KrugerRand Denominated Bonds: a New Funding Source
by Simone Daws and Leigh Cunningham-Scott, Debt Capital Markets dealmakers, Rand Merchant Bank
Diversification of funding sources is an important pillar of liquidity risk management and a sustainable funding profile. As the South African banks move towards Basel III implementation they are required to hold even higher levels of liquid assets and reduce their reliance on short-term institutional funding. This can be a challenge in the South African environment of low net household savings.
Banks are continuously seeking to optimise their funding, and improve risk adjusted pricing. In a low savings environment the ability to tap into a new and broader investor base with differing mandates while raising long term funding efficiently is of great value. Those banks which are able to get the most efficient mix of funding are able to provide more competitive products and pricing to their clients and it is not surprising that this is currently a focus across all the South African banks.
The KrugerRand denominated bond
Following the theme of innovation and alternative funding sources, Rand Merchant Bank recently arranged a KrugerRand denominated bond raising R2bn in the initial offering. This product, a first for the domestic market, is a five-year interest bearing, KrugerRand denominated note issued by FirstRand Bank Limited and listed on the Main Board of the JSE. The bond is unique in that it is the first to be denominated in KrugerRands rather than ZAR (each note initially represents 10 1oz KrugerRand coins and will trade in 10 1oz increments) and bears a fixed rate of 50bps interest in gold ounces. It therefore gives investors an opportunity to invest in gold while simultaneously earning a positive interest rate. It also represents the only listed gold product available where there is no profit erosion originating from management fees or insurance and storage costs.
To participate, investors subscribe to the bond in 1oz KrugerRand coins, which are made available by Rand Merchant Bank’s (RMB) gold desk. On maturity, investors receive their principle amount and accrued interest in 1oz KrugerRand coins or smaller denominations thereof (if required). Should the investors not wish to hold the physical KrugerRand coins, the issuer undertakes to purchase the KrugerRand coins on the maturity date, effectively enabling investors to receive settlement in KrugerRand coins or cash.