An investigation into the viability of a bond issue programme for Nampower

Barlow, Andries Hercules (2010-03)

Thesis (MBA (Business Management))--University of Stellenbosch, 2010.


ENGLISH ABSTRACT: NamPower is the current power utility in Namibia and needs to access the debt capital markets over the next few years, in order to be successful to finance its capital expenditure programme of NAD 13.9 billion. NamPower intends to raise the funding from its operations, shareholders equity injection and debt, in the form of bonds and development finance. In order to be successful in its bond issuance programme, NamPower must at least maintain an investment grade credit rating. Credit Rating Agencies play an important role to provide investors with their credit ratings and reports. Many investors base their investment decision making on certain levels of credit ratings. A credit rating is the probability that an issuer or instrument will default on its debt repayment obligation. Depending on the circumstances, investors usually require a minimum of an investment grade rating (AFP, 2009:20). Looking at the current financial crisis investors felt left down by the credit rating agencies, as investors relied on the credit rating reports and the underlying credit rating. Investors literally lost billions in financial crisis of 2007-8/9 as corporate and structured products defaulted on meeting financial obligations. As a result of the defaults and financial crisis the credit rating agencies have been criticised for inadequate disclosure and potential conflicts of interest. Many critics argue that credit rating agencies are not asking inquisitive questioning and probing into issues when doing credit reviews. Evidence was not that conclusive, but big corporate failures like Enron and WorldCom are examples of the credit rating agencies’ failures. Furthermore, credit rating agencies are not particular about creating predictions of future developments, but the last crisis has shown that credit rating agencies were fairly successful with corporate or issuer ratings as default has been fairly limited to the higher credit rating categories. Evidence provided in the research supports that investors still rely on credit ratings more so for corporate, institutions and fixed income products, but are very insure about structured products, due to recent market failures. Therefore it is still of critical importance for NamPower to maintain its investment grade credit rating. NamPower has maintained and even improved on its local national scale credit rating. Investors are still risk adverse since the financial crisis but as economic conditions improve investors should be coming back to emerging markets. To bring back the investors to invest in the emerging markets will require a certain appetite returning to the investor, but surely there will be a premium or funding will be more costly in future and not in demand as previously. As for NamPower, the opinion is therefore that although smaller in size, it poses as an attractive investment opportunity for investors as there is shortage in investment grade assets in Sub-Sahara Africa to fill the portfolio gaps and give diversification.

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