnick Credit Analyst,NEDBANK CAPITAL Arno Daehnke Director Money Markets,STANDARD BANK Over to the panel

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