Bond Exchange of South Africa

OECD POLICY SEMINAR“How to reduce debt costs in Southern Africa”

“The Development of the South African Corporate bond market, relevance, impediments, prospects”

TOM LAWLESS – CEO

25 MARCH 2004

TOPICS FOR DISCUSSION TOPICS FOR DISCUSSION

Overview of Global Corporate Bond market

Overview of SA bond market

Why is our market different?

Factors effecting change

Impacts of international banks in SA bond market

Areas of concern

Ways to get markets going

Prospects

APPENDICIESAPPENDICIES

• Corporate bonds issued in last 12 Months

• Bonds in issue 1999-2003

• Bonds in issue 2/2004

• Listing fees

OVERVIEW OF GLOBAL CORPORATE BOND MARKETOVERVIEW OF GLOBAL CORPORATE BOND MARKET

CORPORATE BONDS• US and Europe – big and vibrant markets

• US > 4 million issues of bonds of all kinds – government, states, municipal, banks, mortgage backed etc.

• Corporate bonds exceed government etc in number

• Deutsche Bank spokesman

• “Daily secondary market trading in MBS is now greater than US treasuries”

• Issuance continuing

• Re-rating of some issuers

OVERVIEW OF SA BOND MARKETOVERVIEW OF SA BOND MARKET

Predominantly a government bond market – 94% of turnover in 2003 (Spot & Repo)

Very Liquid market and high velocity of circulation - some 20 times per annum

Government bonds are some 72 % maturities, corporates and public enterprises etc. make up the balance . Corporate bonds in issue have grown from 2.82% in 1999 to 16.9% in 2/2004

Bond Market Turnover (Billion Rand Nominal Traded)

Bond Market Turnover (Billion Rand Nominal Traded)

(US$ = R exchange rates, average for year)

10,655

11,67111,658

10,7989,514

9,510

2,326

4,6273,405

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,00011,00012,00013,00014,000

1995 1996 1997 1998 1999 2000 2001 2002 2003

0.00

2.00

4.00

6.00

8.00

10.00

12.00Nominal traded (billion) US$ = R exchange rate

1995-2003

SPOT & REPO (Nominal Traded - Trillion) SPOT & REPO (Nominal Traded - Trillion)

R0

R2

R4

R6

R8

R10

R12

1998 1999 2000 2001 2002 2003

Year

BESA TurnoverRepo trades

Spot trades

Nominal Traded (trillion)

1992 - 2003

Total Bond Market Turnover Breakdown by Major Issuer (Nominal Traded)

Total Bond Market Turnover Breakdown by Major Issuer (Nominal Traded)

0%

20%

40%

60%

80%

100%

1995 1996 1997 1998 1999 2000 2001 2002 2003

RSA Transnet Telkom Eskom Other

1995 to 2003

SPOT & REPO (Nominal Traded - Trillion) SPOT & REPO (Nominal Traded - Trillion)

1998 -2003

19981999

20002001

20022003

0

5

10

15

20

25

30

Vel

ocit

y

Year

Turnover Velocity(total turnover/market capitalisation)

WHY ARE WE DIFFERENT?WHY ARE WE DIFFERENT?

COMPLEX ISSUE – MANY REASONS ADVANCED

Preference for government, parastatal and bank paper Greater risks not widely understood by trustees – particularly

employee representatives “ROE” of banks received less attention in past Banks appetite for assets – more to lend to corporates than to list Banks chasing market share in corporate finance world Illiquid secondary market :-

little / no market making activity No repo market

FACTORS AFFECTING CHANGEFACTORS AFFECTING CHANGE

Re-investment opportunities for coupon payments

More diversification in issues

• Securitisations

Banks being more innovative

• Capital better utilised elsewhere – Basle II impacts

• Better pricing of corporate loans

New portfolio managers arriving

• Differentiate from the old established firms

Easier to issue using DMTN type documentation – international banks influence

Cost of bond finance dropped dramatically

No stamp duties on issue

IMPACT OF INTERNATIONAL BANKS IN SA BOND MARKETIMPACT OF INTERNATIONAL BANKS IN SA BOND MARKET

Changed the attitudes of corporates

Banks are fee driven not annuity income driven Thus focus different – issue driven, more corporate issues

Issuance styles more towards DMTN

More comprehensive documentation – more European style

More international practice driven

AREAS OF CONCERN AREAS OF CONCERN

Very few mortgage backed securities (MBS)

Why is there no “Ginnie Mae” type operation in South Africa?

Pathetically low savings ratios

Who Is doing anything to reverse this??

Who should do it?

