Banks are seeing a boom in the corporate bond market, as companies take advantage of “near-perfect” market conditions to fund future growth, refinance existing debt and diversify funding from banks, Rand Merchant Bank (RMB) said on Thursday.

The financial services provider reported that over R12-billion had been raised by companies on the corporate bond market in the first four months of this year, while the total amount expected to be raised for the full-year would be as much as R35-billion.

This followed an already-high number of issuances in 2012, which saw R27-billion raised.

RMB Debt Capital Markets co-head Barry Martin believed the shift in corporate borrowing came at the expense of more traditional methods, such as banks loans, which had become more expensive as a result of global regulatory standard Basel III’s more stringent bank regulations.

“Companies participating in this market are taking advantage of the low interest rate environment and attractive credit margins, which, when combined with the high cost of bank loans, makes it significantly cheaper for them to raise debt,” he commented.

In addition, institutional investor appetite for these bonds was at a high level as a result of the added benefits offered by corporate bonds from a diversification perspective, as well as the attraction of good yields relative to other interest rate options.

Martin said the fact that corporate bonds were usually credit rated and listed on an exchange – such as the JSE ¬– had made them attractive to investors such as pension funds, life companies and other investment vehicles.

“A dominant feature of the flood of corporate bond issuances has been the emergence of first-time corporate entrants to the market, often low investment-grade rated or unrated companies, and predominantly with issuances far smaller in size compared with the large groups,” he noted.

The yields for investors on these companies’ issuances were also higher than those earned on better-rated bonds.

An additional feature of the current boom was the fact that several of the larger corporates were taking advantage of attractive conditions to raise funds for long-term capital investments.

This shift followed a period after the financial crisis, during which South African companies built up cash reserves on their balance sheets to better absorb possible further shocks in the global markets and were reluctant to invest in fixed investments or long-term projects.

Many existing corporate issuers were, however, also refinancing existing bond maturities with about R8-billion of corporate bonds expected to mature this year.

“With interest rates likely to remain at current levels for some time, the impetus in corporate bond issuances is expected to continue providing an impetus for increasing numbers of corporates, municipalities and State-owned enterprises to look to the debt capital markets for essential longer-term funding,” said Martin.