Dean D’Sa (Managing Director, PLEION Corporate Finance) – «The Mauritian bond market can grow further with smaller issuers»

How has Covid-19 affected Mauritian bond markets? 

Well, Mauritian government bond yields have decreased significantly because of the Repo rate cut by the Bank of Mauritius (BoM) and because of the risk aversion of investors who prefer the safety of Government bonds as opposed to equities listed on the Stock Exchange of Mauritius. Indeed, these two factors has led to Government bond yields reaching all-time lows no matter whether you look at the 3 month T-bill or a 20yr Government bond. 

In the corporate bond market, where PLEION Corporate Finance is very active, we have noticed that there is a lack of liquidity and very few secondary market transactions taking place. Linked to that, there is the notion of risk aversion whereby investors are cognizant about the impact that Covid-19 has had on various businesses and are now questioning the specific Covid-19 related risks that companies are facing.

When bringing a corporate bond to the market, we have noted that investor focus is on the risk of the company. I call this the “Business Model Covid Test”, as investors assess the resilience of the prospective issuer’s business model in the face of Covid-19, potential future lockdowns, and prolonged border closures.

If you look at some of the corporate bond transactions of securities listed on the Stock Exchange of Mauritius (SEM), one of them was done at a yield of 20% and others were done at yields of 10% and 10.9%. All these were for the bonds maturing in the next three years and issued by large corporates. Bonds trading at these levels for these short maturities is an indication of stress within the market.

This may be something that the BoM or Mauritius Investment Corporation (MIC) could help alleviate in the coming quarters.

Some bonds were restructured due to Covid-19. Can you explain how was this done and did these companies default?

There has not been a default of a corporate bond. There has however been a default of a Credit Linked Note, which is a different and more risky investment. Regarding the ongoing restructuring being done for bonds, none of the clients we work with have had to restructure their debt. However, I am aware that some listed bond issues have indeed had to restructure their debt as they were unable to make coupon payments when they were due.

To my knowledge, some of the restructurings were done fairly, but unfortunately, some were not. I say this because I believe that it is necessary for all investors to have the chance to voice their view on any restructuring no matter how small they are. In fact, the Noteholder Representative Agreement (used in every transaction) clearly describes how these transaction restructurings should be carried out. As the market continues to develop, all parties need to work together to ensure that the correct standards and frameworks are implemented to protect the rights of the buyers of debt instruments.

How are Mauritian corporates getting funding since Covid-19?

With difficulty! On one hand, you have large corporates in some sectors that can get funding from banks, from MIC and from debt capital markets. On the other hand, small companies typically get their funding only from banks. They are therefore severely impacted by the credit contraction in Mauritius as a result of the Covid-19 pandemic. I say this because many banks are either taking significantly more time to make decisions or are actually reluctant to lend.

If companies are looking to borrow via Mauritian debt capital markets, they need to be of a certain size and they need to have a solid business model.

Access to funding today is very challenging and we are seeing a lot of interest from corporates / entrepreneurs in search of guidance or help on how to borrow or structure transactions. Traditionally, corporates have turned to banks to get funding. Now many are looking at alternatives because they are not getting a response from their bank. This is where we have been able to step in. We have helped these clients restructure their transactions to get a quicker and more favourable response from the banks.

PLEION Corporate Finance has executed a few transactions this year. How have you managed to do this in such a difficult environment?

It has indeed been very challenging, especially in a Covid-19 environment where all the risks related to structuring and executing a transaction are much higher. We have done both the biggest and the smallest debt transaction this year, both of which are challenging in their own way. Our team worked on both of these during the Covid-19 lockdown and we were able to successfully execute the transactions because we understand the market environment very well. I mean, there are so many variables that you have to take into consideration when doing transactions like the ones we have done. Our team do this extremely well.

Whilst doing this, we have built a reputation of bringing good companies and good transactions to the market. So now, when we work on a debt transaction, people want to know about it.

In your previous role at MCB, you were involved in the development of the Mauritian government bond market. How do you see this market now?

There is a ‘game of chess’ being played out between the buyers of Government bonds (the banks) and the issuer (the Bank of Mauritius). Every time BoM has an auction, the issuer wants interest rates to remain low, but the ‘caretakers’ of the excess liquidity (banks) want to push yields up. So BoM runs the first auction and either does not accept any bids or accepts bids near the low end. After this, they then hold another auction on the same day or the following day where the banks ‘play the game’ and reduce the level of yield they bid at and BoM accepts more of the bids.

Interestingly, the BoM is intentionally or coincidentally doing something similar to what the Federal Reserve talked about during the financial crisis: “yield curve targeting”. It consists of setting levels for different maturities and then trading at that level to maintain the rate at that particular level. This strategy is also influencing the corporate bond market. Today, when we help a corporate issue debt, the rate that they pay is related to the rate the government pays, for the same maturity. Thus, the policy of BoM is helping push investors to invest in corporate bonds and helping corporates borrow at low yields.

How safe are these corporate bonds and what type of investors are buying them?

As I mentioned earlier, we have not seen defaults in corporate bonds. Corporate bonds can represent a very good investment opportunity. However, investors and businesses need to do their homework before investing in bonds and not just rely on an investment adviser.

Even though a bond is secured, rated, and has an attractive interest rate, it is not 100% guaranteed. Investors should look at the company’s financial statements and business model before investing. Another question to ask is in the case of default, how will the security be converted into cash for bond holders? Corporates have started asking themselves this question because of Covid-19. Investors need to think about which makes them feel more comforted: security that will be hard to liquidate or strong covenants that control the issuers behaviour?

The Mauritian bond market seems to be only available for the large corporates / groups. What options do smaller corporates have as they look to borrow money now?

I believe there is a huge opportunity for the Mauritian bond market, dominated by big companies, to grow further with smaller issuers. Since our inception, we have pushed to diversify the corporate bond market by bringing new issuers to market. It has been especially interesting to bring unlisted companies to the market as these companies offer a fresh exposure to investors.

There are many companies looking for financing and we are trying to make a positive impact on the market by looking to help the companies that we feel are ready to raise money with us. There is a growing opportunity for medium-sized companies with a turnover of about MUR 500 million that can afford to issue debt of between MUR 400 million and MUR 1 billion. We would typically structure these deals as a “Private Debt Deal” that offers something special to the buyer of the debt and is of an interesting value proposition for the issuer. This is a very interesting market internationally and we are hoping to develop it in Mauritius where the model is well suited to these smaller companies.