Azernews.Az

By Bloomberg

Mario Draghi’s plan for fresh European stimulus is offering investors an opportunity to buy South African papermaker Sappi Ltd.’s bonds, which have underperformed the market in 2015.

Sappi’s euro-denominated bonds due in April 2018 have returned 0.5 percent this year, compared with an average 0.7 percent gain for all high-yield corporate securities, according to data compiled by Bloomberg. Rates on the debt of the world’s biggest maker of glossy paper have fallen three basis points to 5.25 percent in the period, compared with a drop of 24 basis points for Portuguese government notes due in October 2017. The nation is ranked BB at Standard & Poor’s, one step higher than Sappi.

“Over time, the appetite for riskier assets will probably increase given where benchmark yields have gone,” Victor Mphaphuli, a fixed-income money manager at Johannesburg-based Stanlib Asset Management Ltd., which own Sappi’s rand- denominated bonds, said by phone on Jan. 23. “There will be demand for higher-yielding assets to improve the returns in portfolios.”

By committing to at least 1.1 trillion euros ($1.2 trillion) of quantitative easing last week, European Central Bank President Draghi took steps to cement a bond rally that has sent yields to record lows in the euro zone, and has also driven down emerging-market rates. Johannesburg-based Sappi said in November it may refinance some euro-denominated bonds when the debt becomes callable in three months’ time as the company plans to spend less on new plants.

Capex Plans

Refinancing the bonds could offer investors another opportunity to buy Sappi debt.

The company will contain capital expenditure to below $300 million for the year through September, using increased cash reserves to repay and refinance a portion of net debt to lower future interest costs, Chief Executive Officer Stephen Binnie said Nov. 10. It will specifically look at its bonds maturing in April 2018 and June 2019, which enter a call window that allows Sappi to repurchase them from April, he said.

The company’s net debt was $1.95 billion at Sept. 30, down $300 million from a year before as annual capital spending decreased from $552 million in 2013.

Sappi won’t refinance 450 million rand ($39 million) of rand notes, ring-fenced and differently rated from the debt it sells elsewhere, that are due in April, Andre Oberholzer, a spokesman for the company, said in an e-mailed response to questions Jan. 22.

Cash Flow

“As Sappi Southern Africa is producing good cash flow, we currently have no need to refinance this debt,” Oberholzer said, declining to comment on the company’s plans for its other bonds.

Sappi’s rand bonds carry an investment grade while its offshore debt is rated junk.

The market’s initial reaction to Draghi’s announcement may be overdone, rendering it too early to predict what the demand for high-yield debt will be, Conrad Wood, head of fixed income at Johannesburg-based Momentum Asset Management, which owns rand-denominated Sappi bonds, said by phone

“Once things calm down a bit investors will revert to discriminating between high-quality and low-quality within risk assets,” Wood said. “Sappi offshore is likely to fall in the higher volatility, higher risk category.”

Sappi sold the 2018 bond, which carries a coupon of 6.625 percent, in 2011. The yield peaked at 11.42 percent on Oct. 5 of that year. The rand weakened 0.7 percent to 11.4854 per dollar by 3:46 p.m. in Johannesburg today.

Quantitative easing in Europe will make Sappi’s debt more enticing, enabling the company to refinance bonds, Cassie Treurnicht, a fund manager at Gryphon Asset Management Pty Ltd. in Cape Town, said by phone.

“As the bonds become callable they can roll them over to lower rates,” Treurnicht said. “You’ll see the benefit over the next few months and years.”