Illiquid secondary market:-

Little / no market making activity

No repo markets

THOUGHTS ON WAYS TO GET MARKETS GOING THOUGHTS ON WAYS TO GET MARKETS GOING

Consolidate municipal debt into more manageable and attractive

parcels

Public / private partnerships should be strongly encouraged to list

debt

Get a “Ginnie Mae” off the ground

List money market instruments

THOUGHTS ON WAYS TO GET MARKETS GOING THOUGHTS ON WAYS TO GET MARKETS GOING

Radical re-look needed at logic of taxing interest on savings

• SA savings ratio is so low

• Encourage, don’t discourage savings

List SA government currency debt here to encourage easier and

further asset diversification

• Invest in our own country in hard currency

• This is not “dollarisation of the Rand”

Invest in municipal bonds of your city

• Get a rebate on rates and taxes

PROSPECTS PROSPECTS

Very promising

Rates low – encouraging environment in which to borrow

Offshore entities allowed to list – (2004/5 – National Budget)

Municipalities – encouraged to list - (2004/5 National Budget)

• Enquiries increasing

Securitisations

Innovative ways coming to the fore

TOM LAWLESS

TEL: (011) 482-2605 FAX: (011) 482-6699

tomlawless@besa.za.com

www.besa.za.com

APPENDICES APPENDICES

• CORPORATE BONDS LISTED – PAST 12 MONTHS

• Corporates

• Securitisation & Dual Listings

• Programmes

• GROWTH SINCE 1999 – R’ BILLION

• TOTAL BONDS IN ISSUE

• LISTING FEES

CORPORATE BONDS LISTED - PAST 12 MONTHSCORPORATE BONDS LISTED - PAST 12 MONTHS

CORPORATES

Eagle Bonds One (Pty) Ltd R887 Million Anglogold Ltd R2 Billion Sasol Financing (Pty) Ltd R2 Billion Imperial Group (Pty) Ltd R1 Billion Lever Ponds (Pty) Ltd R2.5 Billion African Bank Ltd R1 Billion Firstrand Bank Ltd R1.3 Billion Investec Bank Ltd R1 Billion Development Bank of SA R2 Billion SBSA (Credit-linked note) R1.2 Billion Nedbank Ltd R500 Million SBSA R1 Billion Daimler Chrysler R2 Billion Steinhoff Manufacturing (Pty) Ltd R1 Billion SA National Road Agency Ltd R2.3 Billion Trans-Caledon Tunnel Authority R1 Billion

TOTAL R21.7 BILLION

continued on next slide

CORPORATE BONDS LISTED - PAST 12 MONTHS CORPORATE BONDS LISTED - PAST 12 MONTHS

Continued……..

SECURITISATIONS

AutoLoan Invest (BMW) R1.83 Billion Collaterallised Auto Receivables (ABSA) R3 Billion Equipment Rentals Securitisation (SASFIN) R670 Billion Private Mortgages “PRIV” (Investec) R1.4 Billion Thekwini Fund (SA Home Loans) R2 Billion Indwa Investment Ltd (RMB) R4.2 Billion Asset Backed Arbitrage (ABSA) R3.65 Billion Infrastructure Finance Corporate Ltd R150 Million

Total R13.25 Billion

DUAL LISTINGS

Swaziland Posts & Telecoms R41 Million

CORPORATE BONDS LISTED - PAST 12 MONTHS CORPORATE BONDS LISTED - PAST 12 MONTHS

Continued……..

PROGRAMMES

Lever Ponds (Pty) Ltd (CP) R1.5 Billion Grayson Conduit (Pty) Ltd (Investec) (CP) R10 Billion Eagle Bonds One (Pty) Ltd (DMTN) R930 Million First Rand Bank Ltd (DMTN) R5 Billion Investec Bank Ltd (DMTN) R10 Billion Nedbank Ltd (DMTN) R10 Billion Swaziland Posts & Telecommunications (DMTN) R500 Million

Total R37.93 Billion

GROWTH SINCE 1999 – R’ BILLIONGROWTH SINCE 1999 – R’ BILLION

2003 1999 Central Government R371.115 R327.106 Municipal R .091 R .984 Public Enterprises R 35.829 R 48.091 Water Authorities R 18.415 R 11.086 Banks R 30.256 R

7.149 Securitisation R 21.232 R 1.247 Other Corporates R 18.542 R 2.850 Dual Listed R .041 R - Commercial Paper R 11.300 R -

TOTAL R506.921 R398.513

CORPORATES 16.9% 2.82%

TOTAL BONDS IN ISSUE AS AT 29 FEB 2004TOTAL BONDS IN ISSUE AS AT 29 FEB 2004

Central Government R351.76 Billion Municipal R 91 Million Public Enterprises R 35.67 Billion

Water Authorities R 18.02 Billion Corporates R 82.65 Billion

Banks R 31.44 Billion Securitisation R 21.31 Billion Gold Mining R 3.2 Billion Chemical R 2 Billion Food R 1 Billion Household Goods R 1 Billion Telecommunication R 5 Billion Transport R 6.5 Billion Credit Linked Notes R 1.5 Billion Commercial Paper R 9.7 Billion

Dual Listing R 41 Million

TOTAL R488.23 BILLION

Corporates 16.9%

LISTING FEESLISTING FEES

LISTINGS FEES - (BESA FEES)

INITIAL

R10,000 - R25,000 - once off fee (dependent on complexity)

ANNUAL REVISION FEE

ISSUE SIZE BASE FEES

0 < R250m R 2 000

R250m < R1 bn R 6 000

R1 bn + nominal R12 000

LISTING FEESLISTING FEES

ANNUAL

• Comprises a base fee and a surcharge fee, payable annually

• Base fee calculated accordingly to a fixed scale (previous slide)

• Surcharge calculated accordingly to formula

• Surcharge fee = market surcharge (R) X relative size (%)

• Market surcharge amount is currently set at R1,5 million

OTHER FEES / COSTS associated with listings process

• Lawyers • Arrangers

• Road shows • Printing