Denel, South Africa’s State-owned arms manufacturer, is tapping bond markets – and finding buyers for its debt – even after seeking emergency funding in the past two months to pay staff salaries.

The company, one of several state-owned entities struggling to stay afloat after years of financial mismanagement, sold R50-million of two-year floating-rate notes this week, according to a stock exchange notice.

The bonds offered a coupon of 9.333%, or 250 basis points above the benchmark three-month Johannesburg Interbank Rate, which partly explains why they found buyers. They’re also government-guaranteed, meaning investors are reaping that yield with very little risk.

Although there are no details on who bought the notes, the Public Investment Corporation, or PIC, has acted as a backstop for Denel in the past. The PIC, which manages most of the South African government’s pension funds, owns about 88% of the company’s existing bonds.

PENSIONS PUSH-BACK
But ex-government service pensioners may not put up with that for long, according to Peter Attard Montalto, the London-based head of capital-markets research at Intellidex.

“A crunch is clearly coming,” Montalto said. “They have only managed to issue R50-million today. Clearly there is a lot of push-back from the Government Employees Pension Fund on the PIC that is creating problems here.”

Denel has R3.27-billion of bonds outstanding, according to data compiled by Bloomberg. Almost R3-billion of that is due this year. Should the company be unable to roll over the debt, it would put further strain on state coffers at a time when public enterprises including Eskom, the electricity utility, are in need of cash to stay afloat.

South Africa’s potential liability for government-guaranteed debt of State-owned companies was R879.6-billion in March, according to the National Treasury.