A recent conference organised by Botswana Stock Exchange (BSE) in alliance with the Botswana Bond Market Association (BBMA) brought to the fore how bonds can be used as an alternative source of capital, in a similar manner as getting credit from a commercial bank or buying shares in a listed entity. This financial instrument which many are not familiar with offers benefits just like other mentioned instruments and it emerged at the conference that the bond is still under-utilised, though it has significantly improved over the last few years. Over the recent years, the locals in particular have shown interest in buying of shares but a little has been done in to draw their attention to the bond market which is mostly dominated by institutional investors. Different speakers from the financial and capital markets at the conference took turns to speak on the benefits offered by the bond market as vehicle for funding and the challenges faced by the sector in growing it. As it stands, the value of the local bond market stands at P11.6 billion which is mainly dominated by government bonds in terms of value and contribute just 8.2 percent to the GDP.
The reasons behind the dominance by the government, analysts say, is a deliberate strategy to develop the local bond market, hence instead of borrowing from banks or other institutions, the government raises funds through the bond market, thereby killing two birds with one stone - raising capital locally while at the same time developing the local bond market. Observers say the bond market in Botswana has registered some improvements over the past few years, but not necessarily at the rate that could have been wished. A total of 39 bonds have been issued to this end and expectation was the acceleration of issuance post the conference which was the first of its kind in the country with international financial institutions in attendance. Of the 39 issued bonds, 85% of them are corporate bonds with the remaining being government bonds. Since the beginning of the year, three corporate bonds have been issued and subsequently listed. These were listed by Botswana Development Corporation (BDC001) and PrimeTime Property Holdings (PTP021 and PTP024).
The listed bonds have a total nominal amount of P330.3 million while the additional nominal amount listed so far in 2016 in respect to government bonds is said to be P1.45 billion. According to BSE Market Development Manager, Thapelo Moribame there was also tap issuances by government, through its agent Bank of Botswana in auctions conducted in March, June and September. The international Finance Corporation (IFC) - a member of the World Bank group - is one major institution which recently indicated its intentions to float P270 million bond before the year ends. In addition to the IFC issuance, another issuance is said to be on the pipeline from an international financial development agency whose name the Moribame could not disclose.
Head of Research at Motswedi Securities, Garry Juma, says the demand is very high in the local bond market hence there is mismatch between demand and supply. “The secondary market is virtually non-existent as most investor simply buy and hold their bonds,” Juma said in an interview.
According to Juma, there is need to issue more papers, especially more of longer dated papers with better yields as they are more popular mostly with long term institutional investors such as pension funds and life assurers. The bonds are said to be more popular among institutional investors as seen by the massive take up rate of all bonds that have been floated before by the corporates especially the listed bonds. “In fact, all the bonds that have been floated and listed have been oversubscribed by up to 300% in some instances,” he said.
Challenges that are said to be affecting the local bond market include lack of a robust risk free curve, infrequent issuance of government bonds and treasury bills and lack of neutral bonds indices. The BSE, however, has made some progress in addressing the those challenges as currently it is said that there are quarterly auctions, predominantly tap issuance and introduction of standard bond pricing formulas. But the local bond market is reportedly fairly illiquid and on a year-to-date basis, bond trades have amounted to P240.8 million compared to the total bond nominal amount of P11.6 billion.
But what exactly is a bond
According to BSE Investor Handbook, a bond is defined as a financial instrument that is similar to a loan agreement between a borrower and a lender. The arrangement is that the borrower makes an undertaking to pay the creditor some interest after a certain period of time at varied dates in the future. In addition, the borrower promises to repay the initial amount of the money from the financier. In the bond market, the lender is known as a bondholder while the borrower is known as an issuer of the bond and an issuer can be any entity such as government, a private company or parastatals. According to the investor handbook, entities, whether big or small can raise money through issuance of bonds and though in Botswana they are dominated mainly by the government, private companies and parastatals, it is said that in other stock markets insitutions such as councils, hospitals, universities and schools can raise money from the public through issuing bonds.
Benefits to bondholder
Bondholders stand to benefit through payment of interest which happens either annually or semi-annually. Benefits are that the bondholder receives regular cash flow through interest payments made by the issuer during the life of the bond. And when compared to shares, the bonds are said to be a safer investment option in that the principle amount will be repaid when the bond matures.
Bonds are also considered less risky in as a bondholder can have a higher claim on the issuer’s assets should the latter go bankrupt and bondholders get paid before any shareholder. Juma said bonds usually offer a stable rate of return which sometimes is well above inflation. “Bonds are also less risky as one is assured of getting their initial investments upon maturity in addition to the interest payments,” said Juma, adding that bonds are ideal investments for retirees who depend on the interest income for their living expenses and who cannot afford to lose any of their savings.