A plan to give investors the same level of protection when buying South African investment-grade corporate debt as they get with junk bonds is dividing the nation’s money managers. The proposals being debated include limits on further borrowing, which will enhance the safety of the debt, said Jason Lightfoot, a portfolio manager at Futuregrowth Asset Management.
Stricter covenants may reduce the bond market’s attraction as issuers will have to maintain the debt safeguards on an ongoing basis, Investec Asset Management’s Simon Howie said.
The Association for Savings and Investment South Africa, whose members together manage about 4 trillion rand ($450 billion), is debating standardized debt covenants, the Cape Town-based body said by e-mail.
Prudent underwriting practices have deteriorated with the inclusion of so-called covenant-light transactions and less- than-satisfactory risk management practices, according to March 22 guidance from the U.S. Federal Reserve, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. Covenant-light loans carry fewer safeguards for creditors such as limits on how much debt a company can add to its balance sheet.