JPMorgan sees virus fallout reviving South African equity sales

Financial turmoil caused by the coronavirus pandemic will rejuvenate equity sales in South Africa as companies shore up their balance sheets to cope with a deteriorating economy, according to JPMorgan Chase & Co.

In the absence of deep corporate-debt capital markets and a banking industry with finite capacity, the “fall-back position” for companies to raise cash will likely be through issuing shares, Kevin Latter, the head of JPMorgan’s sub-Saharan African operations in Johannesburg, said by phone. “We expect the deal flow to be primarily equity focused.”

Initial public offerings, additional stock issuance, accelerated bookbuilds and rights offerings have declined each year since reaching a record in 2015, according to data compiled by Bloomberg. But things are starting to perk up. The value of equity-linked transactions for 2020 already amount to almost two-thirds of all deals done last year, when issuance fell to the lowest level on record.

With an economy expected by the nation’s central bank to shrink 7% this year, domestic companies will have little choice but to plug their funding needs by following their European and US peers with equity offerings, Latter said.

JPMorgan shares the top spot for share sales from South Africa this year and is also part of the country’s biggest rights issue in two decades, with Sasol expected to raise as much as $2 billion. The lender, along with Citigroup and Bank of America Corp, have entered an underwriting agreement with the fuel and chemical producer for the potential deal.

Others are also in the works. Shareholders of Harmony Gold Mining on Thursday supported a share sale of $200 million, while real estate investment company Lighthouse Capital in May raised R4.2 billion selling shares to existing investors. Private-equity firm Braitand Gold Fields also both issued stock this year.

While a strict lockdown brought all but essential services to a halt before being eased gradually last month, the pandemic is unlikely to fundamentally shift the themes that have driven deals in Africa’s most industrialised economy in the past decade, Latter said.

“Companies will continue to diversify and add capacity,” he said. Many South African companies, including the nation’s banks, insurers and retailers, have expanded into the rest of Africa, Europe, Australia or India to compensate for a struggling economy at home.

Clients have been quicker to approach JPMorgan for credit to boost their liquidity levels and bolster risk-mitigation strategies than they did during the 2008 global financial crisis, Latter said.

With no material changes to the New York-based lender’s strategy in the region, JPMorgan will continue to follow multinational clients into new geographies, he said.

© 2020 Bloomberg