A credit rating is a prerequisite for a successful securitisation issue. Such disparities in the costs of borrowing are challenging the prevailing wisdom that equity is the cheapest form of capital. Despite this, gearing ratios in South Africa tend to be low by international standards, but this is undoubtedly a function of the high level of interest rates in this country. One factor which could radically change this is the launch of money market funds in May this year. The market for corporate paper has been somewhat stifled up to now.
Credit ratings are an integral part of establishing the price at which corporate paper is issued.
The emergence of a strong corporate paper market opens new funding possibilities for local borrowers. Borrowing is also essential in facilitating black empowerment and unbundling deals, although Berry cautions that where these are debt-financed, the new owners will find themselves under intense pressure to crank up dividends to meet the debt servicing costs. Paying out higher dividends means less is retained in the business for future expansion. As a result, many of these companies may have to recapitalise in a few years. Where dividend ratios rise, we can expect price-earnings ratios to fall, which makes equity financing less attractive.