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Getbucks bond issue heralds new debt offerings

Getbucks Financial Services Ltd’s maiden bond issue heralded a pipeline of new tradeable debt offerings in Zimbabwe’s capital markets, as companies – and Government – look to cheaper, sustainable ways for raising money.

The firm last week successfully sold and listed its 3-year fixed rate notes, raising $5 million, at a coupon of 11 percent. Interest is payable semi-annually in arrears, according to a 113-page prospectus on the issue, which has accountants KPMG as lead book-runners, brokerage firm Lynton Edwards Securities as sponsors and PriceWaterhouseCoopers as reporting accountants and auditors.

The issue was the first in a phased offering that aims to raise $30 million in total, to fund product expansion, and to cut the cost of funding by 2,5 percent, says Getbucks.

Importantly, it was the first debt listing on the Zimbabwe Stock Exchange (ZSE) in 20 years – the exchange having upended the bond market due to a lack of interest. It is likely Getbucks was keen on testing the waters, preferring a smaller sized debut of an (credit) unrated issue.

But investors were little concerned, as the strong reception to the bond pointed towards a deep hunger for longer dated interest-bearing assets in a market short on options.

Actually, Getbucks, majority owned by nascent South African financial services group, Getbucks Ltd, could have sold more of its debt, which opened April 12.

Investors, made up of pension funds, insurance companies, individuals and others, put up orders of $5,4 million, 7,4 percent above the debt on offer. Now, investors will be watching whether the Getbucks medium-term notes will open up a new line of issues to be traded publicly from Government or companies, and provide a pricing benchmark for others to follow.

New thrust
It should, really. Authorities at the stock exchange have over the past five years been trying to build capacity that makes it easy for companies to raise capital for the long-term, moving away from a reliance on equity financing and expensive short-term bank loans.

With domestic bank credit as expensive as 18 percent, the ZSE on April 26 brought back the bond market, two decades after halting trades, hoping to provide a regulated platform for new issues, and trade of debt, including that of the $2,1 billion Government stock in Treasury Bills (TBs)..

The revived fixed income board will allow for trade of both private and public sector debt, according to the ZSE, with relaxed conditions for increased participation by foreign investors, already spellbound by the higher yielding African sovereign bonds that have flooded European markets in recent years.

It has not been a stampede, but past successful unlisted bond issues (Bindura Nickel Corporation $20 million, a few CBZ Holdings Ltd’s multi-million dollar issuances, and the IDBZ’s current $2 billion university infrastructure bond) have demonstrated the appetite for long-term debt is present. And so is the risk.

Most of the bonds, including Government paper, do not have a credit rating from an internationally recognised rating agency. That means the debt is considered junk – speculative, with a high default risk.

Indeed, worries have lingered over Government’s ability to make good on its TBs obligations, amid fears it could have rolled them over, as it did with others that were offered 10 years ago.

But Finance Minister Patrick Chinamasa has calmed nerves, assuring investors it won’t default.

Little security, higher returns

The ZSE’s debt market won’t offer the security of investment-grade bonds, but the great support by the investor community for a first time issuer – Getbucks – underlines what it is that will likely pull those investors averse to risk to Zimbabwe’s capital markets – higher yields.

At a coupon of 11 percent, Getbucks, which is in the business of lending – and, of course, taking money – targeting individuals, start-ups and small businesses, is paying almost twice as much the global average on corporate bonds, as well as sovereign debt of similar tenure or longer.

But it cannot lend what it doesn’t have. So, to do that the group in-turn borrows from elsewhere, or utilises the deposits in its possession, for a fee to the respective lender or depositor, before going on to lend to its own customers.

Getbucks says it is currently paying 12,5 percent interest to its creditors. It now hopes proceeds from the bond issue will slash that to 10 percent in three years, and much lower thereafter. This seemingly minute difference between what Getbucks pays on loans to its creditors, and that which is paid to it by its own debtors, represents one of the key sources of income for the firm, and any other lender.

It may be that the pressure to grow faster to generate good returns for newer investors has driven Getbucks into seeking cheaper capital hardly a year after raising $3,2 million in an IPO.

But the high cost of credit locally, and Government’s poor standing with global lenders which it owes over $6 billion in arrears, is what has choked most companies seeking new money to fund growth; and to pay for roads, energy, housing and other infrastructure projects, as far as Government is concerned.

The stock market’s Debt Listing Requirements allows it some form of regulation over pricing, ostensibly to make sure the cost of raising debt does not outweigh the benefits of the debt itself – and other reasons.

But squeezed for liquidity in an economy failing to generate sufficient exports, the revived fixed income board offers Government and the private sector a chance to tap into capital that both have struggled to obtain on global debt markets, with quicker turnaround.

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